Industries > Finance

Brokerage external access to see new supervision rules with “blacklist”
2015-11-10 13:41

Already collect

It is learnt by 21st Century Business Herald exclusively that regulators recently issued Managing Method on External Access to Information System of Securities Companies (exposure draft) (hereinafter “Method”) to some brokerages, proposing to remodel supervision on external accesses to brokerages’ information system, which will be restarted in the future. 

32 provisions set new rules

It is also learnt that the said Method has 32 provisions specified in six chapters, setting new rules for related items, such as behaviors forbidden in this accessing business, system program and etc.

A head of brokerage sales department under Central Huijin Investment Ltd. indicated that “regulators are very decisive to implement criterions, mainly as system of Hundsun Technologies Inc. (600570.SH) supported the off-market margin financing; various temporarily-suspended businesses still need to be resumed with corresponding criterions after such dramatic disturbance, for example, IPO will be resumed and its access is expected to restart.”

Brokerages are responsible to firstly supervise information system of the third parties according to the Method, and should make it meet the requirements of their own risk control and criterions when carrying out such businesses; meanwhile, they also need to realize specific patterns and clients’ background of the external accesses. 

Based on the Method, technical framework and accessing patterns of external information systems should be mastered; business types in the said systems, major clients and utilization patterns should be realized; recognition, assessment and management should be carried out for potential interest conflicts; any benefit transfer through any patterns shall be banned.

The head of sales department mentioned above also pointed out that “these provisions require the brokerages to make clear which the clients are in the external systems and what they will do”; “besides off-market margin financing, external accesses also involve some complicated strategic trading; there will be potential major risks, if brokerages do not know trading logics or account holders.”

It is worth to notice that, according to the Method, external information systems with securities trading function shall access through specialized communications channels including special lines and VPN; information systems, which realize the securities trading function through isolate application module or program packaged by securities companies or through direct accesses to their general browsers, are regarded as external information systems without securities trading function.

Staff in network technology department of a Shanghai securities company indicated that “these systems usually are software downloaded from official websites of brokerages, such as software of Hithink RoyalFlush Information Network Co., Ltd. (300033.SZ) and Shanghai DZH Limited (601519.SH); entrust end is a system, and market trend end is another system; such cooperative pattern also needs to be assessed and certified after these systems are regarded as external systems.”

Five forbidden behaviors + Blacklist

The Method specifies that five behaviors are forbidden, such as violating laws and rules, off-market margin financing, anonymous accounts, evading supervisions or self-discipline management and trading accesses, which will be “restricted zone” for brokerages when they carry out such businesses.

And off-market margin financing is a main activity banned by the Method. The Method requires that “while conducting securities business through external access, without prior approval from CSRC, securities companies shall not facilitate margin trading or short-selling transactions between clients, or between clients and others, and shall not introduce off-market margin financing to their clients”.

Meanwhile, issues concerning umbrella trust, Hundsun HOMS trading units, sub-account have also been referred to in the Method.

“Securities companies shall not open account in anonym or in fictitious name for a client, or provide services to a client with fake identity; shall not provide conveniences for information technology parties to establish account registration system; shall not leak clients’ sensitive information; shall not open sub-account or virtual account for clients ,” the Method prescribed.

In addition to real-name account system, the Method requires securities companies to examine names declared by clients, and “ensure consistency of names on capital account and securities account of the same client”.

In terms of potential illegal behaviors, securities companies should establish interior system and supervision mechanism in connection with external accesses, and implement day-to-day monitoring, as well as take appropriate contingency methods in abnormal conditions.

Besides, the Method requires Securities Association of China (SAC) to introduce blacklist mechanism for external accesses. “Information technology service institutes and their management should be blacklisted once serious violation occurred.” The Method stipulated that “blacklist will be published on the website of SAC, and will be entered into credit system maintained by SAC in according to regulations. Securities companies are not allowed to connect to blacklist information system”.

Incremental fund may enter

Industrial insiders considering the solicitation of opinions on external access signals restarting of securities companies’ business in this category is moving closer.

“After the accesses are blocked, many clients are not able to make deals in this category,” a manager from institutional department of a large state run securities companies in eastern China said “not only margin financing are forced out, many private funds cannot issue product either, and quantitative, strategic and programmed trading are suspended”.

Journalist from 21st Century Business Herald learnt that even on HOMS and Mecrt, which are systems with margin-financing feature, part of the fund is not margin fund. Such fund simply trade through other functions of these systems, but were unfortunately impacted by the governance of securities companies’ external accesses.

After relevant external accesses halted, self-owned PB businesses of securities companies become alternatives. But the experience from such businesses lagged far behind some professional third party applications.

“Securities companies’ PB cannot keep up with the demand of mangy quantitative strategies,” a general manager from a subsidiary of a fund located in northeastern China said “so, many old clients have not created new products, instead they are waiting for the re-opening of such accesses”.

That is to say, after external accesses connected again, relevant incremental fund are likely to enter the market. Some analysts believe though such funds may not be long positions, but the entrance of such funds will contribute to an active market.

“Such funds are not necessarily long positions, and many are mixed with long and short positions,” the above general manager revealed “but the market will be more active, which to a large extent is in favor of the market, and liquidity risks during the plummeting period will reduce”.
Translated by Jelly and Adam Zhang

Add comments

Latest comments

Latest News
News Most Viewed