The off-exchange derivatives business has revealed a "loophole," and CAITONG SECURITIES and executive Pei Gencai received a regulatory "warning."

The over-the-counter derivatives business has become a "star" business for securities firms in recent years, but if not managed properly, it can also become a "disaster zone" for problems to erupt.

On November 7, the Zhejiang Securities Regulatory Bureau disclosed that it had taken corrective measures against CAITONG SECURITIES, while Pei Gencai, a senior executive in charge of the over-the-counter derivatives business at CAITONG SECURITIES, also received a warning letter.

Regulatory Measures Taken Against CAITONG SECURITIES

The relevant decision shows that the regulatory agency verified that CAITONG SECURITIES' over-the-counter derivatives business had the following issues: the management mechanism for underlying assets is not sound, timely dynamic adjustments were not made for the linked underlying assets; the annual review of investor qualifications was inadequate; effective management of system permissions and passwords was not implemented.

The regulatory agency believes that the above situations do not comply with Article 18, Article 32, and Article 46 of the "Administrative Measures for Securities Companies' Over-the-Counter Options Business" (Zhong Zheng Xie Fa [2020] No. 104), Article 19, Paragraph 1, and Article 16 of the "Administrative Measures for Securities Companies' Income Swap Business" (Zhong Zheng Xie Fa [2021] No. 276), and Article 7, Item 1, and Article 116 of the "Guidelines for Internal Control of Securities Companies" (Zheng Jian Ji Gu Zhi [2003] No. 260), violating Article 3 and Article 6, Item 1 of the "Compliance Management Measures for Securities Companies and Securities Investment Fund Management Companies" (CSRC Order No. 166), and Article 32, Paragraph 1 and Paragraph 2 of the "Information Technology Management Measures for Securities and Fund Operating Institutions" (CSRC Order No. 179).

According to Article 32, Paragraph 1 of the "Compliance Management Measures for Securities Companies and Securities Investment Fund Management Companies" (CSRC Order No. 166) and Article 57 of the "Information Technology Management Measures for Securities and Fund Operating Institutions" (CSRC Order No. 179),

The Zhejiang Securities Regulatory Bureau has decided to take supervisory management measures to order CAITONG SECURITIES to make corrections.

The Zhejiang Securities Regulatory Bureau also requested that CAITONG SECURITIES take the above issues as a warning, conduct in-depth rectification, take effective measures to improve the internal control and compliance management level of the over-the-counter derivatives business, and submit a written rectification report to the Zhejiang Securities Regulatory Bureau within 30 days from the date of receipt of the decision.

Securities Firm Executive Also Receives a "Warning Letter"

In addition, Pei Gencai, the senior executive in charge of CAITONG SECURITIES' over-the-counter derivatives business, also received a warning letter.

According to the information, Pei Gencai was born in February 1966 and has served as the deputy general manager of the Zhejiang Securities Brokerage Management Headquarters, the general manager of the Shanghai Kunshan Road Securities Business Department, the general manager of the Institutional Management Department of the Brokerage Management Headquarters, the general manager of the Institutional Management Department of the Brokerage Management Headquarters of Founder Securities, the general manager of the Marketing Center of the Brokerage Business Headquarters, and the general manager of the Hangzhou Xueyuan Road Securities Business Department of Huaxi Securities. He joined the company in June 2010 and has served as the assistant to the general manager and general manager of the Marketing Service Center, assistant to the general manager and general manager of the Brokerage Business Headquarters, chairman of CAITONG Innovation, and assistant to the general manager and director of the research institute. He is currently the assistant to the general manager of CAITONG SECURITIES.

The regulatory agency believes that Pei Gencai, as a senior management personnel of CAITONG SECURITIES, is responsible for the management of the company's above-mentioned violations. According to Article 32, Paragraph 1 of the "Compliance Management Measures for Securities Companies and Securities Investment Fund Management Companies" (CSRC Order No. 166) and Article 57 of the "Information Technology Management Measures for Securities and Fund Operating Institutions" (CSRC Order No. 179), The Zhejiang Securities Regulatory Bureau has decided to take supervisory measures against him by issuing a warning letter, which will be recorded in the integrity file of the securities and futures market.

"High Professionalism and High Risk Control Requirements"

The over-the-counter derivative business of securities firms typically refers to the service business where securities firms provide financial derivative products to clients outside of the futures trading venue.

This business has high professional requirements for product design, production, and maintenance due to the extensive use of financial derivative instruments for customization, and the risk control requirements are also high, attracting significant attention from all parties.

Risk Warning and Disclaimer

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