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An Introduction to the Operation of Securities Investors’ Protection Fund of China (SIPF) Chen Gongyan Chairman of SIPF. Background of SIPF’s Establishment (I): Collective Breakout of Industry Risks.

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An Introduction to the Operation of Securities Investors’ Protection Fund of China (SIPF)

Chen Gongyan

Chairman of SIPF

background of sipf s establishment i collective breakout of industry risks
Background of SIPF’s Establishment (I): Collective Breakout of Industry Risks

Owing to the continuous bearish securities market and the structural adjustment during the six months between the end of 2003 and the first half of 2004, illegal operation consecutively breaks out in a group of securities companies, and the industry risks take upon a collective explosion momentum. The illegal operation appears as follows:

◆Financial statements do not reflect realities, serious off-book operations;

◆Embezzlement of customers’ assets, illegal high-interest financing, huge fund gaps;

◆Inadequate contribution of share capitals, inexplicit identification of shareholders, ineffective corporate governance and internal control, negligence, misconduct and even malefaction by senior management members.

◆Finance of these companies are confronted with severe difficulties. The assets of some companies cannot cover their debt liabilities, and the capital chain is broken, giving rise to the danger of being run-on at any moment;

◆The settlement system is severely overdrawn, and the entire trading system is facing serious threats. The maximum overdraft on a single business day exceeds RMB17 billion.

From the end of 2003 to the first half of 2004, amongst the 132 securities companies throughout the country, the fund gap of customer transaction settlement accounts was RMB64 billion, assets under illegal management were RMB185.3 billion, embezzlement of customers’ bonds were RMB13.4 billion, and fund impropriation by shareholders amounted to RMB19.5 billion;
  • 99 stocks are held in excess of the prescribed limit, and the off-book operations amounted to RMB105.0 billion;
  • The 84 companies are facing a giant liquidity gap of RMB164.8 billion, 2.8 times the net assets of the industry at that time;
  • The management of 34 securities companies was out of control, and crisis may break up at any moment.
background of sipf s establishment ii traditional risk disposal mechanism of financial institutions
Background of SIPF’s Establishment (II): Traditional Risk Disposal Mechanism of Financial Institutions

On the issue of industry risk management, the traditional practice shows two characteristics:

  • Pursuant to the case by case method, the State reimbursed the legitimate principal and interests to the individual creditors in full.

This practice functioned effectively in maintaining social stability during the time when China was under the system of planned economy and at the initial stage when the market economy was first practiced. However, due to the fact that the government bought the bill for all problems occurring, the investors lacked of risk awareness, and the financial institutions were not bounded by the market constraint, which was prone to give rise to moral risks.

  • To provide assistance to the creditors, the State directly effected the payment, instead of making it via a professional intermediary.
establishment of sipf system
Establishment of SIPF System
  • Two Fundamental Documents:
  • The first document isthe “Opinions on Purchase of Individual Creditor’s Right and Customers’ Securities Transaction Settlement Fund” promulgated jointly by the People’s Bank of China (PBOC), Ministry of Finance (MOF), China Banking Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC) in October 2004, which defined the principle of purchasing legitimate principal and interest of customers’ securities transaction settlement fund in full and purchasing individual creditors’ right at discounts;

The second documents is the Management Measures of SIPF which came into force on July 1, 2005. The document regulated the raising, management and utilization of protection fund as well as the establishment and management of the institution. It constructed a basic framework for systems of the Chinese securities investors' protection fund.

  • Upon the approval of the State Council, SIPF was incorporated on August 30, 2005 and started formal operation on September 30 of the same year.
basic functions of sipf
Basic Functions of SIPF

Management Measures of Securities Investor Protection Fund prescribes:

  • To raise, manage and operate the fund;
  • To monitor the risks of securities companies, and participate in the risk management work of securities companies;
  • To effect reimbursement to the creditors according to pertinent rules and regulations promulgated by the State;
  • To organize, participate in the liquidation process of securities companies which are revoked, closed or go bankrupt;
  • To manage and dispose of the reimbursed assets, and safeguard the rights and interests of the Fund;
  • To establish a rectification mechanism jointly with other competent organizations provided the operation of securities companies is exposed to hidden risks.
organizational structure of sipf
Organizational Structure of SIPF
  • The Company has a Board of Directors, which, as the decision-making body, is composed of nine directors. Among the nine directors, each two are recommended by CSRC, the Ministry of Finance and PBOC respectively, and two are recommended by Shanghai Stock Exchange, Shenzhen Stock Exchange, China Securities Depository and Clearing Corporation (CSDCC) and Securities Association of China (SAC) on a rotation basis; and one independent director is recommended by the Ministry of Finance and PBOC through negotiations.
  • SIPF establishes the Executive Office, Human Resources Department, Financial Department, Clearing Department, Audit Department, Asset Management Department, Legal Affairs Department and Information and Statistics Department inside the Fund.
organizational chart of sipf


Vice Chairman

Vice Chairman

Executive Director

Executive Director

Executive Director

Executive Director

Executive Director

Independent Director

Executive Office

Human Resources Department

Financial Department

Clearing Department

Audit Department

Assets Management Department

Legal Affairs Department

Information and Statistics Department

Organizational Chart of SIPF
external supervision of sipf
External Supervision of SIPF
  • CSRC is responsible for supervising the business operations of SIPF.
  • The Ministry of Finance is responsible for supervising the management of state-owned assets and financial affairs of SIPF.
  • The People’s Bank of China is responsible for supervising and inspecting the Special finance of reloaned funds SIPF borrows from PBOC.
purchase policies of sipf ii contents
Purchase Policies of SIPF (II): Contents

The policies regarding purchase of customers’ securities transaction settlement funds: to purchase the full amount of principals and interest where the fund is embezzled.

The policies regarding purchase of individual creditor’s right: to purchase the funds at different discounts according to their respective time period and amount

purchase policies of sipf iii key issues of current purchase policies
Purchase Policies of SIPF (III): Key Issues of Current Purchase Policies
  • The key issues of current purchase policies are account sorting and account nature identification.

1. According to the prevailing purchase policy, the purchase activities of SIPF must be based on identification of the account nature: i.e. to distinguish the brokerage accounts and non-brokerage accounts, and to distinguish the individual accounts and institutional account in case of non-brokerage accounts.

2. Account sorting is the basis for risk management of securities companies. Only through well-organized control of account sorting and discrimination can the administrative liquidation agencies, SIPF and the supervisory authorities review the fund purchase application and reimburse relevant fund in strict accordance with the pertinent policies applicable for various accounts and ensure the safety and compliant utilization of purchase fund. The disordered account management and huge amount of accounts to be sorted in the securities companies bring great difficulty to the sorting process. The account nature can be determined only after a series of procedures including reviewing the original account opening information and the transaction records. A total of 11.53 million accounts were closed during the risk management process, and more than 7 million accounts were identified as normal brokerage accounts.

3. The problems and difficulties in identifying account nature are that, (1) the nature of accounts in question are difficult to be identified and largely disputable among related parties, besides, there lacks a policy basis for determination of the account nature; (2) the name of some accounts are inconsistent with the actual ownership, and some accounts opened by institutions are held in the name of individuals or vise versa; and some accounts are in the middle status, for instance, the funds are provided by institutions though relevant accounts and contracts are signed/opened by individuals, or the funds are provided by individuals though the wealth management contracts and accounts are signed/opened by institutions.

administrative sorting institutions and sipf
Administrative Sorting Institutions and SIPF
  • The power of administrative liquidation institutions is granted by CSRC based on the provisions in the Securities Law, the Company Law and the Management Measures for Securities Companies.
  • The administrative liquidation institutions are generally assumed by intermediary agencies such as accounting firms, law offices etc.
  • Responsibilities of the administrative liquidation institutions:

1. To dispose the securities-related assets;

2. To purchase the individual creditor’s right and the customer securities transaction settlement funds;

3. To make arrangement for staff and customers;

4. To ensure that assets are all properly disposed in the process of administrative disposal;

5. To hand over all assets and related accounting materials to the court of bankruptcy;

6. To assist the local government in maintaining social stability;

7. To properly handle the applications for bankruptcy.

  • SIPF is not directly involved in the administrative liquidation process.
sipf verification and payment i procedures
SIPF Verification and Payment (I): Procedures
  • The governing policy: the Management Measure on Application and Use of the Securities Investors’ Protection Funds (Trial) which came into effect in March 2006
  • Procedures:

1. After verification and confirmation, the administrative liquidation institutions hand over relevant application materials to the organizations authorized by CSRC.

2. Organizations authorized by CSRC examine the application materials and issue written replies, agreeing to disburse protection fund to the custodian and liquidation institutions, and send the replies to SIPF together with the examination materials and applications submitted by the custodian and liquidation institutions.

3. SIPF examination. The applicant and the authorized organizations provide supplemental materials or explanations in conformity to the format and procedures required.

4. After an application is examined and approved, SIPF disburse relevant purchase funds; and send the written vouchers and certificates to the right claimer for subsequent formalities.

5. The application for, distribution and utilization of protection fund follows the principle of “special utilization, special account management and close operations”, and embezzlement of such fund is strictly prohibited.

sipf verification and payment ii actual practice
SIPF Verification and Payment (II): Actual Practice
  • Strict examination helps maintain the seriousness and unity of purchase policy.
  • To improve the efficiency of fund verification and disbursement.

1. To establish the system of preliminary verification and assist the authorized organizations in verifying the application materials. To fully exchange ideas before the formal application, with a view to remove most of the formality and procedural obstacles and facilitate the progress of purchase.

2. To apply for special finance in advance. Since the sub-loans are credited to the applicant’s account in 41 days on average, SIPF applies for a sub-loan of RMB2.4 billion in advance to avoid the postponement of payment arising from inadequate funds.

  • Promotion of public verification on the disputable and sophisticated accounts.
sipf verification and payment iii purchase transactions
SIPF Verification and Payment (III): Purchase Transactions
  • By the end of 2007, SIPF had reviewed and effected the payment for 114 transactions, in which a total of RMB20,664 million was paid. Of these, RMB15,151 million was used to make up the gap in customer securities settlement transaction funds, and RMB5,213 million was used to purchase the individual creditor’s right, accounting for over 86% of the total amount purchasable.
  • During the verification process, funds of RMB279 million was washed out due to out of the purchase range; RMB968 million which was rejected due to inexplicit nature or inadequate evidence and re-accepted after re-verification and provision of supplemental materials was eliminated, and RMB1,647 million funds of sophisticated accounts was rejected due to unavailable verification result.
sipf verification and payment iv special audit guarantee
SIPF Verification and Payment (IV): Special Audit Guarantee
  • Main Basis:

The Management Measures on Special Audit for Individual Creditor’s Right and Customer Securities Transaction Settlement Funds (Trial) which was promulgated by SIPF on May 22, 2006.

  • The implementation of special audit:

In 2006, SIPF organized the accounting and law agencies to provide 29 audit inspections for 22 liquidated securities companies, in 6 times of more than 340 person times; in 2007, more than 150 person-times from those 17 agencies were engaged in 23 special audit over 13 securities companies.

sipf verification and payment v effect of special audit
SIPF Verification and Payment (V): Effect of Special Audit

◆ All normal brokerage accounts with balance of more than RMB1 million were checked one by one, and key accounts with balance of less than RMB1 million were inspected on a sample basis.

◆Audit inspection was carried out on all of the identified individual creditor’s right in excess of RMB200,000 case by case; and key creditor’s right valuing less than RMB200,000 was inspected on a sample basis.

◆As for the calculation of purchase amount, the inspection and liquidation team discovered in the special audit report that RMB1,558 million of funds was improperly included into the purchase scope due to reasons such as not-accrued interest receivables, uncollected interest payables, freezing and withholding in juridical course or by banks.

source of sipf funds i sources
Source of SIPF Funds (I): Sources
  • Funds raised from the market

1. After the risk fund of Shanghai Stock Exchange reaches the prescribed upper limit, 20% of the transaction commission will be included into the funds;

2. Securities companies contribute 0.5%-5% of their operating income to the funds;

3. In case stocks and convertible bond are issued, the interest income earned on the purchase funds in the freezing period;

4. The income legally obtained from implementing recovery measures on the liable parties and the compensation income obtained from the bankruptcy and liquidation process of securities companies;

5. Donations from institutions, organizations and individuals at home and abroad.

  • Special Financing

Borrowings from the People’s Bank of China;

Issuance of special bonds (Have not been used yet).


Source of SIPF Funds (II): Funds Raised from the Market

Note: The payment by securities companies was worked out as per the operating income of 2007, and RMB2,791 million was paid in the first half of 2007, and the rest will be paid in January 2008.

source of sipf funds iv special financing
Source of SIPF Funds (IV): Special Financing
  • SIPF maintains a total credit limit of RMB28,384 million for special borrowings (re-financing) from the People’s Bank of China, among which a limit of RMB19,962.6 million shall be used to purchase customer securities transaction settlement funds, and a limit of RMB8,421.1 million shall be used to purchase individual creditor’s right.
  • A total limit of RMB10,224 million was used to address the risks of Southern Securities, of which RMB1.5 billion-worth special purchase fund is allocated by the finance department of the central government and the rest are special borrowings from the People’s Bank of China.
  • Total amounts of the above two parts: RMB37.108billion from PBOC, RMB1.5billion from MOF
reimbursement of sipf creditor s right i relevant policies
Reimbursement of SIPF Creditor’s Right (I): Relevant Policies
  • The new Bankruptcy Law which became effective on June 1, 2007 and the Company Law which became effective on January 1, 2005
  • The Management Measures on Reimbursement of Creditor’s Right for China Securities Investors’ Protection Funds Limited (Trial) issued by China Securities Regulatory Commission on May 17, 2006.
  • The Regulations of the Supreme Court on Assignment of Managers for Accepted Enterprise Bankruptcy Cases which became effective from June 1, 2007.
  • The Regulations of the Supreme Court on Determination of the Compensations for Managers of the Accepted Enterprise Bankruptcy Cases which became effective from June 1, 2007
reimbursement of sipf creditor s right ii relationship with bankruptcy manager
Reimbursement of SIPF Creditor’s Right (II): Relationship with Bankruptcy Manager

SIPF participates into the liquidation process as an ordinary creditor

  • To confirm the creditor’s rights with the liquidation team independently or through a professional agency upon receipt of notice from the bankruptcy manager.
  • To claim the creditor’s rights to the bankruptcy manager independently or through a professional agency with the assistance of liquidation institution.
  • To participate in the creditors’ meeting and the Creditors Committee, and exercise the function of supervising the bankruptcy manager as a creditor.
  • Through the Creditors Committee and the creditors’ meeting, to discuss and vote on the bankrupt asset distribution plan prepared by the bankruptcy manager.
  • To participate in the distribution of bankrupt assets.
  • The bankruptcy manager of securities companies are appointed by the Court, SIPF does not serve as or recommend the bankruptcy manager.
  • SIPF’s relationship with the bankruptcy manager:

To claim the creditor’s rights to the bankruptcy manager upon receipt of the notice;

To participate in the creditors’ meeting and the Creditors Committee, and exercise the function of supervising the bankruptcy manager as a creditor.

reimbursement of sipf creditor s right iii actual reimbursements
Reimbursement of SIPF Creditor’s Right (III): Actual Reimbursements
  • As of December 31, 2007, among the 26 securities companies that were disposed with the involvement of SIPF, 24 had entered into the liquidation process, and 18 of them have formally declared bankruptcy and debt liquidation. SIPF preliminarily claimed creditor’s right of RMB4,309.5 million to 15 bankruptcy liquidation groups, and formally declared right of RMB14,460.2 million, including principals of RMB14,061.5 million and interests of RMB398.7 million.
  • Till the end of 2007, SIPF has received RMB134.2 million of cash assets from China Eagle Securities and China Southern Securities; and has taken over a portion of shares (32,625,414 share of S Harbin Pharmaceutical Group and 8,474,964 shares of Harbin Aircraft Industrial Group)
issues for exploration i organizational structure of sipf
Issues for Exploration (I): Organizational Structure of SIPF
  • Part of the protection funds contributed by member companies (securities companies within the protection scope) are used as share capital of SIPF, and the rest is included into the protection fund. Collective of the two constitute the equities of member companies;
  • SIPF does not distribute dividends; instead, all of the accumulated interests are carried over;
  • SIPF reduces the fees it charges upon member companies when the capital of the Fund is adequate, and increases the fees where it needs more protection fund;
  • Where a member company is closed or goes bankrupt, the equities correspondent to its contribution to SIPF will be firstly used to effect the repayment, and protection funds in excess of the member’s contribution will be used for repayment when its contribution is inadequate to repay the debts in full. Where the corresponding equities remained after debt repayment will be taken as liquidation assets of the member company;
  • When the equities of a member company is used for repayment, SIPF does not participate in the liquidation as a creditor; when protection funds in excess of the member’s equities are used for repayment, SIPF participate in the liquidation as a creditor;
  • When a member company faces operating difficulties in the period of existence, SIPF provides assistance (not limited to its equities in the Fund) to it because it owns certain equities in the Fund. The shareholders shall provide guarantee with its assets or equities, and repay the protection fund after the member company resumes normal operation.

A membership company?

issues for exploration ii function expansion of sipf
Issues for Exploration (II):Function Expansion of SIPF

With the end of last round of securities industry risk and the implementation of a series of fundamental system reforms, the Chinese securities industry starts standardized development, and the possibility of compensation becomes much smaller. Therefore, SIPF shall not limit/focus its duties to compensation, and shall properly expand the functions:

  • To perfect the original functions

1. To improve the purchase mechanism

The current purchase mechanism is established on the basis of account sorting, and purchases the debts at different discounts as per the nature of respective accounts. This involves a wide range of parties, lots of procedures and complicated formalities, costs heavy labor and material resources, and runs on complex legal relations. What conditions shall be satisfied if limit compensation is executed by accounts? And is it the right time to implement such a system?

2. Recommendation of administrative liquidation institutions or managers

SIPF performs a public-good function and is different from the commercial institutions in nature. Therefore, is it appropriate for SIPF to recommend the administrative liquidation institutions or managers?

3. To monitor the risks facing securities companies

Through risk monitoring, SIPF may collect and sort out the risk factors existing in securities companies, and change the post-event compensation to prevention beforehand, which is an effective supplement to the monitoring and supervision function.

issues for exploration ii function expansion of sipf cont d
Issues for Exploration (II):Function Expansion of SIPF (Cont’d)
  • To exploit new functions

1. To receive and respond to the investors’ complaints

Restricted by the defects in concepts, systems and legislations, the securities investors’ disputes are usually settled in a unitary manner in China. Many investors have lodged their complaints on the website or through e-mails or in-person visits to SIPF since the establishment of SIPF. The website of CSRC and SIPF ( established a column of “Investors’ Message” to hear the investors’ complaints and suggestions.

Will the SIPF become one of the institutions resolving investors’ disputes (by reconciliation and arbitration)?

2. To educate and provide services to the investors

Education to securities investors is an important part of the long-term investor protection mechanism, and bears upon the development of securities market.

Investor education and services involve a lot of public-good affairs, and do not involve the use of compulsory administrative powers, therefore, SIPF is an ideal candidate to shoulder such a responsibility. Investor education is always related to the assistance services such as consulting and complaint handling. Due to the immature market economy system and law system in China, investors have not adapted to the market economy system, and sometimes behave irrationally and unilaterally. There needs to be a special professional agency between the regulators and investors to analyze and scrutinize the issues raised by investors.

issues for exploration ii function expansion of sipf cont d1
Issues for Exploration (II):Function Expansion of SIPF (Cont’d)

3.Public-Good Litigation

Owning to the lack of a legal entity representing the interests of public securities investors, the infringement of investors’ interest are not prevented in advance, and the public-good function of securities investors are not plaid under certain circumstances. Is it feasible to assign SIPF the function of instituting public-good litigations in any of the following situations?

The shareholders and senior management members neglect the supervision over, or fail to raise correction advices or inquiries against the irregularities in the securities companies; or they bear responsibility for asset impairment, loss or disappearance in the securities company;

Shareholders cheat on contribution of share capital (inclusive of those who did not go through the registration formalities after contribution, or those who did not transfer the management and control right), withdraw the contributed share capital, viciously dispose of assets of the securities companies, embezzle assets of the securities companies, or bear liabilities to the securities companies;

Shareholders and senior management members are involved in activities such as deceit of the securities companies, viciously reduction of the securities companies’ assets and other activities that are against the interests of the securities companies;

Shareholders and the directors/senior management members appointed by them breach the liability of loyalty and diligence, neglect their duties or is involved in other irregularities;

The substantial shareholders and actual controllers impair the legitimate interests of the securities company, other shareholders or customers by leveraging on their controlling position.