To Further Improve Domestic Clients’ Transaction Settlement Capital Custody And Deposit Institution

The foundation of the development of securities market is the safety of clients’ securities investment assets, i.e. clients’transaction settlement capital and securities, while the custody and deposit system is the core to guarantee clients’assets safety.On clients’trade settlement capital level, China’s custody and deposit system has seen three phases. The first one is the mixed custody phase, which is before the implementation of the Clients’Transaction Settlement Capital Management Measures on January 1st,2002. Security company mixed clients’ transaction settlement capital and its private capital under its management. The second one is the segregated custody and deposit phase. From January 1st,2002 to December 31st,2007, i.e. after the implementation of the clients’ transaction settlement capital management measures, yet before the clients’ transaction settlement capital third party custody and deposit approach was adopted throughout the entire industry, the clients’ transaction settlement capital was strictly segregated from the security company’s private capital and under the security company’s independent custody and deposit. In the meanwhile, a number of security companies started to use third party custody and deposit. The third one is the third party custody and deposit phase. By December 31st,2007, the clients’ transaction settlement capital third party custody and deposit institution was fully implemented in the whole security industry.As an institutional arrangement in a special historical period, the clients’ transaction settlement capital third party custody and deposit institution made major contribution to the regulation of the security companies operation, to the clean-up of legacy issues, and to the upgrade of the image and integrity of the securities industry.However, the legislative environment and background of the clients’ transaction settlement capital third party custody and deposit institution has fundamentally changed in recent years with the development of China’s securities market norms, At the same time, the industry practice for years also revealed many endogenous defects and deficiencies of third party custody and deposit institution-Custodian and depository banks and can not effectively fulfill the responsibility to safeguard the clients’transactions settlement capital; the effectiveness of the third-party custody and deposit institution needs assessment; the third-party custody and deposit institution cast a negative impact on innovation efficiency, risk control and balanced development of China’s securities market, and impedes the unity and coordination of the regulation of the securities and futures market.Thereafter, it is imperative to further improve domestic clients’ transaction settlement capital custody and deposit institution in order to lay a solid foundation for the innovation and development of the securities market as well as a the construction of a diversified capital market. On May 9th, 2014, the State Council issued the State Council’s Opinions on Further Promotion of the Healthy Development of the Capital Markets. It was expressly pointed out that under the premise of risk control, the optimization of the clients’transaction settlement capital custody and deposit institution is pressing for increasing urgency.This paper argues that the establishment of domestic clients’transaction settlement capital custody and deposit institution is a systematic project, including the following five parts:I. Segregated account management institutionThe first and foremost measure worldwide to prevent security companies from embezzlement of clients’capital is that security company shall separate clients’transaction settlement capital from its private capital, cut off associations and manage them in segregated accounts. The Clients’ Transaction Settlement Capital Management Measures implemented in 2002 established the framework of the strictly segregated account management institution of clients’transaction settlement capital.II. Strengthening the internal control system of security companiesDuring the comprehensive administration period, the China Securities Regulatory Commission Securities upgraded the overall corporate governance structure and tightened the risk compliance regulation in the industry. Internal control system construction shall be further strengthened and security companies shall facilitate their clients’ transaction settlement capital security management In the process of innovation and development of the securities industry.III. Establishment of strict selection criteria for clients’ transaction settlement capital deposit banksAs prudent selection of deposit bank is an integral part of the safety management system of clients’ transaction settlement capital, strict criteria shall be established for the selection of clients’ transaction settlement capital deposit banks. Special attention shall be paid to the risk resistance capacity, the payment and settlement efficiency and the business outlets during the selection. Preferred are those state-owned big commercial banks with sufficient risk resistance capacity, sound operating performance and secure/ efficient remittance and wire system.IV. Further improvement of the third party supervision mechanism.Empirical evidence of third-party custody and deposit of clients’ transaction settlement capital has proved the fact that the introduction of the third party supervision is an effective security mechanism and measure to guarantee clients’ transaction settlement capital safety.The current situation of clients’ transaction settlement capital custody and deposit exposes deficiencies of banks acting the role of third-party custody and deposit for clients’ transaction settlement capital. In order for the third party supervision mechanism to be more effective, it is suggested that that the more independent and more objective China Securities Investor Protection Fund take on the clients’ transaction settlement capital custody and deposit third party supervision duties. In fact, the stock market transaction settlement capital monitoring system constructed by the China Securities Investor Protection Fund has already been in used to achieve surveillance functions such as daily clients’ transaction settlement capital reconciliation, cross validation, monitoring and pre-warning.V Strict implementation of laws and regulations; Increase in penalties for embezzlementSecurity companies are prohibited from embezzlement of clients’ capital by China’s Criminal Law Amendment and Securities Law. Such behavior constitutes criminal offence. As the ultimate guarantee for the safely of clients’ transaction settlement capital, aforementioned regulations shall be strictly implemented.