PBOC Cracks Down on Illegal Exchanges, Bans Payment Clearing Services
Yicai Global
/SOURCE : Yicai
PBOC Cracks Down on Illegal Exchanges, Bans Payment Clearing Services

(Yicai Global) March 1 -- China's central bank has brought in a new policy to crack down on illegal securities and futures exchanges, prohibiting payment service providers and commercial banks from offering settlements for illegal exchanges.

A document from the People's Bank of China, dated Jan. 23, recently surfaced online outlining the changes. As well as banning payment settlement services for illegal exchanges, the file said providers and banks must have inspected payment acceptance terminals and online payment interfaces by the end of last month.

PBOC was unavailable for comment, but a third-party payment firm confirmed the document was issued.

The file says the central bank found some payment providers and banks offered settlement services for exchanges engaging in illegal standardized contract transactions such as equity and commodity trading without authorization. Three main problems were noted. First, merchants breached review procedures. Second, some payment acceptance terminals and online payment interfaces were leased, rented or sold to illegal exchanges. Third, accounts were opened and payments processed for illegal exchanges due to inadequate review of payment and bank settlement accounts.

To correct the issues, the PBOC introduced five new requirements for third-party payment service providers:

- They are prohibited from offering payment settlement services for illegal exchanges.

- They must enhance reviews of exchange clients.

- They must thoroughly inspect payment acceptance terminals and online payment interfaces

- They must strengthen the management of exchange accounts.

- They must more effectively monitor risks in payment businesses.

The central bank ordered all payment firms and commercial banks to inspect existing payment acceptance terminals and online interfaces by the end of February, and investigate all instances of payment acceptance terminals and online payment interfaces leased, rented or sold by merchants to exchanges. Payment settlement operations should be terminated where violations exist, and action should be taken to protect the contractual rights and interests of payment firms and commercial banks.

Many exchanges have emerged in various guises in recent years. In most cases:

- Commodities such as silver and crude oil are traded based on standardized contracts through centralized trading including call and continuous auctions, electronic matching, anonymous trading and market-making.

- A margin system is adopted with 10 times, 20 times and even 50 times the financial leverage offered, and transactions are settled through hedging without any physical goods delivered.

- Daily netting and forced liquidation for futures trading are implemented, so even minor price fluctuations may cause serious losses to investors.

- Instead of determining commodity prices based on transactions, transaction prices are set by marking up prices in overseas markets.

- Investors place bets against members of the exchanges where member organizations make money if investors lose the bets.

There are over 300 futures exchanges suspected of illegal trading and quasi-securities speculative trading markets in China. Most of them are precious metal, stamps, coal and crude oil exchanges in Dalian, Hebei, Hunan, Ningxia, Beijing, Jiangsu, Guizhou and Qingdao.

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