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Rules tackle futures risks

(China Daily)
Updated: 2006-11-24 09:28

China's securities regulator yesterday issued draft rules setting out risk control requirements for futures brokers as part of its move to curb irregularities and misconduct in the capital industry.

A domestic futures firm must have net capital, or assets apart from risk-related charges and provisions, of at least 15 million yuan (US$1.9 million), the China Securities Regulatory Commission said in a statement on its Website.

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Net capital must also account for no less than 40 percent of a futures broker's net assets and at least eight percent of its total liabilities, the statement said.

Luo Xufeng, general manager of Nanhua Futures Co, said these requirements should not be obstacles for most futures brokerages. All brokers want their net capital to be as big as possible because "it's the primary factor" in judging the strength of a futures firm and luring customers, Luo said.

China requires domestic commercial banks to reach capital adequacy ratios of eight percent under an international accord.

But there are no such requirements targeting futures companies.

"I think the new rules are an effort by the regulator to introduce a similar system for futures brokerages," Luo said.

"The government wants to make the industry more orderly and transparent."

In addition, each outlet at a futures firm must have net capital of three million yuan on average and combined net capital should be no lower than six percent of clients deposits, the regulator said in the statement.

"The rules are aimed at tightening risk management at futures firms and urging them to set up internal control systems," the statement said.

"Senior executives at futures brokers will have to shoulder the responsibility" of overseeing risk management.

Futures firms should report to the securities watchdog on their risk-management situations once a month, according to the statement. They must also file an annual report, it said.

Companies would be required to detail reasons to the regulator and shareholders should net capital rise or decline by more than 20 percent a month, the statement said.