Strengthening risk management in the business of the joint stock securities company in vietnam

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INTRODUCTION 1. Introduction and Motivation Vietnam Stock Exchange have been developing for more than 13 years at the end of 2013. During that period, the market used to be considered as one of the most developed exchange in the world with the fastest growth and capitalization. Accordingly, a lot of securities companies have being established which providing financial services for the market and take opportunities from the market as well. At the beginning, there were only 4 securities companies, but these number increased significantly in the next few years. At the end of 2012, the exchange has 105 securities companies established which focused on 4 main operations: brokerage; principal trading; underwriting and consulting. As a result, securities companies have contributed to improve liquidity of the market, attract more and more domestic and foreign capitals for economy and promote the development of the market. However, the unexpected movement of the stock market and financial crisis of 2008 have serious impacted on the business of Vietnam securities companies last few years. Accordingly, many weakeness of the company have releaved such as number of securities company over than the size of the market; weak financial capacity; low competitive ability; inefficient corporate governance. Consequently, many companies have experienced the poor business performances, even falled into several years of losses, insolvency. Specially, some of them have being closed up as the requirement of State Securities Commission of Vietnam. In fact, there are a lot of causes explaining the weakness of securities companies, but one of main reason is due to bad risk management. In some companies, risk management have limited in papers or treating risks in order to minimize the loss, rather than warning the signs of potential lossing. From the corporate governance point of view, risk management is considered as the important instrument that supporing the company to make business decisions and doing business in transparency and effectively. Many researches have been doing on the impact of risk management on enterprises. Clup (2002) investigates the relationship between capital structure and risk management strategy that the companies employ. The study concludes that whenever assumption of Modigliani & Miller change, risk management will increase the value of the companies through improving expected cash flows and reducing costs of capital. In Vietnam, the research of situation of risk management in securities companies has not done yet offically and professionally. Therefore, within the scope of doctor’s research and with desire to study and evaluate the situation of risk management in the securities companies, then contribiting the ideas to criticism of the securities companies, help policy makers and managers to make risk management decision in effectivelly, the topic "Strengthening risk management in the business of the joint stock securities company in Vietnam "has been selected as doctoral thesis. 2. Literature review Risk management is a relatively recent corporate function. Historical milestones are helpful to illustrate its evolution. Modern risk management started after 1950s. Since the early 1963, the concept of risk management evolved considerably by the book of Robert and Bob Hedges. Accordingly, risk management is a process that can be evaluated, controlled, and monitored all risks and their dependences to which the company is exposed.The goal of risk management is to create a reference framework that will allow companies to handle risk and uncertainty. Risks are present in nearly all of firms’ financial and economic activities. Therefore, many researches have been doing and following some main issues: First, how can risk management be implemented in the companies? The study of Clup (2001) focuses on detailing the process of risk management, including indentify, analyse, assess, report, treat and control risk. Second, how can risk management be impacted on the value of firm? Clup (1995) explains how risk management can increase the value of firm in different ways in inefficient market. The ojective of managers, shareholders concentrate on maximizing the value of firms through reducing costs of capital and increasing expected cash flows. Third, how to measure risk management implementation of the companies. There is limited research on criteria to be used in assessing the implementation of ERM in institutions. Most of the criteria used has been developed by consulting firms such as Deloitte with their risk intelligence maturity model and Standard and Poor‟s with the criteria used for measuring the implementation of ERM to be used in rating insurance companies (Standard & Poor‟s Ratings Direct, 2007). On the other hand, Liebenberg and Hoyt (2003) uses the appointment of a Chief Risk officer (CRO) as a signal of ERM implementation. The key limitation of this method is that it does not seem to take into account the fact that there are companies where ERM implementation is championed by the Chief Audit Executive (CAE) thus some companies may be judged as not having implemented ERM when in actual fact they have. This method also does not consider the transitory nature of ERM implementation thus only assumes two states, that is ERM is fully implemented or not implemented at all. Four, which factors can be impacted on the risk management implementation of the companies. Kleffner at all (2003) concludes that the bigger companies have implemented risk management better than smaller companies, then their values have increased better. Although there are a lot of researches on ERM, but some limitations are still available as follows: - Most of studies have investigated the companies in developed markets, and some in developing markets - Researches have concentrated on financial institutions such as commercial banks or insurance companies. There is limited researches on securities companies, investment banks, including Vietnam. In fact, these companies are doing risky businesses, so that it is necessary to implement risk management. - From the macro-economic management, the objective of ERM is protecting investors and the market. Therefore, the companies must implement risk management according to the law. Besides, the cost of the implementing is significant. However, there is no research on the relationship and cost of risk management in the companies. - The methodology of measuring risk management implement is limited and controversially. In Vietnam, risk management of securities companies has been concerned by researchers, policy makers and securities companies as well. Le Cong Dien (2010) studied the issues “Risk management of joint stock securities companies – The status and solutions”. The research analysed the current situation of risk management of securities companies based on each operation process of the companies: brokerage, principal trading, underwriting, accounting, then identify the risk can be exposed to the companies. After that, the study submits some main solutions to improve risk management of the companies [11]. However, the study has not yet analysed detail of system risk and cross risk in the business of the companies. Also, the study has not clarified the situation of treating risk, using risk management instruments, hedging methods of the companies. The article of Le Hoang Nga (2013) identifies some main risk of the securities companies and then provides ERM process for the companies. However, the study limited in theory. Other articles focus on introduction of risk management and guide how to implement. In conclusion, most researches of risk management of securities companies in Vietnam have concentrated on identifying and analyzing each type of risk exposed to the companies. In business, there is no way of avoiding risk without giving up the opportunity to gain profits. Therefore, to be competitive, companies must learn how to manage risk intelligently. This means identifying risks early, expecting the unexpected and knowing which risks are worth taking and which to avoid. The main objective of this study is to assess whether the level of ERM implementation in securities companies in Vietnam causes an increase in the value of those companies and establish the significant factors that influence the level of ERM implementation in securities companies. As a results, some main solution will be provided to hepl the companies implement risk management more effectively. 3. Research purposes Theoretical risk analysis of securities companies and charateristics of risk management of joint stock securities companies. Overview risk management process of securities companies; providing criteria measuring of risk management implementation and listing main factors impacted on risk management implementation of securities companies. Identifying and analyzing type of risk of securities business including systematic risks and specific risks based on doing survey. Accordingly, assessing the current implementation of risk management process, using risk management instruements, appying methods of treating risks in securities companies. Based on vision and mission of the stock market and securities companies, combines with resuts of the survey, solutions of improving risk management of securities companies are suggested in order to help the companies increase their value, market share, position and stainable growth as well. 4. Scope of research The research focuses on analyzing type of risk, risk management process, risk management implementation and risk management instruments of Vietnam joint stock securities companies. The research includes all joint stock securities companies in Vietnam (listed and unlisted companies) untill 31/12/2013, combining with researching experiences of risk management of other countries in the world. 5. Methodology To accomplish the objectives of the study, the research appliesthe method of analysis, synthesis and comparative collation, inductive problem. Based on the method of dialectical materialism and historical materialism to review, evaluate and clarify practical problems, draw the principal needs to be resolved to propose solutions and recommendations. In addition, the research also uses a survey method to interview risk managers of securities companies, collects statistical data from the companies’s financial statement, annual report of State Securities Commission of Vietnam, based on EPIDATA and SPSS software to analyze, graph and calculate the correlation coefficient between random variables. The research also inherits some of the results of the scientific works related to the study which analyzing deeply the concerned issues 6. Structure of research Beside introduction and conclusion, the research includes 3 chapters follows: Chapter 1: Theoretical background of risk management of the business of joint-stock securities companies Chapter 2: The current situation of risk management of joint - stock securities companies in Vietnam Chapter 3: Solutions for strenthening the risk management implementation of joint-stock securities companies in Vietnam CHAPTER 1: THEORETICAL BACKGROUND OF RISK MANAGEMENT OF THE SECURITIES COMPANIES BUSINESS 1.1. OVERVIEW OF RISK OF SECURITIES COMPANIES BUSINESS 1.1.1. Definition and characteristics of risk of the securities companies business Risk of securities business is defined as unexpected events which exposed to the losses of the company’s assets, losses of profits or more expenses to fullfil a certain business operation. The concept consists of two main points: (1) the changes; (2) results of unexpected changes. The changes is considered as uncertainty of issues which can be happened in the future and can not estimated the results or probability of exposures certaintly. In securities business, there is no way of avoiding risk without giving up the opportunity to gain profits. Therefore, to be competitive, companies must learn how to manage risk intelligently. This means identifying risks early, expecting the unexpected and knowing which risks are worth taking and which to avoid. 1.1.2. Type of risk of the securities companies business In term of business behaviour Based on this criteria, risk of securities companies business can be classified into systematic risk and specific risk of each business operation. In term of source of exposures Accordingly, risk can be grouped into system risk and unsystem risk The interaction between risk The analysis of the types of risks are often quite independent but in fact there is close relationship between each other. Because of that, risk management of securities companies is not only managing each type of risk independently, but also need having a strategy which manage the risk systematically and intergratedly to achieve effective performances. 1.1.3. Causes of risk exposed to the business of securities companies - Objective events - Subjective issues from securities companies - Issues from customers 1.2 RISK MANAGEMENT OF SECURITIES COMPANIES BUSINESS 1.2.1. Definition and characteristics Securities companies risk management is, in essence, the latest name for an overall risk management approach to business risks. Precursors to this term include corporate risk management, business risk management, holistic risk management, and integrated risk management. Although each of these terms has a slightly different focus, in part fostered by the risk elements that were of primary concern to organizations when each term first emerged, the general concepts are quite similar. Enterprise risk management is defined as: “The process by which securities companies in all operation assess, control, exploit, finance and monitor risks from all sources for the purpose of increasing the company’s short and long term value to its stakeholders.” Risk management of securities companies business has some charateristics: - It is important role of corporate governance of the securities companies - It has some same characteristics of banking risk management - It can be implemented through capital management 1.2.2. Why joint stock securities companies have to implement risk management The main capital market imperfections used in the literature as a basis for risk management rationales that will be explained in detail in the sections. It is important to specify that the various positive theories to explain corporate risk management rely on different corporate objectives (e.g. firm value, cash flows, pre-tax income). For instance, the corporate tax burden can be reduced by hedging pre-tax income, the cost of financial distress can be lowered by hedging total cash flow, and investment and financing policies can be coordinated by hedging cash flow before investment spending (as will be explained below). Nevertheless, these activities sometimes do not work in the same direction , that is, they can reduce the volatility of some variables but simultaneously increase the volatility of others. Consequently, there exists the possibility of conflicts between different corporate targets that have to be taken into account when determining the risk management strategy. They can be avoided through the selection of appropriate hedging instruments that are independent of each other and can thus be employed to hedge different objective values (Froot, Scharfstein and Stein, 1993; Graham and Smith, 1999; Smith, 1995). 1.2.3. The steps of risk management Enterprise risk management actually represents a return to the roots of risk management. However, gaining the ability to quantify exposures with a far less sophisticated approach than can be used for most hazard and financial risks presents new challenges. Although consideration of operational and strategic risk is important, the lack of data and the difficulty in predicting the likelihood of a loss or the financial impact if a loss were to occur make it hard to quantify many risks a firm faces. That in itself is the challenge that enterprise risk management provides. Nevertheless, the basic approach of identifying, measuring, evaluating, controlling and monitoring risk remains the same. The steps of enterprise risk management are quite familiar to traditional risk managers. Most commonly they are:  Risk Identification – Identify risk on an enterprise basis  Risk Analysis – Measure and report risk exposure  Risk Response – Formulate strategies to limit risk  Risk Control – Implement strategies  Risk Monitoring – Monitor results  And repeat… Except for minor changes in wording, the steps of enterprise risk management are the same as those first enumerated by Mehr and Hedges in 1963. Enterprise risk management is risk management applied to the entire organization. The basic approach, the goals and the focus of enterprise risk management are the same as those that have worked so effectively for traditional risk managers since the field was first developed. 1.2.4. Measuring ERM implementation of the securities companies business Presence of a Chief Risk Officer (CRO)/Risk champion - Risk managers have an important role in the implementation of risk management in institutions. Liebenberg and Hoyt (2003) studied the determinants of ERM as evidenced by the appointment of a Chief Risk Officer and observed that though there was an absent explicit disclosure for ERM implementation, the appointment of a CRO can be taken as a strong signal of ERM implementation in the companies. Beasley et al (2005) also investigated whether the presence of a CRO is positively associated with the deployment of ERM. The study finds that the presence of a CRO/Risk champion in senior management significantly increases the entity‟s stage in ERM implementation. Therefore, we investigate the following hypothesis; Risk management policy represented by risk appetite framework of the securities companies, risk limitation for each operation, applying risk management instruments and software. Emerging risk warning system: this system focuses on controlling the risks that may occur in the process of implementing the securities companies business, assessing the level of market risk, operational risk, settlement risk and total risk of securities business. Risk analysis models: applying value at risk, scenario analysis, tree decision, simulation model are considered as a signal of risk management implementation. Internal control is essentially a series of integrated activities, measures, plans, views, rules and policies and efforts of all members of the company to ensure efficient operation , achieve the company’s goals. Capital safety: securities companies is types of conditional business with required capital according to the securities law. 1.2.5. Factors impacted on risk management of the securities companies business  Organizational structure  Size and financial ability  Human resource  Information technology  Administrative management  Regulations on risk management of the securities companies. 1.3. Risk management experiences of securities companies in the world 1.3.1. USA - Capital condition is one of the useful instrument which used by SEC to conduct the securities companies business. - Investment banks, securities companies are renforced to follow the risk management regulations - Risk management model is implemented from the Risk Council Board of Directors; Executive Committee; Risk Committee; Committee business practices; Credit Policy Committee; Finance Committee; Operational Risk Committee… 1.3.2. Thailand - Securities companies risk management is also done through capital management. - Thailand stock exchange also require securities companies have internal compliance department, internal audit department independently. - The risk management of securities companies in Thailand has been done through the Central Depository and Clearing (Thailand Securities Deposit -TSD) 1.3.3. China - Capital condition is one of the useful instrument which used by China stock exchange to conduct the securities companies business. - The securities companies shall be subject to surveillance activities, implementation of risk management regulations prescribed by China Securities Regulatory Commission - CSRC. - Securities companies are classified into grade from A to E, in each class, the company can be classified into 11 smaller sub-classes (AAA, AA, A, BBB, BB, B, CCC, CC, C, D, E). Rating of A, B, and C show that the risk management capabilities of the company's securities meet the current business, in which subclasses reflect the level of risk management of the company 1.3.4. Lessons for joint stock securities companies in Vietnam - The securities company is the kind of business conditions, including the legal capital for each type of business and closely monitored by Securities commission. - Securities Commission issued regulations on risk management and compliance have forced securities companies in order to create the second layer of risk protection - Securities Commission also provides remedies for violations of securities regulations, including administrative sanctions and criminal. - Ranking and classification of securities companies. - Risk Management is essentially an enterprise operating activities. - Securities companies build risk management department independently. CHAPTER 2 – THE SITUATION OF RISK MANAGEMENT OF THE SECURITIES COMPANIES BUSINESS IN VIETNAM To assess the risk management implementation of securities companies in Vietnam, the research have done a survey for all joint stock companies. The questionaires have interviewed dean of risk management department (if possible) or Internal controlling/auditing department. The survey focuses on identifying the types of risk of the securities companies business and assessing the level of risk management implementation as criteria mentioned in the chapter 1. Moreover, the database have been collected from financial statement of the securities companies and its websites as well during the period of 2008 – 2013. Some information have also collected from websites of Ho Chi Minh stock exchange and Hanoi stock exchange. EPIDATA and SPSS software are used to support input and output of the survey. In fact, number of securities companies have increased from 4 companies in the beginning period of the market to 105 companies at the end of 2008. This number remains until 2013. However, among 105 questionaires have been sent to these companies, only 77 valid of them are obtained. The missing is due to without fully feedback, financial statement, merger & acquisition. The results of the survey as following: 2.1. IDENTIFYING THE RISK OF THE SECURITIES COMPANIES BUSINESS 2.1.1. Overview of securities companies business Ownership structure. Currently there are 44% of survey securities companies having foreign capital, in which 13 companies have maximum foreign capital of 49%, 3 companies with more than 40%, 8 companies with the range of 5% - 30% and the remaining companies under 5%. In term of charter capital, total foreign capital is about 4.510,13 billion dong and accounts for 12,88% of total charter capital of all securities companies in 2013. Operational business. According to the results of the survey, during the period of 2008 – 2013, on average 2% of the companies has been providing only conslting service for the market, meanwhile 60% of the companies have been doing from 2 to 3 services, 38% of the companies supplying full main securities services for the market. Capital size. Capital of the securities companies have increases continuously last years, but their financial capability are still low. At the end of 2013, there are only 26,8% of the companies have enough capital to do full 4 main operations, in which number of companies with the capital of more than 1000 billion dong is very limited and reduced gradually last 3 years. Financial ability. Financial ability of the securities companies is smaller than other financial institutions, even the capital have increased significantly. At the end of 2013, the total value of asset of listed commercial banks is about 271.700 billion dong, of listed insurance companies is 5,150 billion dong, of securities companis is only 1.428 billion dong which account for nearly 30% of the insurance companies on average. Profitability. From 2011 until now, the stock exchange has recovered and increased slightly, therefore profitable ratio of the securities companies have improved as well, but still negative numbers. Liquidity ability. Most of securities companies have good liquidity ratios, in which 27 companies have more than 200% of current ratio (current asset to current liability), 7 companies with the number of 150%-200% and 3 companies with 100% - 150% as the results of the survey. 2.1.1. Identifying risks of the joint stock securities companies in Vietnam Based on the results of the survey with the valid of 77 companies, SPSS software is used to identify main risk of the seurities companies business. The model of 34 variables includes all types of risk which can be impacted on the operating of the companies. After running sub-model, Exploratory analysis is applied together with Varimax method in order to analyse 34 variables. Table 2.12 KMO và Bartlett’s test KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity Approx. Chi-Square .542 1539.845 df 561 Sig. .000 KMO (Kaiser – Meyer – Olkin) and Barlett testing are also applying to test reasonable of the variables. If the value of KMO from 0,5 to 1, the result of analysis can be accepted. Barlett test the hypothesis H0: correlation of the variables is zero. If the testing is valid (Sig.<0,005), there is correlation between variables. The results of the survey show in the table 2.12. with the value of KMO is 0,542. It means that Exploratory analysis is resonable and Sig. is lower than 0,005 that proving the correlation between variables. Next, principal componants analysis is also applied for identifying factors that explaining te best variance of the total sample. In term of Kaiser, if the value of Eigenvalue lower 1, that factor will be invalid. The results of the survey concludes that there are 10 factors with Eigenvalue higher than 1 and acceptable. Table 2.15 Combining risk factors of the securities companies business Risk factor Factoring ratio Systematic risk Interest rate changes 0.888 Lack of information 0.837 Lack of valid information 0.835 Lack of law/regulations 0.809 The changes of the law 0.795 Managing information later 0.792 Wrongly practice the law 0.790 The changes of CPI 0.782 The changes of GDP 0.782 The changes of exchange rate 0.772 Weather risk 0.521 Unsystematic risk Wrongly investing 0.928 Poor managing ability of managers 0.837 Wrongly estimating 0.825 Unsuitable organizational structure 0.786 Lack of operating process 0.758 Technical mistakes 0.744 Moral hazard 0.735 Unreasonable bonus policy 0.682 Less strict of controlling 0.677 High leverage 0.664 Lack of capital 0.625 Credit risk 0.613 Settlement risk 0.595 Extraction Method: Principal Component Analysis. After defining the factor, Varimax method is used to find the best value. The exploratoty analysis is usefull with the value of variable higher than 0,5. The results describles in table 2.15 after labling the name of the variable. For systematic risk, the factor of interest rate risk, without information, not exact information, the changing of the law can be impacted heavily on the business of the securities companies. For specific risk of the companies, the quality of human resources, technical mistakes, moral hazard are factors that impacted strongly on its business. Accordingly, risk management of the securities companies should pay more attention on these risk since their heavily effect. However, the other risk as mentioned in the table 2.15 should be take care during the business of the companies to make sure the companies will practice and manage risk effectively. 2.2. THE SITUATION OF RISK MANAGEMENT OF THE SECURITIES COMAPNIES BUSINESS IN VIETNAM 2.2.1. Legal framwork of risk management for securities companies in Vietnam Regulation on risk management Risk management of securities companies has firstly regulated in the Decision 105/QD-UBCK dated 26/2/2013. It guides the establishment and implementation of risk management for securities companies which ensures and protects from the losses Regulation on capital Circular No. 226/2010/TT-BTC dated 31/12/2010 provided the financial safety ratio and methods of treating poor performance of the securities companies in term of capital requirements. Circular No. 210/2012/TT-BTC replaced Circular No.226, dated 15/1/2013 which require more strict of business conditions of the securities companies. Circular No. 165/2012/TT-BTC dated 9/10/2012 amending and supplementing some articles of Circular No. 226. It also provides safety measures for handling the companies which not meet the criteria of financial security. Regulation on CAMEL standard On 10/2013, State Securities Commission of Vietnam has published the Circular No 617/QD-UBCK on classification of the securities companies in term of CAMEL standard. Its objective is to assess overall performance of the securities companies, based on that supporting for the SSC to manage, controll the companies’ business. 2.2.2. The situation of risk management of securities companies’ business According to the result of the survey, there is no companies that implementing risk management framework fully. It can be explained by the fact that most of the companies have not yet set up early risk warnning system to identify and warn the risk exposures, or follow the changes of exposures. More than 30% of the companies have built and implemented partly of risk management framework. Many companies have applied risk management policy, internal controll system and risk quantitative model. In detail, more than 70% of the companies have published risk management policy in annual reports. More than 40% of the companies have finished partly risk management framework but not yet implemented. This results come from the companies without independent risk management department, depend trongly on internal controlling department. Although some companies have not yet practiced risk management but planned to implement in the near future. From the crisis of 2008, most securities companies understand the necessary of risk management to manage and minimize the losses of risk exposures. Moreover, many regulations on risk management have publishes which means that risk management does not the choice but obligation of the securities companies doing business in the market. The level of risk mamagement implementation have positive relationship with the size of the company but not much correlated with its capital safety. As the result of the survey, three of the largest companies are not the highest capital safety ratios. In fact, some smaller companies have implemented risk management better. Especially, the foreign capital companies have intendedly followed the risk management framework better since their business culture and policy. 2.3. ASSESSING THE RISK MANAGEMENT IMPLEMENTATION OF SECURITIES COMPANIES IN VIETNAM 2.3.1. Sucessful aspect First, the securities companies have step by step implemented risk management framework systematically and effectivelly. Second, the independent of risk management department becomes legal requirement from the law and the companies’ policy. Third, internal controlling department has performanced better in investigating, controlling the daily activities of securities companies, based on that identify ans handle mistakes in time. Four, the securities are aware of complying capital adequacy ratios. It is not only meeting the Circular No, 226 but also ensure the financial safety for the company. Five, finacial ability of the company have increased significantly that meeting the requirement of capital ans financial safety from SSC. Six, risk management become important issue of SSC during the period of restructuring stock maket. 2.3.2. Constraints - Risk management culture is not quite accepted in the securities companies. Some still considered it as expenses rather than potential interest. - Many comapanies have not yet seperation between risk management department with others. - Comapnies have not established reasonable risk management structure. - There is not strict linkage between back offices to support risk management. - The objective of risk management focus on handling risk rather than indentifying and warnning. - Lack of regulations on risk managment in detail 2.3.3. Causes Objectives - SSC does not have specific regulations to help securities companies understand and fully implement comprehensive risk management process. - Vietnam's stock market is quite new, lack of financial instruments for diversification, particularly lack of derivatives market. - The regulations, the legal framework for securities trading activities are creating the over-cautious business environment - The trainning program of university or collage have not much concentrated on risk management Subjectives Organization and operation model of securities companies are unstable, not yet identified an optimal model. The number and quality of human resources has not guaranteed; Quality of information technology is not high; low management capacity. CHAPTER 3- SOLUTIONS FOR IMPROVING RISK MANAGEMENT OF THE SECURITIES COMPANIES BUSINESS IN VIETNAM 3.1. VISION AND DEVELOPMENT PLAN OF THE SECURITIES COMPANIES IN VIETNAM 3.1.1. Development plan of Vietnam stock exchange Building and developing the stock market in accordance with the development of economy – society, establishing the comprehensive and intergrated stock market with the financial system. Developing and expanding the stock market which focus on the quality and safety, gradually moving on the international benchamark and standards. Developing the stock market in the direction of restructuring, re-building state industries, encouraging the development of private sectors. The state will regualate the economy through the law systems, supporting program, facilitating the stable and sustainable development of the stock market. 3.1.2. Vision and development objectives of và securities companies - Restructuring the number of securities companies in accordance with the size of the stock market. - Restructuring organization of the securities companies in order to improve the quality, financial ability, corporate governance and risk controlling ability. - Restructuring shareholders of the securities including commercial banks, corporations, state-owned companies in accordance with international standards - Strenthening the quality of performance ability, controlling of the securities companies. - Opening the stock market as the international committments. 3.1.3. Objectives ans reuirements of risk management of securities companies - Ensuring the suitable organizational structure and process to protect the company from risk exposures and take good opportunities as well. - Actively indentifying, understanding and managing types of risk of the companies. - Quantifying and monitoring types of risk of thes securities companies, based on that finding suitable solutions to handle the exposures. 3.2.SOLUTIONS FOR IMPROVING RISK MANAGEMENT OF THE SECURITIES COMPANIES BUSINESS IN VIETNAM 3.2.1. Risk management organizational structure Before enterprise-wide risk management became the standard, most financial institutions took a fragmented approach to risk, managing each type of risk in a separate organization or department with little or no effort at integrating these areas. Many organizations still follow a traditional model. A chief credit officer, who reports to the President or the Board, sets credit policy and approves exposures. Similarly, the market risk management function independently sets policies and measures and reports on market exposures and limits. Like the chief credit officer, the market risk executive is independent of the trading floor and might report to the CFO or the President. Financial institutions organize their risk management efforts in a variety of ways. The organization structure of the risk management function in most of the financial institutions that have designated a Chief Risk Officer can be classified according to one of the following models: The financial risk model. The essence of this risk management model is the integration of financial risks only and the existence of a Chief Risk Officer to whom the market risk and credit risk functions report. The all-risk model. The distinguishing characteristic of this model is a Chief Risk Officer who is responsible for the full gamut of the company’s risks— including operational risks as well as credit and market risks. Although there is no one approach that is suitable for all institutions, the proposed model is an outgrowth of the all-risk model, which is truly enterprisewide since it integrates all the company’s risks under a single Chief Risk Officer who can influence the firm’s risk philosophy and strategy. Rather than cast the Chief Risk Officer in a “risk police” role, the all-risk approach is consultative. The proposed model adds to the all-risk model what called a risk portfolio analysis function. The risk portfolio analysis group provides a staff that can address crossrisk issues such as integration of market and credit risk, allocation of capital, riskadjusted performance measurement, and analysis of new products and/or acquisitions. The risk portfolio analysis staff gives the Chief Risk Officer the support he or she needs to be effective in coordinating the three major types of risk. 3.2.2. Risk management framework The main issues of risk management framework combine all risk management standards which guiding controlling and creating risk management environment. This framework consists of identifying strategic risk, building alministration structure, classification of reports, self-controlling, managing risk events, risk management instruments. Source: KPMG International 2007 Fingure 3.1 Risk management framework in term of Basel II 3.2.3. Capital funding framework Basically, capital funding framework have been built based on three models with three liquidity levels: normal, tresss and crisis. It is also considered as one of the best capital funding framework by Moody’s Cash capital model Maximum cummulative outflow Contingency Funding Plan Source: Investment bank, Mac Quang Huy (2008) Figure 3. 2 Capital funding framework of international investment banks 3.2.4. Credit framework Securities companies should seperate the fuction of credit activities with credit risk management. 3.2.5. Risk mamagement instruments system Securities companies can apply list of risk management instruments: Key risk indicators; exposures reports, mistake reports, risk matrix … 3.2.6. Risk management process Based on the guidance of risk management legal framework, each securities company should design suitable risk management process. Basically, it should consist of some contents as follow: - Buidling early risk warnning system - Buidling risk protecting and hegding system - Building risk handling and managing system 3.2.7. Human resources training - Building risk management professional culture - Building and applying standards of moral hazard - Building suitable salary and bonus system - Training and self-training 3.2.8. Improving financial ability In order to implement the above suggestions, securities company need to build stable financial resources by using internal funding, debt instruments and equity instruments 3.2.9. Technology ability Upgrading and investing in technology system through purchasing the best software in the world… Spending certain capital for supporting technology system 3.3. RECOMMENDATIONS 3.3.1. Completing the legal framework of the business of securities companies The first, legal framework of investment bank should be clarified on some main contents: - How is organizational structure of investment banks
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