SZSE Front-line Regulation in 2017

date: 2018-1-25

In 2017, Shenzhen Stock Exchange (“SZSE”) tightened up regulation at the front line in general and duly performed its responsibilities as a front-line regulator.


Over the past year, guided by the new socialism with Chinese characteristics for the Xi Jinping era, and in accordance with the strategic arrangements for finance and economy of the Party Central Committee and the State Council as well as the decisions and arrangements of the Party committee of China Securities Regulatory Commission, SZSE firmly upheld the leadership of the Party and its guidance on their work, sought improvement while ensuring the stability of their work, imposed strict regulation overall, firmly held the bottom line of risk prevention, greatly improved front-line regulation, steadily pushed forward the member-based transaction behavior regulation mode, conducted unprecedented exploration into on-site inspection, and significantly improved technology-based regulation.


SZSE’s front-line regulation over the year is showing satisfactory results, with abnormal transactions checked and contained and severe market speculation reduced. The climate for value investing is improving; regulations and guidance for market players are showing results; and the market is operating orderly and steadily in general.

Without Rules, Nothing Stands: SZSE Keeps A close Eye on Regulation.


SZSE has adopted self-disciplinary regulatory measures for 2282 times over the last year, with over unusual cases reported to CSRC.


In 2017, with the changes in market situation and regulatory requirements, SZSE was proactive in making use of its strengths-its closeness and quick response to the market, started with abnormal transactions and focused the regulation thereon, adopted more binding and effective regulatory measures, responded to any abnormal clue, investigated and punished any violation, and enhanced front-line regulation.


SZSE enhanced supervision on abnormal trading behaviors. As severe violations or major market risks mainly stem from abnormal trading behaviors, the principle of indentifying and preventing small risks should be adhered to and abnormal trading behaviors be timely discovered and handled. In 2017, SZSE tightened up real-time supervision and monitoring, imposed strict regulatory measures in time and decisively and precisely cracked down abnormal trading behaviors. Over the year, self-disciplinary regulatory measures were imposed 2282 times, which is 1.72 times the number of the previous year. The measures have effectively reduced stock manipulation in the secondary marker, cracked down securities violations and are conducive to the protection of investor rights and interests.


SZSE strengthens regulation on trading of concepts stocks and delisting stocks. SZSE mainly focused on trading of stocks in Xiong’s district, second new stocks and concept stocks which yield high dividends, and taken regulatory measures for 152 times on accounts with abnormal trading. It is shown second new stocks rose by 609% in 2017 on average compared with 381% in 2016, and the consecutive days of gains were down to 10.4 on average compared with 14.43. SZSE also paid special attention to trading of Xintai Electric Delisting and Century Plaza Hotel Delisting to prevent risks in delisting stocks trading and to ensure a smooth and orderly delisting of the stocks.


SZSE also improved and enhanced the abnormal clues reporting and investigating mechanism. In 2017, SZSE continued to optimize the abnormal clues identifying, reporting and investigating mechanism and has reported more than 210 cases to CSRC, a new height in recent years. SZSE had provided data 498 times externally to assist in investigations, actively cooperating with judicial authorities and investigation departments in their investigations to crack down violations in the securities markets.


Holding Listed Companies Accountable for Behaviors of Their Clients: Setting Up A Member-based Transaction Behavior Regulatory Mode


The member-based transaction behavior regulatory mode is an innovation on regulation in the new era, which centers on the responsibilities of members in managing client transaction behaviors in the form a hierarchical regulation mode requiring the stock exchange to manage its members and the member to manage their clients. SZSE strictly complied with the regulatory requirements of CSRC in 2017, formulated relevant plans, and earnestly push forward relevant work with satisfactory results.


First, giving full play to the role of the special committees of the Administrative Committee of SZSE. The Administrative Committee has convened special meetings involving the self-disciplinary Committee and the Risk Management Committee to discuss relevant arrangements to build a member-based transaction behavior regulatory mode and the establishment of the system of rules with an aim to build consensus among members and to intensify their sense of responsibility.


Second, formulating relevant rules on management of client transaction behaviors by members. SZSE made amendments to the Member Management Measures and formulated the rules on management of client transaction behaviors by members to enhance members’ responsibilities in client management, which has diversified the regulatory measures and means. SZSE also improved the system for management of accounts under special supervision and monitoring, requiring members to impose more intense control and management on investors under special supervision.


Third, enhancing performance appraisal, supervision and inspection of members. In the first half of the year, SZSE had conducted comprehensive appraisals on the management of clients by 102 members involved in brokerage business, collaborating with Shanghai Stock Exchange and local CSRC agencies in on-site inspections of 9 members. In November, SZSE organized and launched non-spot inspections on management of client transaction behaviors involving all members engaged in brokerage business. Over the year, SZSE had imposed regulatory measures 14 times by means of warnings and interviews.


Fourth, promoting compliance training among members. SZSE, in collaboration with Shanghai Stock Exchange, had conducted 4 sessions on transaction compliance management for its members. In late September, SZSE organized two seminars to convey regulatory requirements and attitude to 11 members either with a larger scale of brokerage business or with a lower rating in terms of client transaction behavior management.


Getting to the Bottom of Things: Fully Strengthening the Supervision over Listed Companies


In 2017, with information disclosure as the core of work, SZSE has kept implementing the philosophy of “inquisitive” comprehensive supervision in greater depth. Withholding the principle of getting to the bottom of things, SZSE has made timely response and taken active moves in coping with the sensitive risk events of listed companies and kept a close watch and rigid management on the hot market issues to strictly prevent, control and punish market chaos and endeavor to clean the market environment.


According to statistics, SZSE has issued a total of 3,618 letters of regulatory inquiries, a significant increase from that in 2016, to public companies and their interested parties. The content involves those companies’ information disclosure, M&A restructuring, outward investment and standard operation.


With regard to systems and institutions, SZSE has been improving an information disclosure regulatory system that is based on investors’ needs. Differential supervision has been constantly furthered, with disclosure rules that conform to the features of different boards having been gradually established. Industrial regulatory requirements have been perfected, with disclosure guides for the five industries of LED, medical equipment, civil engineering, express delivery and retail having been newly developed. Classified supervision has been optimized, with a three-dimensional regulatory system for high-risk companies having been constructed from dual cross check on annual reports, fulfillment of promised events and other aspects.


In regulatory practice, SZSE has reinforced the supervision over high-risk companies and outstanding issues. With close attention paid to key risk companies, SZSE has disqualified some enterprises from direct registration, upload and submission of corporate information for disclosure at SZSE or other specified channels and developed special plans for risk emergencies. As to the delisting of Century Plaza Hotel and Xintai Electric, SZSE has properly conducted relevant work and smoothly implemented advance compensation in the case of Xintai Electric. In addition, SZSE has continued to intensified the supervision on M&A restructuring and the examination on matching between high-ratio dividend distribution and corporate performance and interlinking between shareholders’ shareholding decrease plan and secondary market shareholding cut, concurrently taken multiple measures in guiding listed companies to enhance cash dividend awareness, and deeply studied new market conditions like high-ratio pledge and control right struggle, thus proactively exercising its front-line supervision functions according to law.


In terms of ex post punishment on violations, SZSE has built up strength on cracking down the illegal acts of listed companies. In 2017, SZSE has constantly escalated the treatment to the companies and interested bodies that go against the law and stuck to comprehensive and strict law-based supervision to improve listed units’ quality and consolidate the micro foundation for stable market operation. In the year, SZSE has issued a total of 400 letters of concern and 398 regulatory letters, denounced some listed companies and their principals for 143 times, and imposed 343 circulated notices of criticism.


Seeing is Believing: Exploration and Development of Field Inspection


For a long term, the front-line regulatory means for an exchange has been of a little option and there have not been many practices of face-to-face field inspection on supervision objects and other market participants. In 2017, SZSE has set up a compliance check department while exploring and developing diversified field inspection tasks in an aim to put into practice CSRC CPC Party Committee’s requirements of SZSE’s further playing its front-line supervision duty, improve the regulatory efficiency over listed companies and other interested market participants, and enhance the pertinence, effectiveness and deterrence of its front-line supervision. All the moves taken will help SZSE constantly improve its regulatory standards and procedures and effectively perform its regulatory duties.


SZSE has steadily conducted on-site inspection with listed companies and vigorously implemented the Memorandum on Regulatory Cooperation signed with local securities regulatory bureaus. For example, it has sent more than 50 people to participate in the on-site inspection projects on 29 listed companies jointly with the local securities regulatory bureaus in Sichuan, Shenzhen and Ningxia. The check content involves listing resumption, connected transactions, information disclosure and M&A restructuring etc. Through joint field inspection, SZSE and the resident institutions of CSRC have established efficient and smooth cooperative regulatory mechanisms, forming a regulatory resultant force in the system.


SZSE explored and established a sound on-site inspection mechanism on a regular basis. For emergency, severe and viciously risky events which take place during daily supervision, SZSE explored and established a regular on-site inspection mechanism focusing on the risks and problems, which is organized and implemented by Securities Exchange in cooperation with CSRC. Since December 2017, SZSE proactively organized and launched two on-site inspection projects, which would further enhance the authority and deterrence of SZSE’s front-line regulation and prevent and eliminate risks.


SZSE carefully organized and carried out IPO company on-site inspections. In October 2017, in accordance with relevant arrangements of CSRC, SZSE initiated on-site inspections to impose strict quality control on some companies planning to go public.


24-hour Non-stop Big Data System: Vigorous Promotion of Technical Supervision


One major issue SZSE faces is to make good use of new technologies such as big data and artificial intelligence to constantly improve its technical supervision capacity. It is also an inevitable choice to perfect front-line supervision under the new circumstances. SZSE elevated its technical supervision and intelligent supervision level in 2017 comprehensively.


In terms of transaction supervision, SZSE steadily promoted the construction of the new generation surveillance system based on its independent big data surveillance system. SZSE adopted an open, large-scale and expandable distributed architecture to further optimize system’s performance and enrich supervision data. Taking advantage of big data technologies including steam computing, data mining and visualization, SZSE explored the intelligent application of associate accounts combined warning, investor portrait and securities portrait and others to constantly improve market supervision and the efficiency in discovering clues of violations.


In terms of enterprise supervision, SZSE continued to optimize listed companies supervision system. Using information technologies such as text mining and could computing, SZSE explored and built a portrait map of listed companies and behavioral characteristic analysis system of companies and shareholders to gradually realize the cross comparability analysis of information disclosure, public opinions and information and reported information as well as to improve the ability in finding clues.


In terms of risk surveillance warnings, SZSE enthusiastically deployed big data technologies such as data mining and artificial intelligence to raise the risk surveillance ability in key business and fields including stock and bond markets, stock pledge, margin trading and classified funds. SZSE also actively promoted the construction of risk surveillance monitoring platform. The bond risk surveillance system developed by SZSE independently is the first in its kind in the securities supervision system combining transaction data, aggregate rating data and financial information construction.


In 2018, SZSE will continue to further implement the spirit of the 19th CPC National Congress, the Central Economic Working Conference and National Finance Conference in its front-line supervision work, in accordance with the arrangements of CSRC, strengthen Party leadership, continue to implement strict supervision in accordance with the laws, and further strengthen the construction of supervision ability by focusing on the essentials and improving weak links. SZSE will consolidate the work of risk prevention by putting major risk prevention at first, stick firmly to the bottom line of preventing and eliminating institutional financial risks and ensure the sustainable, stable and healthy development of the capital market.