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Management of Risks Associated with Securities Margin Trading Business of Securities Companies

Management of the Opening of a Margin Account for Investors Before opening a margin account for an investor, the securities company rigorously examines the investor's credit history, income level, and real properties based on a grading system. The identity, wealth and income, securities investment experience, risks and preferences, and specific needs of the investor will be studied thoroughly. A primary review of the investor's credit and assets will be conducted and a risk and qualification review report will be produced. The report will show the extents of ethic risks and financial risks associated with the securities margin investor. The trader must ask the investor to sign a risk alert letter and inform the investor about the risks of margin trading. This ensures that investors taking part in securities margin trading are high quality investors who are fully aware of the risks involved.

Margin Trading Account Risk Control The key to margin trading account risk control is to conduct real-time monitoring of maintenance margin ratio and to respond in a timely manner. In order to ensure the efficiency and quality of risk control for margin trading accounts, securities traders should strengthen the application of information technologies, enabling the system to automatically calculate risk levels of various margin trading accounts, identify abnormal accounts, and send processing alerts accordingly. Accounts breaking the prewarning account threshold must be frozen immediately. The securities margin trading account manager of the operation division should immediately inform the account holder. Additional collateral is then required within a specified period of time. If the investor neither deposits a sufficient amount of collateral nor pays back the corresponding part of debt, forced liquidation should be carried out and the collateral disposed of, according to the contract. For accounts breaking the high-risk-account threshold, forced liquidation should be carried out immediately, and the investor should be demanded to make up the shortfall.

Management of Securities Trader Margin Trading Limits Management of securities trader margin trading limits involves managing the following:

- Limits of a securities trader's involvement in the securities margin trading business

- Limits imposed by a securities trader on individual investors' securities margin trading transaction amounts

- Limits imposed by a securities trader on the amount of a single securities margin trading transaction

The purpose of managing the margin trading scale of individual stocks is to prevent institutional or individual investors with abundant capital from manipulating the rise and fall of certain securities. This can occur by exploiting the effect of the securities margin trading business on the fluctuation of the stock market, which will increase market risks and cause volatility in the securities market.

Integrated Utilization of Various Risk-Control Measure Establish Scientific Profit Models and Formulate Reasonable Capital Use Policies Securities companies should compare profits from the securities margin trading business and proprietary business under various market conditions to identify the optimal benefit point by establishing scientific profit models. Available capital should be allocated proportionally at the optimal benefit point. The two business lines should be managed separately. By doing this, limited amounts of capital can be allocated rationally, and the capital utilization efficiency can be raised.

The pledge ratio, warning line, and liquidation line of a client's account should be monitored constantly. This is done through concentrated monitoring of and timely inquiries into various risk control indexes, the balance and changes in the client's credit capital account and margin trading account, and the market value of securities and changes thereof. The key to dynamic management of risks is to establish and build up the daily market-to-market system, the margin call system, and the forced liquidation system to minimize risks.

Standardize the Forced Liquidation System and Clarify Risk Liabilities In order to safeguard its own interests, a securities trader may carry out liquidation on entrusted securities to make up the shortfall of margin in the client's credit securities account. Before carrying out liquidation, the securities trader has to fulfill its obligations accordingly, such as informing the client about risks and requiring the client to increase the margin in a timely manner. A mechanism should be established to allow the securities trader to send risk forecasts, alerts, and warnings to the client before carrying out liquidation. Liquidation should stop when the income from liquidation equals the amount of the margin needed. It should not go beyond that extent. Agreement should be reached as to each party's liabilities in the face of risks, so as to avoid unnecessary disputes. An agreement should be signed between the securities trader and the client that clearly defines each party's rights and obligations, sets out detailed provisions about risk liabilities, and clarifies specific operational issues such as liquidation notification, liquidation scope, and liquidation timing.

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