Research on Legal Issues of Securities Client Assets Risk

Author: Liao Fan
Publisher:
Publish Date: 2005-11-01
Features: In the current sluggish Chinese securities market and the crisis of securities companies, the risk of client assets has become increasingly prominent. This book defines the risk of client assets as the risk that securities and/or funds entrusted by securities investors to securities companies or other custodians may be partially or fully unrecoverable due to the latter's bankruptcy. From the perspective of investor protection, it systematically analyzes the important legal issues involved. The book is divided into five chapters. Chapter discusses the holding and custody system of securities, aiming to provide a knowledge background and technical platform for the entire book, as different holding and custody systems imply different rights and obligations between custodians and clients, directly affecting the scope and extent of client asset risk. The book analyzes that, unlike most securities markets, China implements a direct holding and first-level custody system for securities holding/custody, and discusses and refutes the so-called "central registration, second-level custody" practice in practice. After discussing the institutional background of client asset risk, the second chapter analyzes the content of client asset risk, namely client securities risk and client funds risk. Client securities risk is more prominent under the indirect holding system, and countries respond by specifically defining the nature of the rights of indirect holding securities. Since China implements direct registration/holding, client securities risk is relatively low, and the main issue is client trading settlement funds risk. After a detailed analysis of the ownership of client trading settlement funds, the author suggests introducing a trust mechanism to ensure the independence and safety of client funds. Chapters three to five unfold in three relatively independent yet closely linked and interactive aspects. Chapter three discusses preventive controls of client asset risk in daily operations, analyzing from two aspects: the capital adequacy requirements of custodians and the obligation of separate management of client securities and funds. It focuses on China's client trading settlement funds separate account management and independent custody system, pointing out that it will be difficult to fundamentally solve the problem without introducing a trust mechanism. Chapter four discusses the practical response to client asset risk, namely how to prioritize the satisfaction of clients' securities and funds claims through biased liquidation procedures when the custodian goes bankrupt. In China currently, this is mainly reflected in the property liquidation and distribution after securities companies are forcibly removed from the market. The book discusses some special procedures and handling methods different from general bankruptcy liquidation systems, as well as their connection with the investor compensation system, and suggests that when formulating the "Bankruptcy Law" or implementation measures for financial institutions, the two should be unified. As a logical extension of the logic of chapter four, chapter five discusses the unified compensation for clients' losses when they cannot fully satisfy their claims through bankruptcy liquidation procedures, that is, the establishment and operation of the securities investor protection fund. The book analyzes the sources of funds for the investor protection fund, its management and operation model, compensation scope and limits, and suggests that the "Bankruptcy Law" or relevant implementation measures should explicitly stipulate the special status of the investor protection fund management agency in bankruptcy liquidation procedures.