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Speech by CSRC Chairman LIU Shiyu at the International Seminar on Front-line Supervision by Stock Exchanges
25-08-2017

 

Distinguished guests, ladies, and gentlemen,

Good morning! Today, friends from nine stock exchanges of the three continents of America, Europe, and Asia gathered in Shanghai to discuss the very significant topic of front-line supervision by stock exchanges in the capital markets. The Seminar is convened at the suggestion of the China Securities Regulatory Commission (CSRC). On behalf of the CSRC, I would like to extend my appreciation to Shanghai Stock Exchange (SSE) for the thoughtful arrangement in hosting the seminar and warm welcome to all the distinguished guests present here.

In the process of developing the socialist market economy, the Chinese government attached great importance to the development of the capital markets, which grew substantially under joint efforts. Despite rapid growths, the equity financing market is still smaller in size than other financial sectors. Under the master planning of the central government, the CSRC fully adheres to the fundamental goal of capital markets serving the real economy and commits to the regulatory mission of investor protection, by imposing comprehensive and strict regulation in accordance with the law to realize sound and stable growth of the capital markets. Stock exchanges, as market organizers and operators, as well as self-regulators of market participants, are at the forefront of the supervisory system, endowed with unique advantages and irreplaceable roles. I would like to avail this opportunity to share with you some of my opinions on this topic.

First, from global perspective, stock exchanges are inherently market supervisors, which is commonly written into law. Looking at the 400-year history of stock exchanges, we can come to three basic conclusions: Firstly, stock exchanges were created with regulatory functions. Whether it's the Jonathan's Coffee-House, the origin of the London Stock Exchange (LSE), or the Buttonwood Agreement, the beginning of New York Stock Exchange (NYSE), both had experimented with self-regulation. Stock exchanges per se were founded to organize orderly tradings, with self-regulation written into their Article of Association. The 1897 Exchange Act of Germany, the 1934 Securities Trading Act of the U.S., and laws and precedents of many other countries made clear stipulation about the supervisory functions of stock exchanges. Secondly, no matter how the organizational structures of the stock exchanges have evolved, they have always played the role as market supervisors. Even in the late 1990s and early 20th century, when demutualization waved across stock exchanges worldwide and segregated their supervisory functions and means to different extent to avoid potential conflict of interest between profit-making and regulation, the exchanges had always played the role as market supervisors. In recent years, with lessons learned from the global financial crisis, a number of stock exchanges reinforced their supervisory functions in different ways. Thirdly, the notion of stock exchanges as front-line supervisors is not only an international consensus, but also broadly practiced with rich experiences. IOSCO also believes that stock exchanges have a lot to do in performing supervisory duties over the members, financial products, and trading activities. The stock exchanges which are represented here today have employed different measures in their supervisory role, which my colleagues and I would very much like to hear about.

Second, from China's perspective, stock exchanges should be persistent in performing front-line supervision, and there is huge room for improvement. China's capital markets are still young. The Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) , which were set up less than 30 years ago, are yet to be mature institutions. The stock market is very unique in that, with over 100 million investors, 80% of the trading volume is contributed by retail investors. In such a market, we are faced with a most onerous job to protect the interests of investors. When the stock exchanges were founded, their self-regulatory and other supervisory functions were written into the Article of Association. It was also stipulated in the Provisional Measures of the Administration of Stock Exchanges by the Securities Commission of the State Council in 1993, written into the Securities Law in 1998, and further improved in the revision of the Securities Law in 2005, empowering the stock exchanges in making trading rules, real-time market monitoring, imposing trading halt on abnormal accounts, and issuing disciplinary sanctions, all of which on the legal basis for front-line supervision.

Frankly speaking, in the past, China's stock exchanges did far from enough in front-line supervision, which was exposed in the abnormal stock market volatility in 2015. We have come to realize that, stock exchanges are not merely trading venues, but must be strong supervisors to safeguard market orders and be responsible for the investing public. Not to mention the fact that stock exchanges house all the trading activities and store all the trading records, they are duty-bound to tighten supervision on the floor.

In 2016, the SSE and SZSE set up a "member-oriented" supervisory system, through which the exchanges shall effectively manage the members who are bound to know their clients, monitor client tradings, and report abnormal trading behaviors. In the past year, the stock exchanges prioritized front-line supervisory work and reinforced real-time surveillance, effectively curbing market aberrances and improving market ecosystem. In China's capital markets, trading accounts are managed in a see-through system. Leveraging on what is an institutional advantage, we will step up the development of the Central Surveillance System which spans over cross-border, cross-exchange, and cross-account abnormal transactions, leaving no misconduct going unnoticed in the markets.

Moreover, the stock exchanges also go into the roots of information disclosure by listed companies, provide compliance trainings and on-site inspections on the members. Any leads to misconduct and malpractice are timely reported to the CSRC, together creating a regulatory synergy.

In general, China's capital markets have been on stable course over the past two years, thanks to the SSE and SZSE who performed due front-line supervisory duties. I believe the stock exchanges will play an even bigger role in the future.

Thirdly, Chinese stock exchanges shall work together with their international counterparts to fulfill the role of front-line supervision. Front-line supervision is not a new concept, but new issues keep sprouting up. For example, how can stock exchanges better serve the public interests and provide fair trading opportunities to all market players in the face of novel financial products and trading methods? How to improve trading rules and set sensible parameters on abnormal tradings in order to simultaneously maintain normal trading and police market orders? How can stock exchanges develop RegTech with the help of new technologies, such as big data and artificial intelligence? And how to crack down on cross-market manipulation by strengthening cross-border cooperation on front-line supervision? Those are all meaningful issues worth discussing. Today's seminar sets off for a very good start. I would like to make the suggestion to hold such meetings regularly on annual basis, inviting more exchanges to share and learn from each other.

China's stock exchanges are the fruits of reform and opening-up. In recent years, the exchanges sped up the pace of two-way opening-up, with the launch of Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and substantive cooperation with exchanges in Belt and Road countries and regions. In the future, the CSRC will make even greater efforts to support exchanges from China and abroad to set up overseas branches, provide staff training, and advance market connectivity, injecting new momentum into the stability and prosperity of the global capital markets.

Last but not least, I would like to wish the seminar a full success, and wish you all a pleasant stay in Shanghai. Thank you.



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