Implementation of Risk Management

Given the advancement of knowledge and technology, we should find it easy to claim that risk management of financial markets is more sophisticated than those in two decades ago. However, how come financial scandals could happen in financial institutions with a strong risk management team? One of the reasons is weak implementation of risk management policies and procedures.

This week SFC issued a circular to mention its recent inspection findings that some securities dealers may be failing to manage their risks prudently, such as client overtrading, margain shortfalls, a major client default, liquidity squeeze, etc.

Some unacceptable risk management practices are highlighted by SFC:

• Risk management policies and procedures, even exist, are not strictly enforced, where management overrides them actively or tolerates non-observance proper jurisdiction.
• Failure to apply a sufficient hair to securities collateral.
• Excessive exposures to individual clients and particular securities.
• Failure to prevent clients from exceeding pre-set limits and lax margin call procedures.
• Allowing cash clients long credit periods to settle their trades and allowing margin clients to trade when their accounts are under-secured.
• Taking on settlement obligations that significantly exceed the aggregate of the broker's available cash and banking facilities.

Actually all of the above problems happen 10 years ago during the stock market crisis, where many securities brokers had collapsed. Up to today many people have not yet learnt the lessons.