MANAGEMENT OF RISKS ASSOCIATED WITH INNOVATIVE BUSINESS OF SECURITIES COMPANIES
The securities industry overall is in a period of structural adjustment. Going forward, the decline of traditional business lines will accelerate in the face of fierce competition. As the reform of the Chinese capital market deepens, institutional changes and changes of operational environment will be the major trends, creating room for the survival and development, product innovation, and transformation/upgrade of domestic securities traders. Due to its sensitivity to both policies and the market, innovative business needs favorable market environment and lax regulatory policies. The regulators will only prudently adjust regulatory policies in favor of the launch of innovative business when resistance to risks are enhanced, the overall classifying and grading levels are improved, and the overall risk-management quality is raised. Currently, for innovation business, the regulators apply a policy of "piloting before spreading." This means that companies with better overall strength speed up the introduction of new types of business and gradually change the traditional profit patterns and structures. The traditional over-reliance on brokerage business will be changed, and the income structure will gradually become more reasonable with diversified sources of income. The profit structure will become increasingly similar to that of established international investing banks, resulting in greater gaps between large securities traders and small and medium ones.
Management of Risks Associated with Securities Margin Trading
Analysis of Risks Associated with Securities Margin Trading
Risks of Runaway Business Scale Risks of runaway business scale mainly refer to situations in which the scale of securities margin trading business gets out of control. The financing for an individual client is oversized and the term is too long, leading to the possibility of low asset liquidity or breaches of regulations concerning net capital scale and ratios. By providing clients with securities margin trading services, securities companies can not only collect financing fees, but also reap more commissions for the amplification of transaction volume. In pursuit of higher profits, securities traders will expand the securities margin trading business where possible. But as they blindly increase the scale, the risks facing them also get bigger.
Credit Risks The securities margin trading business is conducted between the securities trader and the investor. When the client's capital financing or securities financing effort results in losses, the remaining amount in the margin account can be used as a remedy. However, when the loss is so big that it exceeds the remaining amount in the margin account, there will be risks of breaches of contract. The characteristics of securities margin trading amplify market fluctuation and risks. When an investor breaches the contract in a securities margin trading transaction, the transaction will be canceled. But if the investor is unable to compensate the securities trader for the huge losses, the trader will bear the risks. In securities margin trading transactions in China, the accuracy of client credit risk evaluation directly affects the risks and benefits of the securities trader. Without enough independent credit evaluation companies, the securities traders have to take it upon themselves to evaluate the credit risks of their own investors. Credit risks will arise if the investor fails to give the securities trader its capital or securities.
Market Risk Market risks of the securities margin trading business mainly refer to the possibility of losses in certain situations. Market fluctuation caused by unforeseeable and uncontrollable factors can make it difficult to carry out securities margin trading business normally in a securities exchange. It can also threaten market security or lead to a depreciation of the value of collateral deposited by the client with the securities trader. Market fluctuation can also cause a below-the-standard margin maintenance ratio, in which it is difficult for the securities traders to carry out forced liquidation or reclaim the borrowed capital (securities).
Securities Margin Trading Fuels Market Speculations Securities margin trading, combined by the short mechanism and stock index futures, will amplify risks. Given that the market and credit systems are not sound enough and the securities margin trading mechanism has yet to be improved, securities margin trading will have a large impact on market fluctuation. When the market is low, the leverage effect of securities margin trading will exacerbate the decline and tend to cause a disruption of the investor capital chain. This brings about liquidation risks in the investor's company and market fluctuations.
Credit Risks Will Exacerbate Market Risks When the maintenance margins are insufficient, if the client fails to provide additional margins in time, the securities trader will carry out forced liquidation on the collateral in its capital account and credit securities account. This will inevitably lead to a lack of liquidity for the investor. If most investors in the securities market are subjected to forced liquidation, there will be a panic in the market, bringing about serious market risks.
Exasperation of Market Risks by the Price-Limit Mechanism If the investor fails to meet the minimum margin ratio requirement while the securities placed as collateral keep reaching their price limits, the securities trader will not be able to carry out liquidation. Although securities traders have the right of recourse when the collateral is no longer sufficient to ensure their interests as creditors, failure to dispose of the collateral in a timely manner will inevitably increase their own liquidity risks. This then leads to a shortage of capital, a lack of liquidity, and the cause of market risks.