Analysis of Risk Management in Chinese Securities Companies

A securities company's ability to survive is based on its ability to protect against and control risks. Strict and efficient risk management is the basic condition for the company's development. The global financial crisis was precipitated by a high leverage and overuse of derivatives by major global investment banks such as AIG, Lehman Brothers, and Merrill Lynch. Chinese securities companies have experienced fallout from their misconduct due to out of control risk management. These problems for securities companies have accumulated to the point of complete exposure by 2003. Therefore, the China Securities Regulatory Commission (CSRC) made prominent the comprehensive reordering of securities companies in 2004. After that, the sense of compliance management and ability in risk management was clearly strengthened. This established a system for institutions to monitor risk gradually and enhance business risk management.

After the global financial crisis, the risk-management model of foreign securities companies, that was once regarded as the example for the whole world, was reexamined. An urgent hope arose to find a new solution for a risk-management system that could be suitable for indigenous Chinese securities companies. The process was simply to develop successful or useful strategies and discard those that were not.

This chapter details the research on the current status and development trends for risk management of Chinese securities companies. It emphasizes the management of traditional risks and business innovation risks and puts forward the standards for risk management in terms of future development trends.


All securities companies are marked by high risks. How well they manage risks is often indicative of their performance and even their survival. Comprehensive and effective risk management and control can promote the stable and healthy running of a securities company and of a securities industry as a whole. It can enhance the confidence of a vast number of investors and thereby invigorate market transactions. After going through such stages as internal checks, internal control system, internal control structure, and internal control integrated framework, risk management in Western securities companies entered into the comprehensive risk-management stage. Comprehensive risk management emphasizes full coverage of risks, participation of the entire staff, and control of the entire process. It means setting a new standard for risk management. In this comprehensive risk-management stage, securities traders position themselves as organizations that operate risks and gain profits from doing so. Some Chinese securities traders learned from the advanced experience of risk management overseas and constructed their own risk-management system earlier than others. Due to infrastructure deficiencies, however, a number of risk-associated incidents have been triggered by a collapse of the risk management and control system or inappropriate operations. One example of such collapse was China Eagle, the first Chinese securities companies to come up with the idea of risk management. It was forced to shut down and was placed in trust. Since 2004, there has been a purge of comprehensive securities companies occurring in the Chinese securities market. The purge may provide opportunities that will promote the establishment of internal control and risk-management mechanisms in securities companies.

The financial crisis that swept the world in 2008 forced the financial industry in various countries to elevate the status of risk management and control. In China, however, it called into question the effectiveness of the risk-management systems used overseas. In light of that, it is necessary to study the risk-management practices of both Western and Chinese securities companies and learn from their successes and failures. Risk management then needs to be optimized for the special environment of Chinese securities companies and the characteristics of the risks they face.

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