Tuesday, the China Securities Regulatory Commission (CSRC) announced regulations managing stock-trading funds placed into securities companies and banks by traders.

Starting next year, all funds in trading accounts for domestic securities trading and clearance, including deposits, securities proceeds, dividend and interest, must be put in special accounts in designated commercial banks and securities clearing companies at the exchanges, the CSRC circular said.

Transactions and settlement of funds can only occur between accounts that have been officially registered and that are clearly separated from accounts owned by the securities companies.

The new rule is intended to prevent securities companies from embezzling the clearance funds of clients, a rampant practice in the country in recent years, a CSRC spokesman said.

Separate management of the client trading accounts and funds owned by the brokerages will also increase investor's safety if securities companies face financial difficulties.

In the past, many stock traders put their money directly in securities houses for convenience.

Management and custody of the funds were controlled by the securities companies. Faced with limited legal financial channels, the companies would misuse the funds they controlled.

Such behaviour caused disorder in the clearing system and seriously damaged the interest of investors when it got out of control, said the CSRC spokesman.

Many securities companies have not fully realized the serious impact of embezzlement, he said.

Investors may possibly not even have enough money in their accounts to trade stocks.

Limited cash flow and poor credit could trigger panic and have investors flocking to withdraw money. This could fuel a major crisis in the entire securities and financial markets, he said.

In order to open more legal financial sources to the securities companies, the CSRC has taken several concrete measures over the past few years, including allowing them to acquire bank loans by using securities as collateral.

"All securities companies must come up with practical plans to return the embezzled funds," said the spokesman.

Those who can not repay on time will face a loss of business and punishment according to the Securities Law.

The situation has already improved as a result of the authority's regulating efforts.

The rate of embezzlement of client funds in securities companies dropped to 2.33 percent by the end of last year.

(China Daily 05/22/2001)