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 1.1.2.1. 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. 1.1.2.2. In term of source of exposures Accordingly, risk can be grouped into system risk and unsystem risk 1.1.2.3. 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 sub- classes 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 [...]... 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. .. 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... follow these directions The research provides overview of risk management for the business of the securities companies, classifying types of risk that impacted heavily on their business From that point, the research restructures the theory of risk management of the securities companies Also, the research analyses experiences of risk management from different securities companies in the world in order...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. .. 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. .. 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... 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. .. 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. .. 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. .. 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 . 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. 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 business, in which sub- classes 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