Legal Regulation Research Of The OTC Sec Urities Market

OTC market is an important part of multi-layered capital markets, and reflectsinvestment and financing needs of the general concerns of SME. In addition to the main board, OTC market provides more diversification, more flexible transaction methods, and more complicated and customized securitization product. Mostly, the enterprises listed in OTC market are SMEs in the early growth stage, with underperformed corporate governance, management and unpredictable profitability. As a result, the risk of OTC securities, particularly the market risk turns out to be relatively high. With the expansion of GEM and the growth of regional OTC markets, transaction explodes in volume. Therefore, it has become an important issue for the domestic and abroad securities legislation research and practice how to ensure the OTC market sustainable development and protect the investors'interest. In recent years, although Chinese scholars had conducted in-depth research on the OTC market's regulatory system and learned a lot from foreign market about OTC market construction, there are still problems to further clarify. On our securities practitioners' opinion, we comprehensively use the knowledge ranged from civil law, economics sociology to practical experience, study and analysis the OTC market regulation.We will discuss the problem through six thorough sections.The first part analyzes the fundamentals of OTC market establishment, and we particularly contemplate the OTC legislate characteristics.Firstly, we analyze the characteristics of OTC markets, and compare the concept of OTC market, capital market, property ownership market with over-the counter market, in order to clearly define the OTC market. We believe that the OTC market is independent of the exchange transaction system, and is essential to the stock market. OTC market has various investment portfolios, multiple market participants, less regulation and lower entry requirement. Meanwhile, OTC market functions benefit both private and public. In the public sectors, OTC market plays a positive role as improving the multi-layer capital market and promoting regional economy growth. In the private sectors, OTC market provides enterprises with financing and enforces the company improve corporate governance practice. We believe it is the core value of OTC market that the capital trade functions provide to the private sector and connect the capital demand and supply.Secondly, compared OTC with exchange markets, we distinguish the character differences in the legal system, transaction features and supervision mode, and come up with the idea that the legislation of OTC market subject to private law. We believe that OTC markets thrive on autonomy of the will. Rather than administration instruction, the social contract within the market participants leads OTC construction progress. The participants 'common interests emerge in the markets functions and values, trading rules and other legal system design and arrangement. The participantsfollow the honesty, equality, mutual benefit and other basic principle of civil law, in less regard of the legal norms of public law. Autonomy of the will and other basic principle of civil law play an core role in OTC markets. It is the innovation in this essay that we define OTC legal system subject to private law, and we deduct following conclusions just from this origin.In the second part, we discuss how to regulate the OTC market maker. We define a market maker or liquidity provider is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread. Thanks to the difference in mechanism, counterparty and information of market maker trading and auction trading, it is obviously that the regulation should make a change.Secondly, we explain the main reason that OTC market should choose market maker system is market liquidity and stability. For investors, market maker provides a more reasonable price and ensures the price-discovery process. For regulation, market maker helps increase efficiency and lower regulation cost.Also, we explain how the market makers quote bid and ask price, how they activate the liquidity, the risk they undertake and information asymmetry. We analyze the necessity of establishing legal regulation in market making system.Then, we suggest the indicators of choosing market makers, including instant transaction capacity, valuation ability and integrity. A good market maker should be able to balance and fulfill these requirements.Finally, we propose the information disclosure rules as the fundamental to improve OTC market maker systems. This idea comes from our analysis on OTC market making in US, Taiwan and other primary OTC markets.In the third part, we analyze the information disclosure.Firstly, the issuer should make disclosure to all the OTC market participants. Secondly, we stress the necessity of disclosure as signal and solution to market information asymmetric and anti-deceive. Third, due to the difference with exchange and OTC market, OTC information disclosure should be adequate, not complete, and the relevant standards should be lower than exchange market requirement. Fourth, we insist that our disclosure requirement should consider the experience of US in the rules of multi-dimension disclosure, the implementation of differentiated information disclosure, and the role of self-regulatory organizations. Fifth, we propose five methods to perfect China's OTC market information disclosure.In the fourth part, we discuss investor protection. First, we analyze the investor suitability and propose that the investor suitability play a core role in investor protection system, and require associated financial institutions realize that the products and services match the investors'financial status, risk tolerance, investment experience. The underlying principal is investor access conditions management. In addition, investor protection model based on investor segmentation can be extended to domestic OTC market, from the US, European and Japan market. Third, OTCBB and regional OTC market demand that we should require investor suitability as part of investor protection system. We detail the methods about how to operate under investor suitability management, perfect transaction and disclosure rules, perfect civil liability rules and put investor protection into actionIn the fifth part, we discuss the OTC supervision.Although the private law prevail the law nature of OTC markets, the supervision inevitably shows public law influence. The research focus on how to balance the private and public conflicts in practice and theory, facilitate the health growth. Firstly, in respect to the field of law, economics, social sciences regulatory connotation of understanding and analysis, combined with the legal relationship between the regulation of the OTC market behavior adjustment, regulation purpose and "private property" regulatory entity analysis,we believe that the OTC market regulation belongs to a special civil legal act in essence. We further propose the integration of public law and private law influence the economy and entitle the current OTC regulation with public law property, but the OTC market regulation should still be private law act. The civil and commercial law property also determines the regulation model, selection and design.Secondly, with regards to the private law property and necessity of the regulation, we compare the self-regulation mode (UK-US mode) with the government-direct mode (Japan-Taiwan mode), and contemplate the politic, economy and historical factors, combined with the current status of China's OTC market development, finally we propose the idea to construct home OTC market regulation mode, which should be government-direct, supplemented by self-regulation. We also emphasize that the ultimate target should be a high degree self-regulation, which is determined by the private law property.Thirdly, we presume that the OTC market regulator should be a centralized institute, considering the advantage and disadvantage of current foreign centralized regulation mode. Under current circumstance, the administrators should authorize CSRC to regulate the OTC market and encourage self-discipline organization's(SAC) supervision, rather than adopt some scholars plan which suggests local government manage the OTC market. We set up a framework on how CSRC and associated self-disciplined organization function. We suggest CSRC follow the OTC market development trend and optimize the regulation practice. CSRC should transform to fundamentalideology change and focus more on intermediary and ex-post regulation.Finally, thorough examining the US, UK and Japan regulation framework, we concludes that the CSRC should supervise OTC market participants including market, broker, dealer, listed companies and other intermediaries. CSRC & SAC must set standards on entry and exit, information disclosure, trade behavior and so on.In the sixth part, we concentrate on the conclusion. The main conclusion of this study is a combination of regulatory legislation idea of OTC market recommendations, including:First, under current circumstances, it is not suitable to develop a Unified "OTC Securities Market Law", we believe that the private characteristic of OTC market represents the common will of all market participants, its entire soul build on the pillars of autonomy and integrity principles, the weaken public power is not only a characteristic of OTC, but also maintain a special value premium, as a result, the OTC market regulation should focus on self-regulation. Given the diversity, multi-layered, complex structures and immaturerelated theoretical research, current impulse to develop unified legislative norms may be unrealistic. From experience of foreign mature OTC markets, it does not seem necessary to form a unified legislation. Second, maintain to establish a government regulation mode, supplemented by self-regulatory mode,and continuing to reform to a self-regulatory mode, supplemented by government regulation mode; third, establish and perfect the information disclosure system, market makers and investors suitability system in OTC legal system; Fourth, establish and improve the transfer board mechanism, strengthen the OTC market exit supervision.This paper makes some innovations:First, define the OTC market as private law regime, and OTC is the expression of participants' autonomy in will and social contract, the disclosure, market making, investor protector, supervision and other rules should be based on this reality. As OTC legal system comprise of multiple layers complexity, westudy the problem not only from law perspectives but also from economics and social science to strengthen the conclusions.Second, we bravely analyze the evolution of the OTC market regulatory entity, the nature of the legal relationship adjustment, regulatory purpose and combined with "private law" Trend theory propose that regulatory actions in the OTC market is essentially a special civil legal point of view.Third, based on the private law regime nature, we disagree with the current fashion of government-regulated, supplemented with self-regulation. We believe the regulation mode seems a dynamic revolving, with a mean-reverting trend to private law essence. Although it is premature to immediately adoption of self-regulation mode, the movement to self-regulation is inevitable.Fourth, we propose the idea of main regulation system, consist of information disclosure, market maker regulation and investor suitability regulation. In information disclosure, we believe the disclosure adequacy and voluntary disclosure combined with mandatory disclosure. Regards to the investor protection aspect, we propose introduction of compulsory disclosure and voluntary to cooperate with each other.