The mainland parliament yesterday passed the country's first national Securities Law, unifying about 250 sets of provisional rules and regulations governing the rapidly expanding but scandal-ridden securities markets. After six years of political wrangling, the law passed by the National People's Congress Standing Committee comes into effect on July 1. The grace period is intended to give market regulators and practitioners time to comply with the provisions. Comprising 214 clauses under 12 chapters, the law sets out in detail standard practices for share issues and trading, codes of behaviour and penalties for violation. Its provisions cover listed companies, stock exchanges, brokerages, registration and settlement companies, self-regulatory associations and government regulatory bodies. Market talk of the law's impending passage has triggered capital flight from the Shanghai and Shenzhen markets in recent weeks as speculators involved in illegal activities withdraw funds for fear of being caught. A new provision requiring brokerages to separate their trading accounts from those of clients to prevent houses abusing customer deposits has also contributed to the liquidity squeeze. The daily combined trading volume of the two exchanges has fallen to a yearly low of about four billion yuan (HK$3.72 billion) to five billion yuan, and investors are concerned that more liquidity will be squeezed out of the markets when the law comes into effect. Although the practice is illegal, nearly all brokerages rely on customer deposits to fund underwriting activities, proprietary trading and share speculation. Yesterday, the Shanghai A-Share Index dropped 1.51 per cent to 1,215.43 points and the Shenzhen A-Share Index by 1.67 per cent to 368.59 points. The legislation mostly codifies existing practices to protect investors against unethical practices such as insider trading, market manipulation and fraud. It reaffirms the ban on foreigners trading in mainlanders-only A shares, the use of bank funds to speculate in shares, and on brokerages providing margin trading and short selling to investors. It forbids state enterprises from speculating in stocks, but remains vague on whether they can invest in shares at all and what constitutes stock speculation. New provisions include: requiring stock exchanges, brokerages, and the share settlement company to set up compensation funds to protect clients and houses against default by exchange members and in the event brokerages have acted improperly; establishment of a committee by regulators and external professionals to vet listing applications by voting, as is the case in Hong Kong; giving the China Securities Regulatory Commission - the sole market regulator - the leeway to delegate certain powers to the exchanges to suspend and terminate listing of shares and corporate bonds; ranking brokerages as either comprehensive securities houses if they have a registered capital of at least 500 million yuan and a sound trading record or as those permitted to trade only on a client's behalf; giving share issuing companies the choice to name sponsors and underwriters. NPC Standing Committee chairman Li Peng was quoted by the Xinhua news agency as saying: 'The law outlines fundamental principles for codes of conduct governing the country's securities market. 'It will play an important role in pooling construction funds, protecting the legitimate rights and interests of investors, preventing and resolving financial risk and guaranteeing the healthy development of China's fledgling securities market.' He said legislators had formulated the law after drawing lessons from the Asian financial crisis and the mainland's experiences during development of the speculative industry. Li Yining, the chief author of the law, said: 'Passing the law was far from an easy task.'