The People’s Bank of China, China BankingRegulatory Commission and China Securities Regulatory Commission released TheNotice on the Promulgation of the Administrative Rules for Stock-pledged Loansof Securities Firms. The Notice says, to broaden the channel of financingfor securities companies and to support a healthy development of the Chinesecapital market, the People’s Bank of China, China Banking Regulatory Commissionand China Securities Regulatory Commission revised the Administrative Rulesfor Stock-pledged Loans of Securities Firms jointly promulgated by thePeople’s Bank of China and the China Securities Regulatory Commission onFebruary 2, 2000. The revised Administrative Rules for Stock-pledged Loansof Securities Firms consists of 8 chapters and 44 articles and will enterinto effect on the day of issuance, and the former Administrative Rules forStock-pledged Loans of Securities Firms will be invalidated at the sametime.
Attachments: Administrative Rules forStock-pledged Loans of Securities Firms
Administrative Rules for Stock-pledged Loans ofSecurities Firms
(UnofficialTranslation)
Chapter One GeneralProvisions
Article 1 These rules are formulated and promulgated according to the Law of thePeople’s Republic of China on the People’s Bank of China, the Law of thePeople’s Republic of China on Banking Regulation and Supervision, the CommercialBanking Law of the People’s Republic of China, the Securities Lawof the People’s Republic of China, and the Guaranty Law of thePeople’s Republic of China so as to regulate the stock-pledged loanbusiness, safeguard legitimate interests of creditors and borrowers, preventfinancial risks and further promote the steady development of China’s capitalmarket.
Article 2 Stock-pledged loans hereinafter in these Rules refer to loans providedby commercial banks to securities firms that use proprietary stock, securitiesinvestment funds or convertible bonds issued by listed companies as pledge.
Article 3 Pledge in these Rules refer to RMB common stocks in proprietary tradingby securities firms and listed and traded in the securities exchange (Ashares), notes of securities investment funds and convertible bonds issued bylisted companies (hereinafter referred to as stock).
Article4 Borrowers in these Rules refer tosecurities firms (head office of legal entity) legally established and approvedby the China Securities Regulatory Commission to engage in securitiesproprietary business. Creditors herein refer to legally established commercialbanks that conduct stock-pledged loan business with the approval of the ChinaBanking Regulatory Commission (hereinafter refer to as a commercial bank). Inthese Rules, securities registry and clearing institution refers to thelegal registry and clearing institution of the pledge.
Article5 Commercial banks shall report to the ChinaBanking Regulatory Commission when authorizing their branches to conductstock-pledged loan business.
Article6 Borrowers may have to use the stock-pledgedloans only to meet the needs of liquidity in accordance with the SecuritiesLaw of the People’s Republic of China.
Article 7 The People’s Bank of China and the China Banking Regulatory Commission shallsupervise stock-pledged loan business according to relevant laws.
Chapter Two Creditors andBorrowers
Article8 Toconduct stock-pledged loan business, the applicant as a creditor shall:
(1) meet the requirements on supervisory indicatorssuch as capital adequacy ratio set by the China Banking Regulatory Commission,
(2) establish sound internal control mechanism andunified credit authorization system,
(3) formulate risk control measures and businessoperation procedures for the conduct of stock-pledged loan business,
(4) set up department with staff members specializedin conducting and managing stock-pledged loan business,
(5) develop specialized management information systemcapable of acquiring timely information of the stock market and listedcompanies and analyzing the classified stocks to determine the pledge ratio,
(6) meet other conditions required by the ChinaBanking Regulatory Commission.
Article9 The borrowers shall meet the followingconditions:
(1) possess sufficiently liquid assets and be able torepay the principal and interest of loans,
(2) meet the criteria of risk control ratio in proprietarystock trading stipulated by the China Securities Regulatory Commission,
(3) set aside adequate trading risk reserves inaccordance with the China Securities Regulatory Commission’s requirement,
(4) have disclosed regularly balance sheet, netcapital statement, income statement, profit distribution statement and otherrelevant information according to the requirement of the China SecuritiesRegulatory Commission,
(5) have no record of major violation of laws or regulationsor major risky behavior over the immediately preceding year, with their seniormanagement and staff having no record of serious misconduct defined by theChina Securities Regulatory Commission,
(6) be confirmed by the China Securities RegulatoryCommission to have settlement funds for customer transactions without anyembezzlement,
(7) meet other requirements laid out by creditors.
Chapter Three Maturity, Interest Rate and Pledge Ratio
Article10 The maturity of stock-pledged loans shall bedetermined and agreed by the creditors and borrowers and may not exceed oneyear. The loans shall not be extended upon its maturity, and newly borrowedloans pledged by stocks shall be subject to fresh examination and approval inaccordance with these Rules. Pre-repayment of loans shall be approved bycreditors.
Article11 Interest rates charged on stock-pledged loansand the calculation and repayment of interest shall conform to the InterestRate Administration Rules set by the People’s Bank of China.
Article12 Stocks used as pledge shall have goodperformance and liquidity, with trading volume up to a certain level. Creditorsmay not accept the following stocks as pledge:
(1) stocks issued by the listed company that reportlosses for the last financial year,
(2) stocks with a price volatility (highest/lowest)exceeding 200% over the previous six months,
(3) shares tradable in themarket being held by only few shareholders,
(4) PT (particular transfer) stock or stock delistedfrom the stock exchange,
(4) stocks speciallytreated by the stock exchange,
(6) stocks issued by the securities firm that hold 5%shares of a listed company, but this limit is not applicable to stocks held bya security firm as a result of underwriting business.
Article 13 Pledge ratio is determined by creditors and borrowers according to the qualityof stocks and the financial and credit status of borrowers, and may not exceed60%. The upper limit of the pledge ratio shall be adjusted by the People’s Bankof China and the China Banking Regulatory Commission.
Calculation of thepledge ratio:
Pledge ratio =(principal of the loan / market value of the stock pledged)*100%
Market value of the stock pledged =volumeof the stock pledged * the closing price of the stock in the preceding 7trading days
Chapter Four Loan ExtensionProcedures
Article14 The applicant shall submit the followingdocuments or materials to creditors for stock-pledged loans:
(1) business license, code and certificate of legalentity,
(2) the loan card approved and issued by the People’sBank of China,
(3) balance sheet, profit and lossaccount, net capital statement of the preceding month and financial statementof the previous year audited by qualified accounting (auditing) firms,
(4) documents provided by the securities registry andclearing institution about the terms of the pledge,
(5) information of the listed company whose stock isused as pledge,
(6) other documents required by creditors.
Article15 After receiving the application documents,creditors shall examine the applicant on its proposed use of loans, creditrecords, repayment ability and authenticity of the documents, analyze the stockto be used as pledge, and give response to the applicant in time.
Article16 Creditors shall determine the credit lineunder the unified credit authorization management on the basis of prudentanalysis of the borrowers’ credit risks and financial strength.
Article17 When a creditor approves an application, itshall sign a loan contract according to relevant laws and regulations
Article18 After signing the contract, creditors andborrowers shall register the pledge in the securities registry and clearinginstitution, which shall issue the registration documents to creditors.
Article 19 Creditors shall establish special membership for stock-pledged loan business inthe stock exchange before extending loans so as to keep custody of the stockused as pledge, and shall input relevant information of loans into creditregistry and consulting system after the extension of loans.
Article20 Borrowers shall repay the principal andinterest of loans in line with the loan contract. The contract will beinvalidated automatically upon the repayment by borrowers. Creditors shall cancelrelevant pledge registration at the expiry of the loan contract, and return theregistration documents of pledge to borrowers.
Chapter Five Risk Control
Article2 The outstanding balance of pledged loans maynot exceed 15 percent of the creditor’s net capital. The outstanding balance ofpledged loans extended to a single securities firm may not exceed 5 percent ofthe creditor’s net capital.
Article22 Borrowers shall notify creditors in time ifthe borrowers:
(1) anticipate difficulty in repaying the principal orinterest at maturity of the loan, or
(2) experience divestment, merging, splitting,dissolution or applying for bankruptcy, or
(3) experience change ofownership, or
(4) experience othersituations stipulated in the loan contract.
Article23 Stocks accepted by a commercial bank and itsbranches as pledge may not exceed 10% of the issuing company’s total tradablestocks. Stocks used by a securities firm as pledge may not exceed 10% of theissuing company’s tradable stocks, and 5% of its outstanding shares. Stocksused as pledge may not exceed 20% of the tradable stocks of the issuing company.The above ratios are monitored by the securitiesregistry and clearing institution, and in case these criteria are not met, therelevant stocks may not be registered as pledge in the securities registry andclearing institution. The People’s Bank of China and the China BankingRegulatory Commission may adjust the above ratios when it is deemed necessary.
Article24 Creditors reserve the rights to verify theauthenticity and legitimacy of the pledge with the securities registry andclearing institution, and the securities registry and clearing institutionshall provide relevant information to creditors in a timely and authenticmanner.
Article25 The creditor shall analyze the risk andvalue of each stock at all times, select stocks suitable to being used aspledge, and draw a detailed list of acceptable stocks as pledge and the pledgeratio for the bank on the basis of price, profitability, liquidity, performanceof the listed company, financial indicator and the overall stock marketperformance.
Article26 Creditors shall track at any times themarket value of the pledged stocks held, and make assessment at least onceevery trading day of the total market value of the pledged stock for eachborrower.
Article27 It is required to establish thealarm line (market value of the pledged stock/ principal of the loan *100%) andselling line (market value of the pledged stock/ principal of the loan *100%)so as to control risks caused by stock price volatility. The floor of the alarmline is 135% while that of the selling line is 120%. In case the ratio ofmarket value of the pledged stock to principal of the loan declines to thealarm line, creditors shall ask borrowers to instantly fill the gap of pledgevalue caused by the drop of stock price. In case the ratio drops to the sellingline, creditors shall sell the pledged stock in time so as to repay theprincipal and interest, with the residual returned to the borrower or shortfallrepaid by the borrower.
Chapter Six Custody andManagement of the Pledge
Article28 Creditors shall establish special membership for stock-pledgedloan business (hereinafter referred to as special seats) in the stock exchangeto manage and keep custody of the pledge, and establish special settlementaccounts (hereinafter referred to as settlement accounts) in the securitiesregistry and clearing institution for the purpose of settlement. Borrowers maynot transfer stocks kept by special member before the maturity of the loan,except for the case stipulated in Article 33 of these Rules or thesituation where creditors and borrowers reach an agreement.
Article29 Securities registry and clearinginstitution shall transfer the full amount of pledged stocks to specialmembership in time according to the application of borrowers and creditors.
Article30 Borrowers may apply to creditors for thepartial or full replacement of the pledge. The contract may be renewed toreflect the replacement with the consent of creditors. The two parties shallregister this replacement in the securities registry and clearing institution,which shall issue the new registration documents of pledged stock to creditors.
Article31 Creditors may sell partial or all pledge inaccordance with the application of borrowers, and the proceedings shall bedeposited in creditors’ account so as to repay loans ahead of schedule, withthe residual returned to borrowers.
Article32 Creditors shall inform borrowers and askborrowers to replenish or replace the pledge, or increase funds deposited increditors’ account in the following cases:
(1) the market value of thepledge being under the alarm line designated in Article 27 of these Rules,
(2) pledge being involvedin any of the activities described in Article 12 of these Rules.
Article33 Creditors have the right to dispose thepledged stock if its market value is at or below the selling line designated inArticle 27 of the Rules, and the proceedings from the selling shall beused to repay the claims of creditors directly.
Article34 Creditors shall return the pledge to borrowerswhen borrowers honor the repayment at the expiry of the loan contract. Creditorshave the right to sell the pledged stocks through their special membership ifthe borrower fails to repay, and the proceedings from the selling shall be usedto repay the claims of creditors directly.
Article35 Propagated Interests (including scrip issue, dividends,interests etc) of the pledged stock shall also be pledged.
If a rights issuewith respect to pledged stocks takes place, borrowers are supposed to purchaseand pledgeize the newly issued stocks. If the borrower fails to do so and thereforecausing the pledge value to decline, pledge should be replenished.
Chapter Seven Penalties
Article36 The China Banking Regulatory Commission shallissue a warning according to law to the creditor that has had any of thefollowing misconducts. Serious event may result in suspension or cancellationof the creditor’s business license on stock-pledged loans and punishment ofthose accountable for these misconducts:
(1) conducting stock-pledgedloan business without the approval of the China Banking Regulatory Commission,
(2) extending stock-pledged loans to unqualifiedsecurities firms stipulated in these Rules,
(3) extending the maturity of stock-pledged loans tomore than one year,
(4) accepting as pledge stock prohibited in these Rules,
(5) having pledge ratio and other credit line ratiosabove the limits stipulated in these Rules,
(6) failure to provide stock-pledged loans inaccordance with unified credit authorization and prudential principle,
(7) disclosing confidential information on stock-pledgedloans and business secrets of the borrower.
Article37 The China Banking Regulatory Commission shallissue a warning or publication to the borrower that has had any of thefollowing misconducts, and those held accountable shall be punished:
(1) using non-proprietary stock as pledge,
(2) failure to exert loans in accordance with thecontract,
(3) refusal to be supervised by the creditor on theuse of loans,
(4) failure to fulfill the obligation of informationdisclosure in accordance with the fourth item of Article 9 in these Rules.
Article38 The regulatory authorities shall issue awarning or publication to the securities registry and clearing institution thathas had any of the following misconducts, and those held accountable shall bepunished:
(1) failure to verify the authenticity and legitimacyof the stock according the requirement of creditors,
(2) failure to freeze and unfreeze the pledged stockin time in accordance with the requirement of creditors,
(3) conducting pledge registration for stocksexceeding the ratio stipulated in these Rules,
(4) issuing false registration documents ormisreporting the volume of pledge for borrowers.
Article 39 The People’s Bank of China andits branches may advise the China Bank Regulatory Commission, the ChinaSecurities Regulatory Commission or their branches to carry out supervisoryexamination over any violations of the Rules, and penalties by theregulatory authorities shall be recorded by the People’s Bank of China and itsbranches.
Chapter Eight SupplementaryProvisions
Article40 Securities registry and clearing institutions shallformulate relevant rules of implementation in line with these Rules.
Article41 Commercial banks conducting stock-pledged loan businessshall formulate detailed rules of implementation, relevant business proceduresand management system, and report to the People’s Bank of China and the ChinaBanking Regulatory Commission.
Article42 Expenses incurred to creditors in their stock-pledged loanbusiness shall be shared on the basis of negotiation between creditors andborrowers.
Article43 These Rules shall be jointly interpreted by thePeople’s Bank of China, the China Banking Regulatory Commission and the ChinaSecurities Regulatory Commission.
Article44 These Rules shall enter into effect on theday of issuance, and the Administrative Rules for stock-pledged Loans ofSecurities Firms promulgated jointly by the People’s Bank of China and theChina Securities Regulatory Commission on February 2, 2000 will be invalidated at the same time.
