Laws of the People's Republic of China

Zheng Jian Ji Gou Zi [2006] No.124

All the securities companies:

For the purpose of guiding securities companies to establish and perfect the internal control mechanism for the pilot margin trading, Guidelines for the Internal Control of Pilot Margin trading of Securities Companies are hereby formulated and promulgated, and shall come into force as of August 1, 2006.

China Securities Regulatory Commission

June 30, 2006

Guidelines for the Internal Control of Pilot Margin trading of Securities Companies

Article 1

The present Guidelines are formulated for the purpose of guiding securities companies to establish and improve the internal control mechanism for the margin trading and to prevent various risks related to the margin trading.

Article 2

Where a securities company develops the pilot margin trading, it shall establish and perfect the internal control mechanism in accordance with the Guidelines for the Internal Control of Securities Companies and the present Guidelines.

Article 3

Where a securities company develops the pilot margin trading, it shall establish adequate management rules, operational procedures as well as risk identification, evaluation and control systems to ensure that the risks can be monitored, controlled and endured.

Article 4

A securities company shall improve the business separation system, and ensure the separation of the margin trading from the securities assets management, securities self-run business and investment banks etc. concerning the organization, personnel, information and account etc.

Article 5

A securities company shall conduct a uniform administration on the margin trading. The policy decisions and major management functions of the margin trading shall be borne by the head office of the securities company.

Article 6

A securities company shall establish the policy decisions and authorization system for the margin trading, which shall be established and operated in principle under the structure of the board of directors - business policy decisions department - business implementation department - branch office.

The board of directors shall be in charge of formulating basic management system for the margin trading, and shall decide the department establishment, their respective functions and the total scale relating to the margin trading.

The business policy decisions department shall consists of relevant senior managers and person in charge of departments, and be responsible for formulating operational procedures relating to the margin trading, choosing branch offices which are able to engage in the margin trading, determining the credit quota to a single customer and of a single securities, the term and the interest rate (charging rate) of the margin trading, the proportion of guaranty bonds, the minimum guaranty maintenance proportion, types and the conversion rates of securities that can be used as guaranty bonds, as well as types of securities that can be bought or sold by the customers through the margin trading.

The business implementation department shall take charge of substantial management and operation of the margin trading, draw up the standard texts of margin trading contracts, determine the credit quota to specific customers, and examine and approve, cross check and supervise the business operations of branch offices.

The branch offices shall, under the centralized supervision and control of the head office of the company and in accordance with the uniform provisions and decisions of the company, specifically take charge of the credit investigation of customers, contracts signing, accounts opening, guaranty bonds collection, businesses implementation and other business operations.

Article 7

The front, middle and back departments of the margin trading of a securities company shall be separated from each other and restricted with each other, and various major links shall be in the separate charge of different departments and posts, the department and post that is responsible for risk control and business audit shall be independent of other departments and posts, and no senior manager in charge of the margin trading may be concurrently in charge of the risk control department or the business audit department.

Article 8

A securities company shall strengthen the control of the margin trading of its branch offices, prohibit them from providing the margin trading to customers without approval of the head office and from deciding the contracts signing, accounts opening, credits granting, guaranty bonds collection, or any other matter that should be determined by the head office.

Article 9

A securities company shall establish a system of customer choosing and credit granting and clearly define the procedures and power limit for the customer choosing and credit granting:

(1)

To establish the customers choosing standards and an examination system of account opening for the margin trading, and clarify the qualifications for customers to engaging in the margin trading and the key points and procedures for examining the account opening application materials;

(2)

To establish the customer credit evaluating system, separate the customers into different types and levels in accordance with their status, property and incomes, securities investment experiences, risk preference, and etc., and determine the credit quota, interest rate or charging rate for each type or level of customers;

(3)

To clarify the contents, procedures and ways for the credit investigation of customers, assess the authenticity and accuracy of the customer materials, know the credit status of customers, and evaluate the risk assumption ability and the possibility of breach of contract of customers; and

(4)

To record and analyze the position varieties of customers and the business conditions, and adjust the credit ranking of customers timely subject to the operational conditions and the modification of their credit status, and etc.

Article 10

A securities company shall print and use the standard text of the margin contract, the content of which shall pursuant to the provisions in the Measures for the Administration of Pilot Margin Trading of Securities Companies and the Essential Clauses for the Margin Contracts.

Article 11

A securities company shall, before signing a margin contract with a customer, perform the following obligations for notifying the customer:

(1)

To remind in written form the customer of the investment loss risk that may results from the enlargement of investment scale, the misjudgment of market trend, the mandatory buy-in due to the failure to complement collaterals in time;

(2)

To assign a special person to explain to the customer the rules, procedures and contractual clauses for the margin trading; and

(3)

To notify the customer of the possible legal litigation risk if the customer lends the credit account to another, and remind the customer to properly keep the credit account card, the identity certification and trading passwords.

Article 12

A securities company shall, after signing a margin trading contract with a customer, open a real name credit securities account for the customer pursuant to the Measures for the Administration of Pilot Margin Trading of Securities Companies and the relevant provisions of the securities depository & clearing institution.

A securities company shall entrust the third party depository bank to open real name credit securities accounts for customers.

Article 13

A securities company shall, on the basis of meeting the relevant provisions and in accordance with its own operational capital, market situation and the credit status of customers, and etc., determine the interest rate and charging rate for the margin trading, and publicize them in the business place.

Article 14

A securities company shall, on the basis of meeting the relevant provisions, determine the types and conversion rates of securities that can be used for guaranty bonds, the types of securities that can be bought and sold by the customers in the margin trading, the proportion of guaranty bonds and the minimum guaranty maintenance proportion, and publicize them in the business place.

Article 15

A securities company shall designate special persons, in real time, to supervise and control the collaterals value and the debts value of customers, and the alteration of their proportion, and when the said proportion is lower than the minimum guaranty maintenance proportion as reserved in the contract, the securities company shall, in a timely manner, notify the customers to complement collaterals under a reserved means and adopt necessary measures to record down the time and contents of the notice, and etc..

Article 16

A securities company shall formulate operational rules and procedures for the mandatory buy-in, and when a customer fails to complement collaterals subject to the relevant provisions or pay debts within the time limit, the mandatory buy-in shall be implemented immediately. The capital from the buy-in shall first be used to make debt repayment of the customer, and the remaining capital shall be transferred into the credit capital account of the customer.

A mandatory buy-in order shall be issued by the head office of the securities company, and the post for issuing buy-in orders and the post for implementing buy-in orders shall not be held by a same person. The mandatory buy-in operation shall be recorded down.

Article 17

A securities company shall establish a technical system for the margin trading under the uniform administration of the head office, and implement the automatic management to the main procedures of the margin trading.

A securities company shall establish a centralized risk supervision and control system for the margin trading, the functions of which shall include centralized management of business data, total amount supervision and control of the margin trading, classified supervision and control of credit accounts and automatic warning in advance, and etc.. The system shall set up necessary open functions or data accesses so that the regulatory organ may timely know and examine the information about the margin trading.

Article 18

A securities company shall take effective measures to safeguard the safety of the assets of customers:

(1)

To enhance the administration on the operational procedures and technical systems, prevent technical obstacles, operational mistakes, institutional and procedural omissions, moral risk of employees and other issues that may affect the safety of customers' assets;

(2)

To establish and perfect the administration and audit system for credit accounts, and prevent the assets mixing, accounts mixing, accounts lending, and false accounts, and etc.;

(3)

To provide reconciliation statements to customers pursuant to the reserved methods, and faithfully provide the detailed securities and capital data to the securities depository & clearing institution and the third party depository bank for the inquiry of customers; and

(4)

To inform the customer in a timely manner if the assets of customer are frozen, sealed up or deducted, and etc. due to the credits or debts of the customer.

Article 19

A securities company shall strengthen the risk supervision and control and business audit in the margin trading, which shall cover all the links of front, middle and back departments.

The risk supervision and control department shall implement the real time supervision and control and risk quantitative analysis of the margin trading, analyze and evaluate the information about the proportion, bad debts, concentration, quota and etc. of the high risk accounts, bring forward the control measures accordingly, and issue opinions on such serious matters as signing margin trading contracts with customers, examination and approval of customers credit quotas, and the mandatory buy-in, and etc.

Article 20

A securities company shall establish a mechanism for supervising controlling and adjusting the scale of the margin trading with the net capital as the core:

(1)

To determine rationally the proportion of the margin amount to all the customers, a single customer and of a single securities to the net capital and other risk control indicators under the supervisory requirements and its own financial status;

(2)

To monitor the net capital, the fluidity, the assets, the liability and other main financial indicators, and timely adjust the scale of margin trading in accordance with the alteration of indicators; and

(3)

To supervise and control of the scale of open interests of the margin trading of the customers through the centralized risk supervision and control system, and making such main financial indicators as the net capital of the company subject to the supervisory requirements through adjusting the scale of the margin trading.

Article 21

A securities company shall, pursuant to the relevant provisions and the supervisory requirements of the State, formulate the accounting system for the margin trading, prudently evaluate the risk of bad debts that may be brought by the margin trading, sufficiently draw the provisions for the relevant loss in the same term, and fully reveal it in the financial statements.

Article 22

A securities company shall establish an internal reporting system for the margin trading, and clarify the reporting routes and feedback mechanism for the business operation, risk control, business audit and other relevant information.

A securities company shall establish an information submission system for the margin trading, assign special persons to be responsible for the audit and cross check of relevant information, and ensure that the information submitted to the CSRC and the self-discipline organization is true, accurate and complete.

Article 23

A securities company shall establish a management system for the customer archives and enhance the management of customer materials of the margin trading. As to the customers in margin trading, the credit status of whose is not good or who have records of breach of contract, the securities company shall record them down in the archives, and timely report them to the Securities Association of China.

Article 24

The present Guidelines shall enter into force as of August 1, 2006.