Circular of the Securities of Association of China on Issuance of Essential Clauses of Securities Lending and borrowing Contract and Essential Clauses of Disclosure Document of Transaction Risks of Securities Lending and Borrowing


Zhong Zheng Xie Fa [2006] No. 289

All securities compaines:

In order to adapt to the requirements of development of securities lending and borrowing business pilot, regulate the content of margin financing and securities lending contracts and protect the legal rights and interests of securities companies and clients, we organize to set down Essential Clauses of Securities Lending and Borrowing Contract and Essential Clauses of Disclosure Document of Transaction Risks of Securities Lending and Borrowing (hereinafter referred to as "Essential Clauses" uniformly) in accordance with the regulations, such as, Measures for the Administration of Pilot Securities Lending and Borrowing Business of Securities Companies and Guideline on Internal Control of Capital Financing and Securities Financing Business Pilot of Securities Companies. They have been approved by China Securities Regulatory Commission and hereby promulgated. The relevant issues are now circulated as follows:

  1. Securities Lending and Borrowing Contracts are the legal documents based on which securities companies and clients establish legal relationship, regulate rights and obligations, conduct securities lending and borrowing business and set down disputes resolution method. Securities companies conducting pilot securities lending and borrowing business (hereinafter referred to as "Pilot Securities Companies") shall strictly comply with the regulations of the Essential Clauses and set down the standardized contract of securities lending and borrowing and clearly stipulate the relevant issues possible happened in the course of securities lending and borrowing. The standardized contract may be separately made according to securities lending and borrowing contract or uniformly made by securities lending and borrowing contract.
  2. Pilot Securities Companies may make addition and supplementation or changes to the wording and the clause to the content of the Essential Clauses in accordance with the relevant regulations of China Securities Regulatory Commission, Stock Exchange, Securities Registration and Clearing Agency and the actual need of internal control of capital financing and securities financing business pilot when drafting the standardized contract of securities lending and borrowing. However, the addition, supplementation and changes are not allowed to be contradictory with the regulations of the Essential Clauses.
  3. The standardized contract of securities lending and borrowing made by Pilot Securities Company shall be specific and specific. It shall not be allowed to regulate certain issues by entering into supplementary agreements and etc. The standardized contract of securities lending and borrowing shall be filed with the Securities Association of China before using.
  4. Pilot Securities Company shall make client credit securities account card required by securities lending and borrowing transaction in accordance with the pattern of our association and deliver to the clients.

The Securities Association of China

September 5,2006

Essential Clauses of Securities Lending and Borrowing Contract

Article 1 Securities companies shall enter into securities lending and borrowing contracts (hereinafter referred to as "Contract") with investors when conducting securities lending and borrowing business. The Contract shall contain the relevant information, such as, parties' name, address and etc, including but not limited to:

Party A (referred to "Investor", similarly hereinafter): name (or title), address, name of legal representative, Company Business License/ID Card Number and contact information and etc.

Party B (referred to "Securities Company", similarly hereinafter): name, address, name of legal representative and contact information and etc.

Article 2 The Contract shall contain the purpose and basis for entering into the Contract.

Article 3 The Contract shall explain or define the technical terms, such as, credit account, securities lending and borrowing transaction, guaranty, deposit percentage, maintenance of deposit percentage, compulsory clearing and etc.

Article 4 The Contract shall contain representation and warranty of the parties, including but not limited to:

  1. Party A shall be qualified as the legal body of securities lending and borrowing and there are no circumstances which are prohibited or restricted to conduct securities lending and borrowing transaction by laws, administrative laws and regulations, rules or other normative documents. Party B is a legally-established securities operation institution and is qualified to conduct securities lending and borrowing business approved by China Securities Regulatory Commission (recording the name and number of the approval documents).
  2. The two parties shall voluntarily obey the regulations of relevant laws, administrative regulations, rules and other normative documents.
  3. The assets of the parties ("Assets" including capital and securities, similarly hereinafter) for securities lending and borrowing shall legally obtained. The assets supplied by Party A for providing guarantee to Party B shall not pledged or without defects of right
  4. Party A shall promise to provide real ID materials, credit certification materials and other relevant materials to Party B and shall be responsible for the authenticity, accuracy, integrity and legitimate of all documents, materials and information. Party A agrees Party B to learn credit and performance ability by the legal way and agrees Party B to submit the securities lending and borrowing transaction data, credit securities account registration materials and other relevant information to the supervisory departments, the Securities Association of China, Stock Exchange and Securities Registration and the Clearing Agency and etc.
  5. Party A shall be responsible for the risks and loss of securities lending and borrowing transaction. Party B shall not guarantee Party A to obtain investment profits or bear the investment loss of Party A by any means.
  6. Party A shall not transfer any right and obligation under the Contract without written consent of Party B.

Article 5 The Contract shall contain the relevant content for opening credit account, including but not limited to:

  1. Party A shall apply to Party B for opening real-name credit securities account as the second-level account of Party B's Securities Companies' Client Credit Transaction Guarantee Securities Account for the purpose of recording the detailed data of Party B's guaranteed securities entrusted by Party A. Party A shall open only one credit securities account for the listed securities transaction in stock exchange. The name or title of Party A in credit securities account and ordinary securities account shall be consistent.
  2. Party A shall open real-name credit capital account in commercial bank under the relevant regulations, as the second-level account of Party B's Securities Companies' Client Credit Transaction Guarantee Capital Account for the purpose of recording the detailed data of Party A's deposit. Party A shall open only one credit capital account.

Article 6 The Contract shall contract the specified property trust relationship of securities lending and borrowing as follows:

  1. Trust purpose. Party A voluntarily transfers deposit (including valuable securities used for offsetting deposit, similarly hereinafter), all securities purchased via capital financing and all capital sold via securities financing and the dividend derived from the above capital, securities, and establish trust for Party B as the trustee, Party A and Party B as mutual beneficiaries and for the purpose of guaranteeing Party B's creditors' rights of securities lending and borrowing towards Party A.
  2. Scope of trust assets. The scope of the aforementioned assets shall be the relevant securities and capital in Party B's Securities Account of the Securities Company's Clients for Credit Transaction Guarantee and Capital Account of the Securities Company's Clients for Credit Transaction Guarantee deposited by Party A. The specific amount and number shall be in accordance with the data actually recorded in Securities Account of the Securities Company's Clients for Credit Transaction Guarantee and Capital Account of the Securities Company's Clients for Credit Transaction Guarantee.
  3. The establishment and effectiveness of the trust. As of the date of sign in the Contract, the trust with regard to the relevant securities and capital in Party B's Securities Account of the Securities Company's Clients for Credit Transaction Guarantee and Capital Account of the Securities Company's Clients for Credit Transaction Guarantee established by Party A shall be effective. The effective date of trust shall be the date of trust establishment.
  4. Management of the trust assets. The aforementioned trust assets shall be held by Party B as trustee in his own name, independent from other assets of the parties and not be affected by other creditor's rights or obligations of the parties.
  5. The disposal of the trust assets. Party B shall enjoy security interest of trust property and Party A shall enjoy the usufruct of the trust property. After settling the debts of capital financing and securities financing, Party A may request Party B to deliver the remaining trust property. If Party A does not on time deliver guaranty or pay back the debts of securities lending and borrowing, Party B is entitled to take compulsory closing measures. When disposing the aforementioned trust assets, the money gained from disposal shall be firstly used to reimburse Party A's debts to Party B.
  6. Termination of the trust. After Party A closes securities lending and borrowingtransaction, settles all securities lending and borrowing debts and terminates contracts, the guarantee established by Party A used by relevant securities and capital in Party B's Securities Account of the Securities Company's Clients for Credit Transaction Guarantee and Capital Account of the Securities Company's Clients for Credit Transaction Guarantee for Party B's debts shall be dissolved automatically and the trust relationship between Party A and Party B shall be terminated automatically.

Article 7 The Contract shall stipulate the deposit proportion and calculating formula, calculating formula of deposit applicable balance, range of securities used as deposit and conversion rate and the securities range of subject matter, and shall contain the following matters:

  1. Party A shall make full payment of deposit as required by Party B before conducting securities lending and borrowing transaction. After the payment of deposit, Party B shall provide securities lending and borrowing service. Securities used to offset the deposit paid by Party A shall be in accordance with the regulations of stock exchange and Party B.
  2. The whole of deposit paid by Party A and all securities purchased via capital financing and all capital sold via securities financing and the dividends of the aforementioned capital and securities shall be regarded as guaranty to guarantee the Party B's creditors' rights of securities lending and borrowing towards Party A.
  3. Party B shall ascertain and adjust the range of the company's securities, the range of securities used to offset the deposit and conversion rate in accordance with the regulations of stock exchange.
  4. When the rate between the price of guaranty supplied by Party A and securities lending and borrowing debts is beyond the one stipulated by stock exchange, Party A shall convert the guaranty beyond the stipulated rate.
  5. Party A shall apply to Party B two transaction days in advance for supplying guaranty as required by the aforementioned regulations.

Article 8 The Contract shall stipulate the issues, such as the credit line, the time limit of securities lending and borrowing, securities financing rate and fee and the relevant calculating formula, etc. for Party A to conduct securities lending and borrowingtransaction and contain the content as follows:

  1. The maximum time limit of securities lending and borrowing shall be no longer than 6 months. The postponement of the time limit shall be in accordance with the Measures for Administration of Pilot Securities Lending and Borrowing Business of Securities Companies and the circumstances regulated by stock exchange; the time limit of securities lending and borrowing shall be calculated from the date of actual use of capital and securities.
  2. The financing rate shall be not lower than the financial institution's loan basis rate stipulated by the People's Bank of China in the same term. Capital financing interest and securities financing fee shall be calculated in accordance with the days of Party A's actual use of capital and securities.

Article 9 The Contract shall stipulate the main business operation process of the securities lending and borrowing transaction and contain the following matters:

  1. Party B shall synthetically ascertain or adjust the authorized credit line of Party A based on the credit situation, the price of guaranty, the performance circumstances, the market change and Party B's financial arrangement, etc., and provide Party B with capital and securities required by Party B when conducting securities lending and borrowing transaction.
  2. Party A shall conduct securities lending and borrowing transaction within the securities range of the subject matter stipulated by the stock exchange and Party B; if the transaction order made by party B is beyond the securities range of the subject matter stipulated by Party B, Party B is entitled to refuse the performance.
  3. Party A shall keep the materials, such as credit accounting card, ID card and transaction code, and shall not lend credit accounting card, ID card and transaction code to others.
  4. Party B shall establish for Party A the detail account of securities lending and borrowing transaction, truly recording the circumstances of Party A's securities lending and borrowing transaction for Party A's inquiry.
  5. Party B shall report to the supervisory departments or the stock exchange the abnormal transaction and take relevant measures as required to restrict Party A's securities account transaction.

Article 10 The Contract shall stipulate the guarantee maintenance proportion and the calculating formula when Party A conducts securities lending and borrowing transaction, time for covering the short position, time limit for covering the short position, the guarantee maintenance proportion after covering the short position and the notice method for Party B to require Party A to cover the short position. The regulation shall be in accordance with the relevant regulations of the stock exchange.

Article 11 The Contract shall stipulate the issues, such as various circumstances for Party B to compulsorily close the position, conditions of beginning and stopping closing the position t and turns of closing the position, etc,. The contract may also stipulate if Party A is overdue to repay debts, Party B is entitled to collect the penalties for breach of the contract and definite the calculating method of the penalties for breach of the contract

The Contract shall stipulate as well that Party B is entitled to recourse in case fully closing the position of Party A's guaranty is still not enough to repay Party A's debts to Party B.

Article 12 The Contract shall stipulate the issues, such as range, way and time limit for discharging Party A's debts and disposal method of credit account after discharging, etc., and contain the following matters:

  1. The range of debts that Party A shall discharge includes capital and securities borrowed from Party B, financing interest and fee, securities transaction fee, penalties for breach of the contract and other relevant fees.
  2. Party A may discharge Party B's debt before the expiration of the stipulated time limit of securities lending and borrowing or discharge Party B's debts in advance after negotiating with Party B.
  3. Party A may discharge Party B's debt by choosing securities sales or direct payment when conducting financing transaction; the capital gained by Party A's sales of securities shall e firstly discharge Party B's debt. If Party A conducts securities financing transaction, Party A may choose the method of returning securities by purchasing securities or directly returning securities to discharge the securities financed by Party B.

Article 13 The Contract shall stipulate the disposal method for unsettled securities lending and borrowing transaction during the period of securities lending and borrowing transaction under the circumstances that the range and conversion rate of securities used to offset deposit change, deposit proportion and guarantee maintenance proportion change, the securities range change, securities suspend trading or terminate listing, Party B is disqualified or restricted to conduct securities lending and borrowing transaction, judicial institutions take property preservation or compulsory enforcement measures with regard to rights and interests recorded in Party A's credit securities account, rights and interests recorded in Party A's credit securities account is inherited and property is divided or transfer without charge.

Article 14 The Contract shall stipulate the disposal of rights and interests issues with regard to securities lending and borrowing transaction, including but not limited to:

  1. The Contract shall stipulate that Party B shall perform the rights of securities issuer according to securities recorded in the Securities Account of the Securities Company Client for Credit Transaction Guarantee with its own name for Party A's benefit. When performing the rights of securities issuer, Party B shall solicit in advance Party A's opinion and handle according to Party A's opinion. The Contract shall clearly stipulate the specific method of Party B's soliciting opinion.

    2. The rights of securities issuers refer to the rights to convene securities holder's meeting; to participate in securities holder's meeting, raise proposal, and vote; to place of the rights of subscribing for shares and to request to distribute investment profit, etc.

  2. The Contract shall stipulate that securities distributed by Securities Registration and Clearing Institutions shall be recorded in the Securities Account of the Securities Company Client for Credit Transaction Guarantee when distribution of investment profit in securities form and correspondingly change the specific data of Party A's credit securities account; capital distributed by Securities Registration and Clearing Institutions shall be recorded in the Capital Account of the Securities Company Client for Credit Transaction Guarantee when distribution of investment profit in cash form; Party B shall notify commercial banks to change the specific data of Party A's credit capital account when distributed investment profit in cash form arrives on the account.
  3. The Contract shall stipulate that after securities conversion and before securities return by Party A, distribution of investment profit by securities issuers, placement or distribution of securities to securities issuers, purchase of shares in advance by securities holders, discharge of debts by Party A shall be in accordance with the regulations of contract and pay Party B the securities or capital equivalent to profit by securities conversion. The Contract shall clearly stipulate in advance the specific method, number, amount of compensation of Party A to Party B. The agreed method, number and amount of compensation shall be fair and reasonable.
  4. The Contract shall stipulate that the aggregate number of shares or rights of one listed company held by Party A or uniform partners via ordinary securities account and credit securities account reach to the stipulated percentage, they shall perform the relevant obligations of reporting, information disclosure or offer acquisition. The aforementioned shall be taken responsibility to handle by Party A.

Article 15 The Contract shall stipulate the relevant issues with regard to notice and service, including but not limited to:

  1. the detailed contact information of Party A, such as mailing address, post code, designated contact person (Party A or designated contact person with written authorization), fixed telephone number, fax number, mobile telephone number, e-mail address, etc. The Contract shall contain the method and time which Party A shall notify Party B when Party A's contact information changes.
  2. the methods Party B performs various notifying obligations, such assigning and getting written notice by himself, e-mail notice, posting written notice, telephone notice, public notice, etc. The Contract shall stipulate as well the time upon which notice can be regarded as serving Party A after sending the aforementioned notices by Party B.
  3. the method Party B provides Party A with account check service, such as website or telephone transaction system inquiry, sending e-mail inquiry, posting bill statement inquiry, etc. The bill statement provided by Party B to Party A shall contain the following:
    1. Party A's authorized credit line and remaining available authorized credit line;
    2. Party A's the total assets of the credit account, total liabilities, deposit proportion, balance of the available deposit and the deposit could by drawn, guarantee securities market value, guarantee maintenance proportion;
    3. the interest and fee of each capital financing, time limit of discharge, the entrusted price, quantity and amount for purchase of capital financing and sales of securities financing.

Article 16 The Contract shall clearly stipulate that if each party to the contract fails to timely or fully perform the contract due to force majeure, such as fire, earthquake, etc., technical system abnormal without causing by Party B, policies, laws and regulations change, and other circumstances regulated by laws and regulations, each party shall be exempted from liabilities.

Article 17 The Contract shall stipulate various specific circumstances leading to the termination of the contract, including but not limited to:

  1. the death or the loss of civil capability of Party A;
  2. Party A is declared to enter into bankruptcy procedures or dismiss;
  3. Party B is disqualified, stopped business for rectification, shut down, revoked by the securities regulatory institutions;
  4. Party B is declared to enter into bankruptcy procedures or dismiss; and
  5. other statutory or agreed circumstances for the contract termination.

The Contract shall stipulate as well the disposal method of unsettled securities lending and borrowing transaction in case the aforementioned circumstances.

Article 18 The Contract shall stipulate the applicable law and dispute resolution method (arbitration or litigation alternatively).

Article 19 The Contract shall clearly stipulate the issues, such as, conditions of establishment and effectiveness of contract, contract term, contract number.

Article 20 The Contract shall clearly stipulate that "Party B has already informed Party A the risks of securities lending and borrowing transaction. Party B does not guarantee Party A to obtain investment profit or bear the loss of Party A's investment. Party A confirm to have full understanding of the contract and shall be liable for the risks and losses."

The Contract shall stipulate as well that the Contract shall be signed by Party A, and in case Party A is an institutional investor, it shall be signed by its legal representative or its authorized representative.


Essential Clauses of Disclosure Document of Transaction Risks of Securities Lending and Borrowing

All securities companies:

In order to make investors fully understand the securities lending and borrowing risks, securities companies conducting pilot securities lending and borrowing business (hereinafter referred to as pilot securities company) shall set down Disclosure Document of Transaction Risks of Securities Lending and Borrowing to fully disclose the risks in securities lending and borrowing business and the losses due to the failure of submit guaranty and be compulsorily closed. Disclosure Document of Transaction Risks of Securities Lending and Borrowing shall at least includes the following:

  1. to remind investors to be aware securities lending and borrowing business have the same policy risks, contract breaching risks, system risks, etc as ordinary securities transaction and the special risks of enlarging risks, etc.
  2. to remind investors to learn whether securities companies have the qualification to conduct securities lending and borrowing business before opening account to conduct securities lending and borrowing business.
  3. to remind investors to possibly encounter closing risks if the failure to pay back debt, or the percentage between guaranty price and securities lending and borrowing debt caused by price fluctuation of listed securities is lower than guarantee maintenance along with the failure to add guaranty in accordance with the stipulated time and number.
  4. to remind investors that during the course of conducting securities lending and borrowing business, if their credit decreases, securities companies may reduce their authorised credit line or the risks caused by increasing warning standard and closing standard by securities companies may lead to economic losses of investors.
  5. to remind investors that during the course of conducting securities lending and borrowing business, if People's Bank of China increases the loan base rate of
    6. financial institutions in the same term and securities companies correspondingly increase the capital financing rate or securities financing rate, investors will face the risks of increase of securities lending and borrowing cost.
  6. to remind investors that during the course of conducting securities lending and borrowing business, if due to their own reason, judicial institutions take property preservation measures or compulsory enforcement measures on their assets or they are declared to be disable, bankrupt or be dismissed and securities companies may terminate securities lending and borrowing business in advance, thus investors may encounter economic losses.
  7. to remind investors that during the course of conducting securities lending and borrowing business, if securities range of securities lending and borrowing subject matter changes, securities suspend trading or terminate listing and securities companies may terminate securities lending and borrowing business in advance, thus investors may encounter economic losses.
  8. to remind investors that during the course of conducting securities lending and borrowing business, securities companies will send investors notice in accordance with the notice and service method and mailing address stipulated in Securities Lending and Borrowing Contract. After sending notice and expiration of stipulated term, securities companies shall be deemed to perform the notice obligations to investors. No matter investors fail to timely receive notice for what reason, investors shall face the risks of closing the position by the securities companies and may lead to economic losses.
  9. to remind investors to carefully keep credit account card, ID card and transaction code, etc. Investors shall bear the liabilities if they lend credit account card, ID card and transaction code to others.
  10. Besides the aforementioned risks, all Pilot Securities Companies may further list the existing risks in Disclosure Document of Transaction Risks of Securities Lending and Borrowing stipulated by the company for capital financing and securities financing business, as the case may be.

Disclosure Document of Transaction Risks of Securities Lending and Borrowing shall contain the following with striking words:

The disclosure issues in the Disclosure Document of Transaction Risks of Securities Lending and Borrowing are just for list, while it does not cover all risks in securities lending and borrowing transaction and all factors possibly influencing listed securities. Investors shall carefully read the relevant business rules and the Clauses of Securities Lending and Borrowing Contract before participating in securities lending and borrowing transaction and learn the rules for securities lending and borrowing transaction and confirm the risks evaluation and financial arrangement have already made to escape the intolerable losses for participating insecurities lending and borrowing transaction.

All pilot securities companies shall make the investors sign in the Disclosure Document of Transaction Risks of Securities Lending and Borrowing as required by the pilot securities companies and confirm to know and understand the whole content of Disclosure Document of Transaction Risks of Securities Lending and Borrowing and be willing to bear risks and losses in securities lending and borrowing transaction.


The Securities Association of China 2006-09-05