Analysis On The Internal Risk Management Of XINHUA Securities Company And The Internal Risk Assessment Of Securities Companies

On December 5, 2003, China Securities Regulatory Commission issued a proclamation that pointed out that Xinhua Securities Co., Ltd.'s operation through seriously breaking the rules had been taken into account, for the purposes of protecting the stability of securities market and of financial order and the legitimate benefits of the investors and creditors, and decided to repeal it as of Dec. 5, 2003 in accordance with Securities Law of The People's Republic of China. Why had Xinhua Securities been closed down and repealed after it was establish not enough three years? It has caused the people to think the issue on risk management of Securities Company widely and thoroughly. The basic train of thoughts and logical structure of this paper are as follows: Firstly, it introduces the general theories on the internal risks and risk management of Securities Company. Secondly, it brings forward the issues that exist in the risk management in Xinhua Securities Company and makes deep analysis. Thirdly, it leads to the important meaning of the internal risks management of Securities Company and the corresponding suggestions. Finally, it brings forward the methods of the internal risks control of Securities Company and sets up the risk assessment system of Securities Company. This paper is made up of four parts and main contents are as follows: The first chapter mainly introduces the general theories on the internal risks and risk management of Securities Company. The paper firstly make off concepts of securities company and corporate governance. Then it introduces six types of the internal risks of Securities Company, such as market risk, credit risk, liquidity risk, operational risk, legal risk and system risk. Finally, it introduces the general theories on risk management. The main viewpoints of this chapter are as follows: Securities Company is an intermediate between securities issuing company and securities investor, who plays an intermediary role. The corporate governance mechanism is a set of system setup, which is produced due to the corporate entrusted agency system and serves for solving the issue on entrusted agency relationship of the company. The core of the risk management is the reduction in losses. The second chapter mainly proposed the existence question on interior risk management of Xinhua securities company and has carried on the thorough analysis. The article first introduced Xinhua securities company's historical evolution, then proposed main question of risk existence inside the company, such as the company's shareholder meeting, the board of directors, the board of supervisors are unable to play the corresponding role, the company internal control person seriously in fact; The corporate finance management is extremely chaotic; The company does not control foreign investment, so that creates the company's property massively loss; The computer information system control lacks, provides the false information to the client and the bank; The fixed asset management is chaotic and account reality symbol question is serious; The headquarters lack effective control to the fund outflow; The phenomenon that subordinate securities sales office act of their free will is serious, manage off-the-book seriously; The company lack essential control to fund account number. Finally the article has made thorough analysis to the reason of the company's risk. The major point of this chapter is: internally piloting mechanism of Xinhua securities company looked complete from the system, but in the actual operation these system don't execute truly, the internal control system loses completely. Its most mainly reasons are the imperfection of the company governing structure, that the phenomenon to be controlled by internals is extremely serious, at the same time, the private capital pursuing the short-term advantage, the question left over by history, the systematic lacks of the stock market and the supervising vacancy also are the factors which the risk forms. The Third chapter is the main content of this article, which pointed out the importance of interior risk management for securities companies and put forward corresponding proposal. The article first proposed the importance of interior risk management for securities companies, then made analysis on the risk reason for the securities company. Finally it proposed the solution for risk management of securities companies. This chapter's major point is that the effective internal risk management of securities companies is advantageous on guard against the market risk and protecting investor's benefit, is of advantage to enhance the efficiency and the benefit of securitiescompanies and realize company value maximization, completely complete the management goal and the developmental strategy. The main reasons of the securities company's risk forming include, first is the constitutive reason, including company's organizational structure is simple, majority for the straight line or the function frame, the company stockholder's rights structure is unreasonable, the shareholder meeting, the board of directors, the board of supervisors can't play the role, at the aspect of driving the staff it's obvious of the heavy matter to drive but the light spirit drove, the heavy short-term drove but light long-term drive. Second is the market risk impact, because our country securities company's traditional services have the strong dependence to the stock market quotation and its trend, therefore the market risk causes the instability of securities company 's receive and profit. Three is the fluid risk agglomeration, it's few that the securities company's legitimate financing channel and the property quality lowly, which cause the ability of the securities company to resist the risk insufficient. Four is the hobby to contrary risks, the securities company's internal control mechanism expires, internal control causes the contrary risk massive occurrences. Five is the financial risk hideaway, the bookkeeper deception, the revenue and expenditure is false, managing outside the account, the financial control is chaotic, the financial report is not real. Six, the management risks ambush, the financial operations defeat or the financial costs increase, the services simplify, the company scale expansion doesn't fit, the management ideas distort, the specialist quality is not high, all of these possibly cause the management risks increase. Seven, the settlement risks mainly display the overdraws of the transaction and the national debt's return-buy. The securities company risks'solution mentality is to perfect securities company's governing structure; Second, expand company scale and enhance the ability of protection risk, solve behind-questions in the development; Three, establish the risk assessment and management system; Four, set up good control; Five, speed up the construction of securities company internal management information system; Six, clear about the risk management procedure; Seven, perfect risk management organizational structure and responsibility scope; Eight, cultivate good faith for enterprise culture. The fourth chapter is the main part of the article. It proposed the control method of interior risk of Securities Company and established the risk-assessment system. Themajor point of this chapter is: The internal control method of Securities Company includes establishing the organizational structure of risk-control, enacting the flow of risk-management, setting down the risk tolerance, applying the quantitative analysis model of risk-control, enacting the corresponding reward measures. The design principles of risk-assessment system of Securities Company are the general principle, the representative principle, the commeasurable principle, the practical principle and the sensitive principle. The establishment of risk-assessment system of Securities Company includes establishment of risk index system, dynamic examination of the risk index. The risk-assessment system can be the reference of other Securities Companies. The main conclusion of this article: through analysis to the exist problems of interior risk-management of XinHua Security Company, we found the reason of being repealed is its serious vacancy of the governance structure and extremely control of internal person; the continuing of historical risk, the chaotic internal management and the loss of internal control; the pursuing short-term advantage of private capital. Against the forming reason of interior risk of Securities Company, the article proposed Securities company should consummate the governance structure, expand Securities Company scale, establish risk-assessment and management system, set good control activity, speed up the construction of internal management information system, know about the risk-management procedure, consummate risk-management organizational structure and clear about the responsibility scope, cultivate enterprise culture of regarding faith. Proposed the interior risk-control method, including establishing the organizational structure of risk-control, enacting the flow of risk-management, setting down the risk tolerance, applying the quantitative analysis model of risk-control, enacting the corresponding reward measures. Established the risk-assessment system, and evaluated the internal risk condition of 2002 of Xinhua Securities, found it has serious risk. Thus it can be the reference of other Securities Companies when applying risk-assessment.