Study On Internal Control Of Securities Companies’Proprietary Trading Based On Risk Management

Securities companies’ proprietary trading is a high risk, high yield business. With the development ofthe securities companies’ scale and the innovation of proprietary trading, the problem of proprietarytrading’s management emerged. From Shenyin Wanguo Securities, China International Capital, SouthernSecurities in1990s, and the bankruptcy of Huaxia Securities in2008to the Everbright SecuritiesCompany" Oolong means" event recently, they all have problems in proprietary trading’s management,reflecting its poor risk management and internal control. It seriously affects the stability of China’ssecurities industry development. As securities company is an important component of the financial marketsand securities investment has a wide range effects on public, and that proprietary business belonging tohigh-risk business, so the study of securities companies’ internal control mechanisms not only has practicalvalue for the stable development of the securities company itself, but also has great significance for themaintenance and smooth operation of financial security as well as financial security in our country.This paper explore the internal control of proprietary trading deeply by taking COSO “Internal Control-Integrated Framework” and “Enterprise Risk Management Framework” as theoretical basis and referring“Basic Norms of Internal Control”. In case study, take Everbright Securities Company as a case, analyzesits drawbacks of internal control of proprietary business, and thus extends to proprietary business of theentire securities industry. Propose the concept of internal control of securities companies’ proprietarytrading based on risk management. Use the idea of comprehensive risk management to improve the internalcontrol of securities companies’ proprietary trading. Integrate risk management and internal control, andbring up measures to improve internal control in elements.First, this paper reviews the international and domestic academic research and related guidelines of therisk management and internal controls. Internal research on risk management and internal control is mainlyreflected in “Internal Control-Integrated Framework” and “Enterprise Risk Management Framework”issued by COSO Committee. Domestic research is mainly reflected in “Comprehensive Risk ManagementGuideline of Central Enterprises” in2006and “Basic Norms of Internal Control” in2008, followed by“Supporting Guidelines of Internal Control” in2010. Then, analyze the theoretical basis of Internal Control. Firstly, elaborate the theory of internal controland risk management issued by COSO Committee, including “Internal Control-Integrated Framework” and“Enterprise Risk Management Framework”, and summarize the “Basic Norms of Internal Control” in ourcountry. Analyze the characteristics of comprehensive risk management concept: strategic, all members,professional, double and systematic. Finally, analyze the relationship between risk management andinternal control, that internal control is a subsystem of risk management. The trend of the relationship iscross-cutting, blending and gradually uniform.For case study, this paper takes Everbright Securities Company as a case. Firstly describes EverbrightSecurities Company on the whole, including the company’s governance structure and organizationalstructure. Then put forward drawback of internal controls in this company by analyzing the causes of“Oolong means” event. Finally analyze problems of proprietary business of the entire securities industryfrom Everbright Securities Company, that attach importance to business not to care risk management andinternal control, internal control systems can’t keep up with the development of innovative business, lack ofexecution, risk assessment needs to be strengthened and so on.The last are measures to improve internal control of proprietary trading. Propose the concept ofinternal control of securities companies’ proprietary trading based on risk management. Use the idea ofcomprehensive risk management to improve the internal control of securities companies’ proprietarytrading, and bring up measures to improve internal control in elements. Perfect measures in internalenvironment including coordinate the operations strategy and risk capacity, strengthen risk managementfrom the perspective of full awareness; for risk assessment, put forward perfect measures from riskidentification and analysis, and risk response; for control activities, put forward perfect measures ofestablishing and improving institution of investment decision-making, specifying the process of proprietarytrading risk management; for information and communication, complete management information networksystem and the system of information disclosure; for monitoring, propose establishing and improvinginstitution of internal auditing, and evaluation system of internal control. At last, for external regulation,propose that regulatory agencies should strengthen supervision and improve the trading system.