Citic Securities formally notified of investigation by Chinese market regulator
Guosen Securities also under China Securities Regulatory Commission probe for suspected violations of securities law
Citic Securities and Guosen Securities have received formal notice from the mainland’s securities watchdog that they are under investigation for suspected violations of securities law, the two brokerages told the Shanghai Stock Exchange on Thursday night.
The companies said their operations would continue as normal and they would fully cooperate with the China Securities Regulatory Commission’s investigation.
The CSRC’s probes into Citic and Guosen came after the regulator ordered brokerages to halt the financial derivative – total return swap – used as a financing tool to trade stocks.
According to an internal document obtained by the South China Morning Post, brokerages were required by the CSRC to suspend the businesses immediately. They were estimated to have helped retail investors plough an additional 100 billion yuan into stocks.
The formal notice of the Citic probe follows months of investigation, in which a number of senior Citic executives, top-level CSRC leaders and people connected to Citic executives have been implicated, including the China chairwoman of leading global hedge fund Man Investments. Citic Securities announced chairman Wang Dongmin’s retirement from the brokerage last week.
Mainland media have linked the Citic investigation to a string of irregular stock movements amid the central government’s market rescue efforts, following this summer’s meltdown in the mainland’s leverage-driven equity markets. Citic was appointed one of the state’s agents to execute orders to support the rescue efforts.
Further irregularities have come to light since the investigation became known, including an incident in which Citic submitted a report that overstated the value of over-the-counter swaps by a trillion yuan. The company blamed the incident on an information technology problem.
Yang Tiecheng, partner and China leader of the financial regulatory group at law firm Clifford Chance said the formal investigation notice on Citic did not signify an end to investigations.
Alexandre Werno, executive vice-general manager at Fortune SG Fund Management and a member of the advisory committee of the Asset Management Association of China, said he believed investigations were only starting in China.
Yang said the Communist Party’s disciplinary watchdog had shifted focus to the financial industry, with the conduct of the top echelons at the CSRC also coming under scrutiny.
CSRC vice-chairman Yao Gang and Zhang Yujun, assistant CSRC chairman, are under investigation by the party’s anti-graft body. They are expected to be held responsible for the market rout and unsuccessful bailout efforts, according to sources close to the CSRC.
“The stock market has stabilised in China. But the problems themselves remain,” Yang said. “It will be hard to say how long it will be before these issues can be concluded.”
The next step forward would be reforms to allow the regulators to regulate markets more efficiently and directly, Yang said, pointing out there were three regulators involved in the mainland’s financial market. But efforts were at an early stage. Yang said draft rules for programme trading , a particularly problematic area because the regulators see it as rife with abuse, had only just been circulated for opinion.
Investigations against other securities companies have ended with fines slapped on Huatai Securities, Haitong Securities, Guangfa Securities, Founder Securities and Zheshang Futures in September.
The president of Guosen Securities, Chen Hongqiao, hanged himself in his Shenzhen home a month ago, according mainland media reports.