Active Support in Innovative Development and Enhanced Efforts in Risk Control

（Address of Zhou Ming, Secretary of the Party Committee and General Manager of the CSDC, at the Securities Company Innovation and Development Seminar in 2013）

      In line with the requirements of the China Securities Regulatory Commission (CSRC) and securities companies, China Securities Depository and Clearing Corporation Limited (CSDC) has been adhering to its basic concept of unity of active support in innovative development and enhanced efforts in risk control since 2012, and proposed “ten measures to support innovative development of securities companies”. Up till now, these measures have been implemented and remarkable progress and results have been achieved. Now, I will talk about three aspects of the CSDC efforts to support securities companies’ innovative development. 

      1. What have we done to support innovative development of securities companies? 

      The CSDC has launched “ten measures to support innovative development of securities companies” in 2012. By the end of April 2013, remarkable progress and results have been achieved in the implementation of these measures. 

      (1) To create an integrated securities account management system and support off-site account opening. 

      To overcome the problems of high cost and low efficiency of opening a securities account over a counter, the CSDC promulgated the Interim Measures for the Off-site Opening of Securities Accounts on March 25, 2013 to set up an off-site account opening system based on a real-name system and standardization. By April 25, 38 securities companies had opened 11,625 securities accounts in off-site mode by using the witnessing service for account opening; 70 securities companies have already submitted application materials and obtained approval for carrying out the off-site account opening business. The online account opening service by using digital certificates is ready for use. 

      In addition, to solve the problem of coexistence of multiple sets of securities accounts in Shanghai Stock Exchange and Shenzhen Stock Exchange and a complicated management system, The CSDC has set about the integration of the management systems for securities accounts and set up an investor-oriented securities account management system capable of accommodating different securities holding and custody modes and serving multiple trading places. 

      (2) To research into a system for transfer of ownership of securities, and support securities companies’ innovation in asset management businesses and products. 

      In the client asset management business of a securities company, it is necessary to transfer securities from the client’s account to the asset management account of the securities company. However, this kind of securities transfer is not allowed by the existing regulations. After a careful study, the CSDC has prepared the Interim Measures for Transfer of Securities (Draft for Comments) and plans to promulgate the interim measures after it receives comments from the market and obtains the approval of the CSRC. The interim measures set up a securities transfer system between clients’ accounts and the asset management accounts of securities companies, improve the securities custody and securities holding system, and enable securities companies to carry out the asset management businesses for clients to revitalize their securities portfolios. 

      (3) To further improve the system for agent collection & payment of fund and provide securities companies with secure, efficient, and cost-effective fund transfer and payment service. 

      The CSDC has set up independent agent fund collection and payment system in Shanghai Branch and Shenzhen Branch respectively, established electronic connections with more than 20 settlement banks, and provided efficient, convenient, and low-cost agent fund collection and payment services for securities companies, custodian banks, and fund companies. Since 2012, the CSDC has formulated a networking solution to agent fund collection and payment systems in Beijing, Shanghai, and Shenzhen, for function optimization. Upon completion of construction, the system will solve the problems of fund accumulation and sharing, improving fund utilization, and reducing inter-bank cross-regional fund transfer and payment cost for settlement participants. 

      (4) To further improve the legislation on the securities collateral system; improve the rules and processes for the securities collateral business, extend the functions of the collateral management system, and enable securities companies and the market to revitalize the inventory assets and realize the value preservation, increase, and effective use of the inventory assets. 

      The CSDC has adopted a series of measures to improve the securities collateral mechanism from 2012. The measures include, but without limitation on, the following: developing an information platform for supply and demand of pledged securities, expanding the pilot programs of agent registration of a pledge of securities for securities companies, optimizing the pledge registration process, improving the pledge registration efficiency, exploring new methods for improving the processing efficiency of the pledged securities, improving the functions of the collateral management system, improving related rules, agreements, and guidelines for the collateral business, and driving the legislation on the securities collateral business. 

      (5) To fulfill the legal obligations in the case of third-party asset custodies, support securities companies in developing multiple innovative businesses including the asset management service for clients, and offer low-cost and high-efficiency asset custody service. 

      With the development of asset management business of securities companies, the CSDC will make the best of its brand image to build a reputable, professional, efficient, and low-cost infrastructure and service platform for the asset management services, and to effectively reduce the operating cost of the securities companies. By the end of April 26, the custodian products reached 43. Among them, 41 are cash management products of securities companies and 2 are other wealth management products of securities companies, with a total amount of 45.3 billion RMB. 

      (6) To further optimize the management of securities account, the management of cash deposit and the services of registration and settlement, promote the development of the securities margin trading and refinancing businesses, and enhance the profitability of securities companies. 

      The CSDC has launched the refinancing and securities loan registration and settlement system in 2012, which provides supporting registration and settlement services and deposit management service for the refinancing business. The transformation of related system has been completed by the end of 2012. At present, it enables customers to open credit securities accounts and participate insecurities margin trading.

      (7) To expand the scope of securities companies’ registration agent businesses, and further improve the centralized securities registration system while also maintaining clear-cut division of labor.

      Under the centralized securities registration system with clear-cut division of labor, the CSDC has worked closely with securities companies to implement the responsibilities of securities registration. From the second half of 2012, the CSDC has completed pilot programs in the first 12 securities companies on remote agent registration of a pledge of securities, and is now ready to launch this business on a large scale.

      (8) To provide securities registration and settlement services with high quality and efficiency, and assist securities companies in developing and operating OTC markets.

      The CSDC actively supports the OTC pilot project in securities companies. Therefore, the CSDC has set up a work group for registration and settlement in the private placement market, propelled the registration and settlement services for the inter-agency private placement market and the OTC market of securities companies. In addition, the CSDC has also implemented centralized backup of the OTC market transaction settlement data, and made research into and preparations for the OTC registration and settlement services for derivative products. 

      (9) To work closely with securities companies in building a share depository and registration system for the non-listed public companies. 

      The CSDC is the statutory registration organization for non-listed public companies as specified in the Measures for the Supervision and Administration of Non-listed Public Companies. The CSDC has promulgated the Detailed Rules for the Implementation of Share Registration and Depository for Non-listed Public Companies (for Trial Implementation) and developed the share registration and depository system for non-listed public companies. Securities companies are welcome to implement the business with us. 

      (10) To strengthen the construction of industry technology platforms and infrastructure facilities, and promote the information security and the development of the IT in the securities industry. 

      Since 2012, the CSDC has made remarkable progress in the construction of such technology platforms and infrastructure facilities as the Data Center for the Securities and Futures Industry, the Centralized Data Exchange Platform for Wealth Management Products, and the Securities and Futures Information Industry Base, according to the work arrangement made by the CSRC. In particular, the CSDC, based on its own advantages, has strengthened the construction of the CA authentication service project for the industry to support online account opening and various online services. By the end of April 2013, 21 securities companies have conducted the interconnection test of the CA system with us. As the infrastructure and a fundamental service provided for the industry, the CA digital certificate and authentication service involve high input and big technological difficulties . We expect that securities companies and other industrial institutions could provide active support and cooperation while we strive to provide high-quality and efficient services. 

      2. What do we think of supporting the securities companies’ innovative development? 

      At the workshop held in May 2012 and the seminar held in November 2012 on supporting innovative development of securities companies, the CSDC has iterated its basic concept of unity of active support in innovative development and enhanced efforts in risk control. 

      (1) Maintain a balance between active innovation and risk control and prevent systematic risks.

      The CSDC sticks to the principle of keeping the risks measurable, controllable, and affordable, and maintaining a balance between innovation and risk management. Firstly, we attach great importance to risk control and exert every effort possible to prevent occurrence of systematic risks and ensure secure and steady operation of the national registration and settlement system. Secondly, we raise the risk tolerance to encourage innovations. Thirdly, we try hard to enhance the risk management level. In 2012, we have set up a new session of risk management committee, developed the specifications for evaluating risks of key innovative projects, and promoted quantitative and refined risk management. 

      (2) Manage the relationship between innovation and development well and stick to the principle of serving the real economy by financial services. 

      As a core part of modern economy, finance also takes a deep root in the real economy. It cannot thrive without a solid foundation of the real economy. Therefore, innovations of securities companies shall focus on developing the real economy, improving the quality and level for serving the real economy, helping the transformation of economic growth mode, and realizing the coexistence and common development of the capital market and the real economy. Innovation and development complement each other, and neither is dispensable. Therefore, innovation must comply with the inherent requirements and law of the development. Innovation is not merely for the purpose of innovation, and neither can it create financial bubbles. It is absolutely unacceptable for us to pursue for short-term interests at the cost of long-term and healthy development of securities companies and the capital market, or even at the cost of the development of the real economy. 

      (3) Manage the relationship between innovation and operation in compliance with law and protect the legitimate rights and interests of investors. 

      In accordance with related regulations of the CSRC, securities companies shall carry out operations and business or product innovations in compliance with the law. Innovations cannot breach the current laws, administrative regulations, and provisions of the CSRC. Compliance with law is not a curb on innovation, but a guarantee for innovation. Compliance with law is of great importance for the CSDC as it provides the systematic financial infrastructure. Investors are the cornerstone of the securities market, and any innovation of securities companies must aim to protect the legitimate rights and interest of investors. Breach of laws or regulations or comprise of investors’ legitimate rights and interest will eventually jeopardize the survival and development of securities companies.

      (4) Manage the relationship between centralization and division of labor and reduce the overall operating cost of the market. 

      As proved by international experience, the registration and settlement business is developing from a decentralized mode to a centralized mode. For example, a highly centralized registration and settlement system is implemented in the U.S., under which the Depository Trust & Clearing Corporation (DTCC) is responsible for providing centralized securities depository and settlement service for multiple stock exchanges, the OTC markets, and overseas markets. It has an average settlement cost of about 1/5 of that in the decentralized European markets. At present, the integration of securities depository and settlement agencies takes place alongside with integration of stock exchanges in the European market, in an effort to cut down the market cost and enhance the international competitiveness. After the global financial crisis in 2008, western developed countries and international financial supervision organizations reached an important consensus, that is, OTC transactions should also be registered and settled in centralized manner whenever possible to improve the market transparency and proactively identify, warn, and remove a systematic risk. We shall draw experience from international development trends and lessons while propelling the innovative development of securities companies. 

      (5) Manage the relationship between the coordination and overall organization and the division of labor responsibility system and guarantee business innovations by system and mechanism. 

      Innovative development of securities companies involves a diversity of aspects and needs close cooperation and coordination of different market players. Firstly, innovative development of securities companies is a strategic and systematic project which requires top-down design, overall coordination and planning, and orderly promotion. Secondly, the CSDC has to implement internal planning and coordination as well. The CSDC has set up a standardized planning and coordination mechanism for business innovations, and strengthened the functions of the mechanism in overall planning, communication and coordination, and supervision and inspection by the conference on planning and coordination of business innovations, project list of business innovations, innovation dynamics, and special summary reports. In this way, the synergic effect and overall efficiency of the mechanism are improved to effectively deal with the difficulty and challenges of innovative development. 

      3. What will we do in the future to support innovative development of securities companies?

      In 2003 and the time ahead, the CSDC will continue to support securities companies in innovative development and risk control. The focus of our work includes: 

      (1) To support the construction of a multi-level capital market. We will actively carry out the registration and settlement services on the New Third Board (a new agency share transfer system) market, and set up a registration and settlement service system adaptable to its characteristics and requirements. 

      (2) To actively and steadily establish a unified securities account management system. We will solicit the market opinions on the Business Proposal to Construction of an Unified Account Platform and on related business requirements. We will then submit the proposal to the CSRC for approval after we amend the proposal based on market feedback. 

      (3) To promote the establishment and pilot of the securities transfer system. We will carry out market requirement survey in line with general arrangement made by the CSRC on the asset management business, and modify the Interim Measures for Transfer of Securities in Asset Management Business, and promulgate it after it is approved by the CSRC. 

      (4) To integrate the information platform for supply and demand of pledged securities, pledge registration, and third-party management of collateral, continue to promote the optimization and improvement of the security business rules, laws and regulations system, and promote and revitalize the stock portfolio. 

      (5) To vigorously develop the CA authentication service, carry out CA system interconnection testing, production system access, formulate and promulgate the Interim Measures on Digital Certificate Authentication Management, and properly resolve related business, technology, and legal issues, and provide digital certificate authentication service for the online account opening business. 

      (6) To further develop the fund TA services, the fund clearing services, data exchange platform of the fund, the integration synergies of the fund capital delivery services and fund asset custody service, develop the centralized clearing and settlement services for fund sales capital, automatic transmission services of fund transaction orders, and the expansion of the asset custody service range, and provide electronic, automatic, and efficient industry infrastructure and services for the wealth management business of securities companies.

      (7) To research, plan and develop derivatives registration and settlement services in accordance with the actual needs of the market, and support the development of the derivatives market. 

      (8) To optimize and improve the settlement business, further improve the settlement risk management system, and improve the refined and quantitative management on settlement risks. 

      The innovative development of securities companies still have a long way to go. The CSDC will continue to provide strong support to the innovation and development of securities companies and to make new contributions to the development of the capital market under the guidance of the CSRC.