Research On Internal Control Of Derivatives

With the functions of avoiding risk,speculating and arbitraging,derivatives developed fast in the international financial market since the 80s of the 20th century. Recently,as the economy of our country grows rapidly,more and more financial institutions and enterprises begin to launch derivatives businesses in order to reduce risks or create incomes.However,derivatives themselves embrace enormous risks. Frequent cases about derivatives investment failures in China and abroad remind us the importance of strengthening risk management and internal control.In June 2008, the Ministry of Finance of the People's Republic of China issued the exposure draft of "Guidelines for Application of Enterprise Internal Control——derivatives" in order to guide Chinese enterprises to strengthen internal control and risk management of derivatives.Based on the above background,this paper aims to improve and flourish the research and practice in the field of internal control of derivatives and to set examples for enterprises which are going to set up and perfect their internal control of derivatives.First of all,this paper introduces relevant concepts of derivatives and discusses the business necessity of derivatives for Chinese enterprises.Then,there comes the discussion of the risks which are faced by enterprises when running businesses about derivatives.Meanwhile,it analyses and summarizes the lessons from several derivatives investment failures happened in the recent financial crisis,pointing out the necessity of establishing internal control of derivatives.In the next part,this paper introduces the evolvement of internal control theory and studies related literatures such as "Internal Control Issues in Derivatives Usage" by COSO.After that, it puts emphasis on making reflections on the exposure draft of "Guidelines for Application of Enterprise Internal Control——derivatives",followed by improving advices.At last,considering what is demanded in the internal control practice,this paper tries to bring out process designs of derivatives internal control based on the revised exposure draft,hoping to be valuable for enterprises which are in need of establishing and improving their derivatives internal control.