Operators ease barriers to OTC market

Qualified securities companies are now allowed to provide brokering and related services at the national over-the-counter (OTC) market without first gaining administrative approval, according to announcements made Friday by the National Equities Exchange and Quotations Co (NEEQC), the management company that operates the country's share-transfer platform for non-listed small- and medium-sized enterprises (SMEs).

Brokerages will still be subject to the same market entry criteria as before - such as having a minimum of 800 million yuan ($128.78 million) in registered net assets and 15 or more sales offices - although these brokers will be allowed to conduct business at the OTC share transfer platform as long as they first register with the NEEQC, the platform operators said Friday in a training seminar for securities trading firms. Prior to this, formal approval from the NEEQC was required in order to conduct such operations.

As of Friday, 72 brokerages had registered with the NEEQC to do business at the share-transfer system where 205 companies are trading, according to information from the NEEQC.

Eligible securities companies can take part in brokering and sponsorship activities, such as recommending companies to trade at the OTC system as well as facilitating trades and verifying information disclosures. "Having a broker to recommend and oversee trading is an important requirement for companies looking to be traded on the share-transfer system," Xie Geng, general manager of the NEEQC, was quoted by local media as saying during the training session. "This is to prevent risk since there are no compulsory criteria regarding applicants' assets or profits."

Brokers may also act in the future as market makers at the OTC market, quoting bid and ask prices for shares while also trading from their own inventories with investors, the platform operators also said. Such a system though will likely need another year to prepare, Xie reportedly explained.

China's State Council banned market makers in 2011 in order to minimize risk for investors. To date, the council has yet to officially lift its ban or comment on its removal.

Over the long term, these looser restrictions may attract more brokerages to the OTC market, Zhang Xin, an analyst from Guotai Junan, told the Global Times. "But compared to the A-share market, the OTC market is still highly risky and illiquid, and few investors are willing to put money there. In that case, it will remain a marginal area for brokerages," Zhang said.

With few mechanisms in place to promote liquidity, China's off-exchange trading volumes have long remained thin, Zhang added.