China’s regulator fines brokers, blames them for financing role in 2015 stock market rout

China’s regulator has penalised three of the country’s largest brokers, blaming them for their role in the 2015 stock market crash, in the first official account of a rout that wiped out US$5 trillion of market value in a few weeks since mid June that year.

Leading mainland brokerages Citic Securities and Haitong Securities, together with smaller player Guosen Securities, were fined by the China Securities Regulatory Commission (CSRC) for breaking margin financing and securities lending rules in a case involving Citadel Securities, filings of the three companies said on Wednesday night.

Analysts have taken the penalty a final conclusion to a two-year investigation led by the CSRC, regarding the involvement of brokerage companies during the sharp stock market slump.

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Citic Securities, China’s largest brokerage house, had broken rules on margin financing and its securities lending business by “failing to execute business contracts with its customers in accordance with the relevant provisions”, the investigation by the CSRC found, the filing said.

Specifically, Citic Securities provided credit account services to Citadel (Shanghai) Trading Company in breach of requirements that the company needed to have an active account open with the brokerage for at least six months, the filing said.

Haitong Securities and Guosen Securities were also punished for violating margin financing rules related to providing margin trading services to Citadel Shanghai.

Citadel Shanghai is a a unit of Citadel Securities. The company confirmed in August 2015 that one of the accounts of Citadel Shanghai was suspended by the Shenzhen exchange, Bloomberg reported.

The Shanghai Stock Exchange suffered a sharp sell-off from mid-June 2015, with 40 per cent of the value of its A-share market eviscerated in just a few weeks.

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At the time, regulators blamed speculators, algorithmic traders, and “malicious short sellers” for exacerbating the market slump.

“Brokerage houses including Citic Securities were brought under investigation for whether they have been colluding with malicious short sellers to take profit from the stock rout, while investors have been selling off Citic Securities to avoid risk,” said Hu Xiang, an analyst with Soochow Securities.

Seven senior managers of Citic Securities including its president Cheng Boming were taken away by police for probe in August that year.

“The penalty announced last night is lighter than expectation, which is a positive news to Citic Securities,” Hu said.

CITIC Securities said in a filing to the Hong Kong and Shanghai bourses on Wednesday evening that it had been fined 308.3 million yuan (US$44.75 million) and had a further 61.7 million yuan of “illegal proceeds” confiscated by the China Securities Regulatory Commission (CSRC).

In addition, the securities regulator imposed separate fines of 100,000 yuan on company executives Da Xinya and Song Cheng.

Haitong Securities and Guosen Securities were also punished for violating margin financing rules related to providing margin trading services to Citadel.

Haitong was fined 2.5 million yuan, while Guosen and its futures unit were fined a total of 105 million yuan. The regulator also issued warnings and fined the Haitong and Guosen executives involved, the brokerages said.

Citic Securities closed higher by 3.9 per cent to 16.4 yuan in Shanghai. Its Hong Kong listed share rose 2.7 per cent to HK$16.2.

Haitong securities added 2.44 per cent to 15.1 yuan in Shanghai, while rose 2.8 per cent to HK$13.1 in Hong Kong.

Guosen Securities rose by 3.8 per cent to 13.11 yuan in Shenzhen.

This article has been amended to correct the name of Citadel Securities.