New brokerage rules give strict risk controls

The China Securities Regulatory Commission (CSRC) has issued new regulations that will require China's securities companies to keep their capital provisions, net assets and liabilities at certain ratios to their net capital. The strict risk controls are aimed at keeping the industry in good financial health, as China's fragmented and competitive brokerage industry is prone to swings in profits and losses. The new regulations will become effective on November 1 2006.

A key feature of the regulations is that accountants must conduct monthly audits of brokerage businesses' exposure to risk. The regulator also has the power to step in and order brokerages to tighten risk control measures. Failure by the brokerages to do so may lead to penalties including revocations of business licences.

Under the regulations, a brokerage needs at least Rmb20 million (US$2.5 million) in net capital to conduct a business and a net capital of Rmb200 million to provide two or more additional services, such as underwriting and asset management. Margin financing will not be allowed to exceed 5% of the net capital for a single client.