Risk Management Measures

Article 53 To reduce the risk exposures associated with the securities depository & clearing operations, the CSDCC shall have in place effective risk management measures as follows:

1. establishing effective risk management mechanism and internal control systems;
2. constructing advanced technical systems with a set of technical standards and specifications adopted and followed by both the CSDCC and the clearing participants;
3. developing sound admission criteria and risk assessment procedures applicable to the clearing participant applicant and the Designated Clearing Bank respectively; and
4. making backup copies for clearing data and technical systems; formulating contingency plan and procedures in case of emergency

Article 54 The CSDCC shall work with the stock exchange to institute a risk control and management system with respect to the systematic risk of the securities market.

The CSDCC shall enter into a cooperation agreement with the stock exchange to define the respective obligations and rights of each party.

Article 55 The CSDCC shall coordinate the establishment of a Securities Clearing and Settlement Joint Guarantee Fund by the clearing participants on a risk sharing basis, which shall be used to provide guarantee of settlement in the event of defaults by clearing participant.

Rules concerning the fund establishment, application, administration and contribution in regard to the Joint Guarantee Fund shall be set out by the CSDCC in its operating rules.

Article 56 The CSDCC may require a clearing participant to provide collateral as security in respect of its obligations and liabilities to the CSDCC (the Settlement Collateral) or impose other risk control measures from time to time against a participant with regard to the participant's particular risk exposure.

The specific amount of the collateral to be provided by the clearing participant shall be prescribed and adjusted by the CSDCC from time to time in proportion to the risk exposure of the participant.

Article 57 The clearing participant is encouraged to deposit additional fund into the Cash Clearing Account as a reserve (the Reserve Fund) to meet the clearing and settlement liabilities.

The Reserve Fund shall be strictly segregated from the funds owned by the CSDCC and be protected from unauthorized application. The CSDCC shall maintain a separate record of the Reserve Fund deposited by each clearing participant.

Article 58 The CSDCC shall establish and maintain a Pledged Securities Safe Deposit Account used to keep the pledged securities handed over by a participant in connection with collateralized repurchase agreement.

Article 59 The following funds and securities that are collected or received by the CSDCC must be restricted to the use of securities clearing & settlement purposes under applicable CSDCC operating rules and procedures and shall be immune to any legal enforcement measures:

1. funds or securities used as guarantee of settlement, such as the Securities Settlement Reserve Fund, the Securities Clearing & Settlement Joint Guarantee Fund, the Settlement Collateral, the Pledged Securities in connection with collectivized repurchase agreement, etc.;
2. securities or funds held in the Central Securities Clearing Account, Central Cash Clearing Account, the Designated Escrow Account, or other designated accounts for settlement purposes;
3. securities held in the Stock Clearing Account or the Securities Disposition Account for the participant; the funds held in the participant's Cash Clearing Account in the amount that is payable under the transactions concluded;
4. securities and funds held by investors that are subject to the settlement process under securities transactions concluded; and
5. the bank deposit of the CSDCC, including the reserve funds provided by the participant for settlement purposes held in a special bank saving account, the special bank settlement account for subscription of new issues, and the bank deposit reserved for distribution of interest, dividend or other benefit entitlement.

Article 60 the CSDCC may establish line of credit with the bank, or pledge the securities kept in the Designated Escrow Account as security against bank loans as it thinks necessary for the purpose of financing its obligations and liabilities in relation with the central securities depository and clearing services.