China's stock regulator has ordered all the country's brokers to designate third-party custodians for clients' securities trading and settlement by next August as part of an industry overhaul, sources said yesterday.

 

Brokerages must put client capital in separate accounts at custodian banks to ensure the funds' safety, according to securities sources briefed on the matter.

 

Any firm that fails to meet the deadline could lose business licenses and face other punishments, they said. China is struggling to have its 110-plus brokers reform and hoped to cut the number by two-thirds via mergers and acquisitions by the end of the third quarter next year.

 

Only a dozen of the domestic brokers use commercial banks as custodians to manage client funds. Most securities companies take charge directly of customer capital which has led to massive embezzlements and partly contributed to the industry's hefty losses in the past four years.

 

China initiated a program in 2004 to require brokers to appoint custodians for their brokerage businesses. The project was delayed partly because the country pushed ahead to tackle brokers who’d stolen money from their clients for proprietary trading.

 

China has requested that stock exchanges, brokers, banks and the nation's clearing house form a joint task force to finish the capital-custody program on time, the sources said. Securities firms that complete selecting custodians will enjoy support from the regulator to launch new businesses, they said.

 

China's key stock gauge has jumped more than 75 percent this year as investors turned bullish on the market's prospect and snapped up shares of large-cap companies.

 

The nation's brokerage industry charted a cumulative profit of 12.3 billion yuan (US$1.56 billion) in the first half of the year compared with a loss of more than 800 million yuan a year ago, according to industry data.

 

(Shanghai Daily November 22, 2006)