The Securities Association of China ("SAC") has recently issued the Guidelines on Risk Management for Securities Companies to be Engaged in Stock Pledged Repo Transactions (the "Guidelines"), with effect from March 12, 2018.
The Guidelines introduce amendments as follows. The first is strengthening requirements on due diligence conducted by securities companies; the second is tightening the monitoring over the capital lent out; the third is detailing requirements on risk control indicators; the fourth is establishing the blacklist system; the fifth is reinforcing administration of the bottom line of activities carried out by securities companies to expand their business; the sixth is better protecting rights and interests of asset management clients; and the last is placing strict control over related-party transactions. In particular, the Guidelines, under the classified-regulation principle, impose limitations over the scale of fundraising in respect of securities companies' engagement in stock pledged repo transactions with their own funds, stating that for a securities company graded as Category A after evaluation, the outstanding amount of financing with its own funds shall be no more than 150% of its net capital; however, such amount shall be up to 50% of the net capital if it is graded as Category C or even lower. Meanwhile, securities companies are required to withdraw the asset impairment reserves for bad debts.