Supervision Measures Concerning Illegal Stock Margin Financing

The drastic fluctuation of the A-shares market in the past four weeks and the so-called “violent” market-saving measures recently taken by the Chinese government not only force market participants to reevaluate the short term and long term impacts on the market,but also force the Chinese banking and finance regulators to revisit the banking and finance regulatory framework and supervisory measures therefor.
As one of the measures that may take immediate effect, yesterday, the China Securities Regulatory Commission (“CSRC”) issued the Opinion on Stopping and Rectifying Illegal Securities Business Activities (“CSRC Opinion”) and the National Internet Information Office (“NIIO”) issued the Circular on Eliminating Illegal Internet Promotion and Advertisement on “Stock Margin Financing” (“NIIO Circular”).
Both the CSRC Opinion and the NIIO Circular intend to target the furious stock margin financing activities that fell out of the supervision and control of the banking and finance regulations. According to some observers, such stock margin financing activities were one of the root causes for this A-share market crisis.
In sum, the essential provisions of the CSRC Opinion are: (i) the China Securities Depository and Clearing Corporation is required to stringently implement the “Real Name Requirement” for securities account opening, strengthen inspections regarding account opening and usage of “Special Institutional Accounts (which we understand should refer to segregated accounts or private fund accounts)”, prohibit any account holder from illegally conducting securities trading in violation of the relevant regulations by using “sub-accounts”, “segregated sub-accounts”, and/or “virtual accounts” opened under the same securities trading account; and (ii) the rectification of securities activities directly or indirectly in violation of laws conducted by information technology servicing institutions.
The NIIO Circular basically requires all portal websites, Internet platforms and media operators to eliminate all illegal promotion and advertisement information on “stock margin financing” as well as to urge them to take necessary measures to prohibit any institution or individual from releasing such illegal promotion or advertisement information over the Internet.
Our Observations
The above two circulars indicate that the Chinese regulators may have realized that stock margin financing through the Internet, which does not fall under the supervisory and regulatory control of the banking and finance regulators was one of the main reasons for the A-share market crisis. In order to prevent any further damage to the traditional banking and financial system, the regulators are attempting to adopt some measures to contain the development of such Internet financing as “margin financing via the Internet”. We anticipate that more regulatory policies and measures will be issued in the next couple of months. We are also keen to see how various regulators will coordinate efforts so as to lay the foundation for the regulation and supervision of institutions that are engaged, at the same time, in banking, finance, securities and/or insurance. Moreover, this crisis also reminds all market participants that any banking and finance innovation must be implemented under the regulatory framework. If the purpose of a financial innovation is to facilitate the evasion of supervision by regulators or otherwise violates banking and finance regulations, the competent regulatory authorities should make an assessment based on the principle of “substance over form” and take appropriate regulatory measures in a timely manner.