Operational Risks

Operational risks refer to losses caused by inappropriate operation of the transaction or management system, or the lack of indispensable background technological support. Specifically, they include operation/settlement risks and loss-of-internal-control risks. These are risks caused by such things as undetected, over-the-limit risk taking, unauthorized transactions, fraud committed by the transaction division or the background division, and unskillful or unstable staff compounded by easy access to computer systems.

Policy Risks

Policies have always been an inescapable factor in the development of the Chinese securities market. The functioning of the securities market and the operation of securities companies are not standardized enough. Therefore, regulators frequently resort to administrative means. Whenever a major change of policy takes place or an important measure or regulation is enacted, the securities market tends to swing drastically, bringing about violent fluctuation in the performance of securities companies. The development of the Chinese securities market is also changing. Standardization is an increasingly urgent requirement for the development of the market. Major policies and administrative means affecting the development of the securities market are gradually adjusted. Changes of policies will change the mode of competition in the Chinese securities market and are likely to have major impact on various business lines of securities companies.

Compliance Risks

In the past, compliance risks were the most common risks facing Chinese securities companies. Typical breaches of law and regulations included false information in the financial statement, prevalent off-the-book operation, illegitimate entrusted wealth management and high interest financing, appropriation of customer assets, illegal bond issuance, bulk-holding and market manipulation, and control of large shareholders.

Financial Risks

Due to unvarying profitability models of securities companies, fluctuation of the securities market often leads to the risk of income and profit instability. The growth of a company's business exposes it to such risks as small amounts of cash holding, low net capital, and weak risk resistance. In daily operation, a variety of factors may lead to large amounts of underwriting, embezzlement of funds, and other activities in the investment banking business. Without timely and sufficient financing funds, this may bring liquidity risks to the company. An oversized line of business may lead to financial losses by reaching the thresholds set out by the Administrative Measures on Risk Control Indicators of Securities Companies. In conducting new business, the failure to maintain a healthy capital structure and keep high-risk business in proportion may pose certain risks to the safety, liquidity, and profitability of the company's capital operation.

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