Management of Risks Associated with Investment Banking Business of Securities Companies

The investment banking business mainly involves prelisting tutoring, sponsorship, and underwriting. It can also include consultancy for merger, acquisition, and investment. Policy risks can arise from changes in macropolicies, laws, regulations, competition risks from Chinese and overseas investment banks, market risks due to market fluctuations, and issuance risks under the approval system. In order to improve their overall competitive strength in the face of increasingly fierce competition, securities companies must build up their risk management for the investment banking business.

Major Sources of Risks in Investment Banking Business

Project Risks In order to issue securities, a company must go through substantive examinations. If a restructuring enterprise tutored by a securities company fails to successfully issue its securities, the securities company will suffer losses in human and financial resources. On the other hand, securities companies have driven up project costs while fighting with each other for projects. Some even offer bridge loans or loan guarantees for companies planning to issue securities. Once the project fails to gain approval for issuance, the securities company will face losses from bad debt or have to advance the fund needed to pay bank loans.

Compliance Risks In the stock underwriting business specifically, breaches of regulations occur if the securities company is involved in the following situations:

- Continues to underwrite the stocks of the issuing company despite knowing that there are illegal practices, such as excessive packaging, or even participates in the malpractice

- Attracts underwriting business opportunities with illegitimate means

- Fails to follow due procedures, perform due diligence during the issuing process, or provide sufficient information in the public solicitation letter

- Fails to perform due investigation when the issuing company attempts to get listed through fraudulent means and false information

Once any of the above events takes place, the securities companies will have to bear consequences. These may include equal or joint liabilities, punishment by the securities regulatory commission, and economic losses and damage of reputation, which further poses potential risks for the stock underwriting business.

Issuance Underwriting Risks Issuance risks of securities underwriting include the following three items:

1. Risks associated with means of issuance: Securities underwriting issuance risks refers to the risks of failing to issue shares or bonds at the predetermined prices, or the issuer failing to raise the amount of funds needed from the market due to unexpected changes in the market. The three means of issuing securities underwriting are: sales by proxy, standby commitment, and standby underwriting. In their capacity as underwriter, securities companies usually adopt the standby commitment approach. In the event of a misjudgment of the trend of the secondary market, the standby commitment may become a heavy burden of risk for the securities company.

2. Issuing body risks: This refers to the possibility of losses or profits of the issuing body being directly impacted by relevant parties in the market. They include the issuing body's operational risks, financial risks, market exit risks, legal risks, and agency risks.

3. Issuance project financial risks: A delay of the share issuance project can be due to market or policy changes or other reasons. The issuer may not be able to raise the expected amount of funds, or the share issuance plan can be vetoed. These actions can all undermine the issuer's ability to pay back on time the bridge loan provided by the securities trader in order to land the project. They can even leave the issuer unable to pay the loan altogether, leading to the risk of bad debts.

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