Practice and Exploration of the SIPF. Basic Information of the SIPF Basic Functions of the SIPF : Risk Disposal of Securities Companies Basic Functions of the SIPF : Fund Raising and Management
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IV. Extended Functions of the SIPF: Establishment of a Normal Investor Protection Mechanism in Combination of Monitoring, Evaluation and Service
Two major risks have occurred on China securities market since 2000.
The first risk: During nearly four years (from June 14, 2001 to June 6, 2005), the Shanghai Stock Exchange (SSE) Composite Index fell to 998.23 points from 2245.44 points, down 55.5%.
Figure 1-1: Jan. 2001—Jul. 2005
Shanghai Composite Index Run Chart
Figure 1-2: Features of the First Risk
The customers’ capital were invested to self-run or industrial sectors, thus to push industry risks to the edge of break-out
Figure 1-3: Mode of Risk in Securities Company significant liquidity difficulties. Notably, risks collectively broke out in 34 ones.
Self-run securities business
Settlement fund for securities trading of customer
Bond buy-back fund of customer
Abnormal fund of customer’s financing business
In the above context, the State Council agreed to set up a protection fund company to strengthen risk management of securities companies.
China Securities Investor Protection Fund Corporation (SIPF) was established with a registered capital of RMB6.3 billion on August 30, 2005 and officially started business on September 29 of the same year. The SIPF is a non-profit institution.
Information and StatisticsDepartment
(3) External Supervision Restructuring
II. RestructuringBasic Functions of the SIPF: Risk Disposal of Securities Companies
Make Plan Restructuring
China’s RiskDisposal Procedure
of Securities Companies
Accounting Nature Identification
Ministry of Public Security
Fund use plan made by SIPF as an appendix
Risk Disposal Plan
State Council Restructuring
Five Group’s Linkage
Special Case Group
Administrative Clearing Group
Judicial Protection Measure（ “Three Interrupts”）
Account Nature Identification Restructuring
Bankruptcy liquidation (exceeding RMB100 billion)
Compensate in full amount (more than 9 million accounts)
Buy at discount (more than 60,000 persons)
Institutional debt in personal name
Accounts claimed by customers(depends on accounts classification)
Accounts unclaimed by customers (inactive accounts are about 2.8 million)
Account Nature Identification Restructuring
To study disputes beyond existing policy, and publish new systems.
Led by SIPF to resolve all the disputes under existing provisions
Settle dispute preliminarily
Securities Company Risk Disposal Office of CSRC
(Review aforesaid classification)
(Classify all accounts)
Compensation Policy Restructuring
3. Protection fund:
A. Fill the fund gap in a brokerage account in full amount.
B. As to the part of the securities appropriated in the brokerage account,
compensate personal accounts in full amount (in cash or securities), but
does not compensate institutional accounts.
C. Personal claims
Bankruptcy Procedure Restructuring
Transactions are transferred to a securities company under normal operation
Administration verification Group
Intermediate People’s Court
Account Clearing Basically
Declare the Bankruptcy
Bankruptcy Liquidation Restructuring
(I) Participants in bankruptcy liquidation:
1. Institutional non-brokerage accounts,
2. Institutional debts in the name of individuals
3. SIPF (with the compensation fund as common claim)
4. The other claims not in SIPF’s coverage
(II) The proprietary assets of the disposed securities company and the assets that
can’t be identified to be customer assets can’t be used for investor compensation,
but enter the bankruptcy liquidation.
① It includes RMB900 million of local governments’ investment.
In order to ensure the compliant and safe use of the State acquisition funds, until April 30th, 2010, the SIPF had organized and completed 92 audit inspections on 24 disposed securities companies. Staff from 64 accounting firms and law firms times had participated in those inspections for over 600 person times.
The First Effect of Risk Handling : Promoting the Improvement of Legal System
The Second Effect of Risk Handling: the Goal of ‘Purchasing System with Money’ was Realized.
The Third Effect of Risk Handling: A Withdrawing System from Securities Company Market was Set Up.
The Fourth Effect of Risk Handling: A System Combining Classified Regulation and Supervision for Securities Company and Protecting Market-oriented Fund Collection was Realized.
The Fifth Effect of Risk Handling: Reset Industrial Reputation and Enhance Investors' Confidence
III. Reputation and Enhance Investors' ConfidenceBasic Functions of the SIPF: Fund Raising and Management
Table 3-1: Type of Securities Company and Comparison of Reputation and Enhance Investors' Confidence
Table 3-2: Funds Raised of the SIPF Reputation and Enhance Investors' Confidence
As of December 31, 2009
Unit: RMB100 mn
IV Reputation and Enhance Investors' Confidence. Extended Functions of the SIPF: Establishment of a Normal Investor Protection Mechanism in Combination of Monitoring, Evaluation and Service
The market risk broke out in the context of the international financial crisis. Different from the last crisis, none of securities companies had liquidity risks, but clients suffered a larger loss.
Thus, during the course of this global financial crisis, it is not one of the main issues to dispose of securities companies’ risks. The biggest challenge is how to make investors get more in-depth understanding of stock market risks, enhance self-protection capacity, and make rational investments suited to their risk tolerance. The appropriate management of investors has become one of the important tasks of the SIPF in protecting investors.
Figure 4-1: Reputation and Enhance Investors' Confidence
Curve of Shanghai Exchange Comprehensive Index (from July 2005 till September 2009)
Unit: RMB100 mn
Customer Transaction Settlement Funds’Control Center
Investor Education and Service Center
(Information andStatistics Department)
Investor Survey Center
Asset Management Department
Figure 4-3: Main Components of Normal Mechanism Functions Extended
Confidence monitoring: To predict the market status ASAP and put forward countermeasures and suggestions by monitoring the change in investors’ confidence.
Capital monitoring: To timely detect activities that break laws or rules and safeguard the legitimate rights and interests of investors by establishing the surveillance system of trading settlement funds on the securities markets and monitoring the change in market capital.
Information monitoring: To participate in monitoring information of various types of business entities on the securities markets, and establish standard, rational and open information disclosure system by using XBRL technology.
Public opinion monitoring: To extensively collect investors’ comments on securities companies and investor protection via investor survey, investor call system and Internet search.
SIPF monthly formulated investor confidence index to supervise market change. The confidence of investors had been in relatively pessimism in 2008, especially in August, at the lowest level of 36.3. But after August, the index is generally climbing. Now it is going toward an optimistic trend this year.
Confidence index is climbing after getting down to the bottom in August 2008. Shanghai exchange comprehensive index arrived at the bottom at the end of October 2008. Confidence index arrived at the bottom two months earlier than Shanghai exchange comprehensive index. The upward trend of confidence index fully reflects market trend, with obvious feature of going ahead.
The advance reaction of market confidence index is beneficial to stay calm and stable when proposing a set of steps to rein the stock market, and avoid over-radical actions.
Market Monitoring: Functions ExtendedMonitoring the Change in Investors’ Confidence
Figure 4-4: Comparison between Investor Confidence
and SSE Composite Index Trends
Under the united deployment of CSRC, SIPF has been building the surveillance and control system of customer’s capital in securities companies since last year. The system will support the regulation of securities, with an aim to supervise the capital flow in the market, to prevent customer’s capital from embezzlement, to timely disclose illegal actions of market dominance and practically protect legal interests and rights of investors.
Necessity: deficiency shows in the operation of the entrusted system of the third party, especially the shortage of effective supervision on the customer’s capital in the whole market, so as unable to timely acquire the status of capital flow in the market.
Figure 4-5: Illustration of Surveillance and
Control System of Customer’s Capital
Securities companies and other investment agents
Shanghai and Shenzhen Security Exchange
Capital account of customers
Day-end transaction data
Customer’s capital information
Surveillance and control system
Capital delivery of legal person
Data of settlement
Capital flow and balance of specific deposit account and administration account for customer’s transaction and settlement
Data of change of customer’s transaction settlement
Registration settlement companies
Securities company N
Securities company N
Capital administration account of customers
Account of settlement provision and customer capital in securities companies
Special deposit account for trading settlement capital of customers in securities companies
Association of securities industry
Capital flow between entrusted banking account of securities company and provision account of registration company
Capital flow of entrusted banking account in securities company
Financial crisis shows that deficiency in highly transparent mechanism of information disclosure and lack of effective regulation, shall lead to huge risks that are hard to foreseeable to various investors participated in capital market, including general investors.
CSRC is to liaison with related organizations to set up a comprehensive standard data system of interactive disclosure of information based on XBRL technique. It aims at establishing a comprehensive system of standard data report and delivery in China, to further increase the transparency and efficiency of disclosing capital market information, without changing the current framework based on all rights and responsibilities and XBRL-based technical support.
SIPF is in the progress of developing XBRL-based data application system. The system will provide investors with more convenient, standard and comprehensive platform of information browsing, which is beneficial to raise the judgment of investors about the market and increase the level of reasonable investment.
Chinese capital market is now in rapid development. The market feature of “brand-new and transit” determines the relatively uncertainty of current capital market in market environment and investor psychology. Besides, the market is lack of an internal regulation system.
Thus, to set up a comprehensive investor-oriented service system is a necessary choice to foster qualified investors and promote stable development of the market.
Concerning the characteristics of Chinese investors in securities market, to strengthen investor-oriented service is of utmost necessity. SIPF displays its own advantage in devotion to build up a multi-leveled and multi-faceted investor-oriented service system comprising of investor survey, investor education, and investor call response, so as to protect the legal interests and rights of small and medium-sized investors.
Strengthen investor-oriented service
Figure 4-6: Protection and Services System of Investors
Fig 4-7: Age Structure securities market, to strengthen investor-oriented service is of utmost necessity. SIPF displays its own advantage in devotion to build up a multi-leveled and multi-faceted investor-oriented service system comprising of investor survey, investor education, and investor call response, so as to protect the legal interests and rights of small and medium-sized investors.
Fig 4-9: Vocational Background
Fig 4-8: Educational Level
Fig 4-10: Income Level
Fig 4-11: Regional Distribution securities market, to strengthen investor-oriented service is of utmost necessity. SIPF displays its own advantage in devotion to build up a multi-leveled and multi-faceted investor-oriented service system comprising of investor survey, investor education, and investor call response, so as to protect the legal interests and rights of small and medium-sized investors.
Fig 4-13: Distribution of Investors’
Fig 4-12: Time of Stock Market Entrance
Investor Services – Response to Investor Call securities market, to strengthen investor-oriented service is of utmost necessity. SIPF displays its own advantage in devotion to build up a multi-leveled and multi-faceted investor-oriented service system comprising of investor survey, investor education, and investor call response, so as to protect the legal interests and rights of small and medium-sized investors.
Fig 4-14: Call Response Process
Inquiry and complaint for fund business
Inquiry and complaint for accounting information
Telephone, online message and email of SIPF
Transferred to the Expert Board or other departments
Transferred to other departments or self-disciplinary organizations
Preparation of response
Transferred to securities operation institutions
First, there is a gap between the authority of investor service and actual needs and the absence of a real investor representation mechanism makes it difficult to improve the efficiency and effect of investor protection;
Second, as most of the disputes on securities investment are settled through court judgment and it is difficult to protect the rights of investors through negotiation and arbitration;
Third, medium and small-size investors are in need of an authoritative and impartial channel and guidance to protect their rights as there is no valid law governing the protection and legal assistance for investors and the responsibilities, contents and forms of legal assistance are not specified.
As listed companies are the cornerstone of the securities market, the protection of listed company investors is of top priority in the protection of securities investors.
SIPF has set up an assessment system: based on the investors’ right of information, right of investment returns and the right of decision-making participation, the Listed Company Investor Protection Assessment System involves three tier-one indicators, 12 tier-two indicator and 40 tier-three specific indicators covering the governance structure, information disclosure and business activities of listed companies, through which, SIPF has acquired the weights of the above-mentioned indicators (See Fig 4-15).
Quantitative Assessment Indicators for Listed Company Investor Protection
Fig 4-15: Investor Protection Indicator and Weight
Institutional construction, 28％
Shareholders’ exercise of rights in shareholders meeting, 22%
Protection of participation in decision-making,
Construction and implementation of board of directors functions, 22%
Construction and implementation of board of directors functions, 18%
Construction and implementation of a supervisory and incentive mechanism by the management, 10%
Disclosure of important governance information, 22%
Protection of information right, 42%
Disclosure of financial reports, 32%
Disclosure of material events, 31%
Disclosure of other information, 15%
Protection of return on investment, 30%
Value creation, 40%
Interest transfer, 29%
Profit distribution, 31%
The listed company investor protection assessment system of SIPF classifies the protection of listed company investors into four grades:
Grade A: investor protection score ≥80;
Grade B: 80 > investor protection score ≥60;
Grade C: 60> investor protection score ≥40;
Grade D:investor protection score <40 or it is subject to the first ST or penalty in the current year or it is suspended from trading permanently.
Based on the Listed Company Investor Protection Assessment System, SIPF has assessed the protection of listed company investors in the following aspects:
Protection of listed company investors in different years from 2003 to 2008 (see Table 4-2, Table 4-3 and Fig 4-16).
Protection of listed company investors in different industries from 2003 to 2008 (see Table 4-4).
The protection of most listed company investors is at a medium level.
The protection of listed company investors remains to be improved.
There is extensive room for the improvement of listed company investor protection.
The protection of listed company investors varies greatly in different industries.
The investors’ right of information is well protected in the disclosure of listed company information.
Table 4-2: Investor ProtectionProtection Index and Rating of Listed Companies' Investors
Table 4-3: Changes in the Protection Status of Investor Protection
Listed Companies’ Investors in 2003-2008
Fig 4-16: Changes in the Investor Protection Indicator Investor Protection
of Listed Companies from 2003 to 2008
Table 4-4: Protection Status of Investor Protection
Listed Companies’ Investors in 2003-2008 by Sector
As the major participants of the securities market, the performance of securities companies’ protection of investors has a direct impact on investors’ asset security and market confidence.
SIPF assesses the protection of securities investors in the following manner: to assess the securities companies’ intentions, capabilities, measures and effect of investor protection concerning the investors’ right of asset security, fair trade, investment information, free choice, investment litigation and bankruptcy compensation through the tree-shaped indicator system (see Fig 4-17) composed of four tier-one indicators, 17 tier-two indicators and 45 tier-three indicators.
Fig 4-17: Securities Investor Protection and Weight Assessment Indicator System
Basic rights of investors
Internal control and corporate governance
Financial assessment of internal control
Soundness of internal control
Effectiveness of internal control
Other internal control matters
Investor education, service and right protection
Classified customer management
Investor information service
Completeness of disclosure
Timeliness of disclosure
Accounting information quality
Transparency of disclosure
Asset trade security
Complaint handling mechanism
Customer service innovation
Securities Investor Protection Assessment Indicators
Grade A: investor protection score ≥ 80;
Grade B: 80>investor protection score≥60;
Grade C: 60≥investor protection score ≥ 70;
Grade D: investor protection score≤60.
Most of securities investor protection is in good condition.
Evaluation results of securities investor protection status was significantly lower than the rate results of classified supervision of securities companies in the same period, indicating that there is still large room for improvement in investor protection.
The evaluation of securities investor protection status takes the legitimate rights and interests of investors as the core, while the evaluation of supervisory classification takes net capital of securities companies as the core. Given the difference in their focus, the findings of securities investor protection assessment based on the legal rights of investors are not necessarily the same with the findings of classified supervision assessment based on the net capital of securities companies.
Table 4-5: Comparison of Securities Company Investor Protection Assessment and Separate Supervision in 2008
The rapid spread of global financial crisis has proved the necessity of establishing an international cooperation mechanism for investor protection. China ranks the third in the world by the scale of securities market after years of rapid development and it is considering the establishment of an international board. The scale, liquidity and globalization level of market call for the strengthening of international cooperation for investor protection.
SIPF has been dedicated to setting up an international cooperation mechanism for investor protection in the past two years. Currently, international cooperation for investor protection is mainly carried out in the following three aspects:
Set up an information reporting mechanism and information communicating platform
Provide consulting services for overseas investors through interactive communication
Promote the establishment of an international forum for investor protection
Thank You SIPF paid an official visit to U.S.A and Canada, to attended the “2010 International Compensation Funds Meeting” in Montreal and participated in the “SIPC Modernization Task Force” in Washington, D.C.！