Default Rules

Article 61 The CSDCC shall establish a Designated Escrow Account to detain the securities to be delivered to a receiving participant or the funds payable to a delivering participant in the event of defaults on settlement.

Article 62 In the event that a participant defaults in payment of any sum payable to the CSDCC, the following procedures shall be implemented:

1. The defaulting participant shall forward to the CSDCC a Securities Transfer Instruction within a stated time period, detailing, (a) the descriptions and quantities of the securities for which the payment has been made in full and the designated account to be accredited with such securities; and (b) the descriptions and quantities of the securities for which the payment has not yet been made. Title and property in such unpaid securities (securities-on-hold) shall not pass to such participant as the case may be.
2. Upon reception of the Securities Transfer Instruction within the stated time period, the CSDCC shall make delivery of the securities for which payment has been made in full whereas transfer the securities for which payment has not yet been made in full in the Designated Escrow Account in line with applicable clearing and settlement operating rules. In addition, The CSDCC must request the defaulting participant to put up additional fund or provide additional settlement collateral to meet the outstanding payment obligation.

Failure by the clearing participant to forward the valid Securities Transfer Instruction within a prescribed time limit constitutes a material settlement default. In that case, the CSDCC is entitled to put on hold all of the securities to be delivered to the defaulter, regardless of whether paid or not, in the Designated Escrow Account, and request the defaulting participant to put up additional funds or provide equivalent collateral to satisfy the outstanding payment.

Should the default continue to remain unsatisfied given the application of the proceeds of realization of the securities put on hold, the additional deposit of funds or the collateral provided by the defaulter, the CSDCC has the right to make a debit entry to the proprietary securities account of the defaulting participant and a corresponding credit entry to the Designated Escrow Account for the amount equivalent to the shortfall. The CSDCC will notify the participant affected of such transfer of securities afterwards.

Article 63 In the event that a participant defaults in payment of any sum payable to the CSDCC, the CSDCC has the power to apply the funds available towards the satisfaction of any amount due to the CSDCC In the following order of priority:

1. cash collateral provided by the defaulting participant;
2. cash held in the Joint Guarantee Fund that is contributed by the defaulting participant;
3. cash held in the Joint Guarantee Fund that is contributed by clearing participants other than the defaulter;
4. cash in the Securities Settlement Reserve Fund; or
5. other funds available

Article 64 In the event that a participant defaults in delivery of securities, the CSDCC is entitled to delay the payment due to the delivering participant until the outstanding obligation is satisfied.

The CSDCC shall hold the amount to be paid to the delivering participant in the Designated Escrow Account and notify the participant affected of the amount put on hold. The defaulter shall put up additional valid securities or provide equivalent collateral acceptable to the CSDCC to satisfy the outstanding delivery obligation.

Article 65 In the event of a default on the part of a participant to fulfill its delivery obligations, the CSDCC may apply all or any of the equivalent securities in lieu of the securities that are the subject of the delivery obligations from the following sources towards the satisfaction of the obligations and liabilities of such participant to the CSDCC:

1. securities furnished by the defaulter;
2. securities purchased using the funds in the Designated Escrow Account;
3. securities available to the CSDCC from other alternative sources

Article 66 Should the default on payment or delivery obligations continue unremedied within the stated time limit, the CSDCC may select to sell the securities collateral furnished by the defaulter, the pledged securities in connection with collateralized repurchase agreement, or the Securities-on-hold in the Designated Escrow Account.

The CSDCC may apply the proceeds from the sale of the above said securities towards the satisfaction of the payment or delivery obligations or the reimbursement of any expense or costs incurred; the balance of such sale proceeds remaining after satisfaction of all obligations and liabilities may be returned to the defaulting participant. If the outstanding obligations remain unsatisfied after application of the proceeds, the CSDCC may exercise recourse against the defaulting participant on the outstanding obligations or any cost or expense incurred.

Should the recourse against the defaulting participant fail, the CSDCC has the right to apply the funds in the Securities Clearing & Settlement Joint Guarantee Fund or the Securities Settlement Reserve Fund towards the satisfaction of the outstanding obligations or any cost or expense incurred from the default without prejudice to the right of the recourse in respect of the default.

Article 67 the CSDCC may require a participant that fails to discharge its payment or delivery obligations on due date to pay to it default fees under applicable provisions. The defaults fees will be credited to the Securities Settlement Reserve Fund.

Article 68 The CSDCC is entitled to take any of the following actions or such other action against a clearing participant upon the occurrence of an event of material default in any of the delivery or payment obligations:

1. to restrict or prohibit the defaulting participant from having access to and/or using any or all of the clearing house's facilities, suspend or revoke the clearing house participantship, and refer the matter to the stock exchange for imposition of sanctions on the trading activities of the defaulting participant;
2. to refer the matter to the CSRC for instigating disciplinary actions against the defaulter including withdrawal or revocation of securities business license, as well as disciplinary actions against the chief in charge or other individuals involved severally or jointly, such as issuance of a warning, imposition of a fine, revocation of the qualifications for holding a senior office or securities practitioner qualifications, etc.

The CSDCC shall work with the stock exchange concerned to establish separate rules and procedures with respect to imposition of market trading activities sanctions against a defaulting clearing participant, and submit the procedures to the CSRC for approval.

Article 69 The CSDCC shall make full and itemized disclosure in its annual report with regard to its application of the resources of the Securities Clearing & Settlement Joint Guarantee Fund and the Securities Settlement Reserve Fund, as well as disclosures about any disciplinary actions or sanctions activated against defaulting participants as set out in Article 67.