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Risk Management of Overseas Securities Companies

Advanced Risk-Management Concepts

Foreign investment banks' understanding of risk management and the importance they attach to it are first reflected in their risk-management concepts and principles. How do they properly and effectively recognize, assess, test, and control each type of risk? This issue bears heavily on the operation performance and long-term development of Western investment banks as they face various risks in their operational activities. Clear relationships of rights and interests give rise to strong internal demand for risk prevention. To withstand risks is an integral part of the core business of securities companies. The desire to control risks comes from within. Thus, mature concepts of risk management have been established.

Well-Rounded Organizational Structure for Risk Management

Investment banks in Western countries usually have a well-rounded internal organizational structure for risk management. In a nutshell, such a structure typically includes an audit committee, a risk monitoring committee, a risk policy team, a risk-management committee, and others. The risk-management committee in turn consists of a market risk team, a credit risk team, a portfolio risk team, and a risk infrastructure team. All of these components come together to form a comprehensive and closely organized management system.

The risk-management architecture of Western investment banks has played an important role in risk management. Well-established corporate governance ensures that the risk-management arm has an important status and role in the entire operation process. Enough attention is paid to risk control, and views and suggestions from the risk-control division are received. The architecture has also designed relatively well-rounded risk-management systems and mechanisms that are effectively enforced.

Effective Risk-Management System and Mechanism

Rigorously designed risk-management systems govern every activity. They establish relevant standards in operational practice. Rigorous systems follow these standards in handling business related report forms, business procedures, and various issues, as well as the designing of promotional materials. Business-related communication and linguistic expression should be as standardized as possible. The information system should be fully utilized in monitoring risk exposures at various business levels.

Quantitative Risk-Management Method

In managing risks, Western investment banks use various financial instruments such as futures, options, and financial swaps to avoid or reduce investment risks. Based on their own advantages, they come up with various permutations of products, interest rates, exchange rates, terms, share prices, indexes, and agreement provisions. These derivatives are also used in hedging, risk mitigation, and asset-liability optimization. The focus of risk-management techniques varies from one investment bank to another. For example, major methods include value at risk (VaR), risk-adjusted return on capital (RAROC), enterprise-wide risk management (ERM), and scenario analysis.

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