The risk management division is no darling of securities companies. Many stock brokerage houses even do not set up this division if they are not pressed by State authorities or this unit is required by the law. Actually, none wants to pay money to keep a “policeman” to look through its business, according to a specialist.
But, if there is no risk management division, is the company vehicle is always safe on a rough road with many potholes and obstacles?
“Too risky”
There is a special two-man unit in VS Securities Company, constituted by a manager and a subordinate. It is responsible for multiple tasks and professions. It is liable to directly approve capital sources for personal customers, while keeping tabs on risk management over financial institutions in any stage where risks may arise like placing orders, transferring money and signing contracts. Many brokers have conflict with risk management staff because they have lost many customers who prefer securities companies with looser risk management requirements. At the end of last year, when VS Securities Company met to vote for best broker, best performer and other internal titles, the risk management unit won the “most impressive speech” award for its frequent phrase “too risky!” Their colleagues called them “Mr... Too Risky” afterwards.
It is certain that not all companies have a risk management division like VS Securities Company. On international financial markets, each large financial institution has its own risk management division. But, even in developed markets, this unit is not always a “much-loved” one.
Following the subprime credit crisis which undermined US banks in 2008, risk management is given more importance. In emerging stock markets, risk management is still at the “fledging” stage. But, there may be no emerging markets like Vietnam, with risk management officers not graduated from specialised training units, although the Vietnamese stock market has been operating for more than 10 years. In addition, the legal framework and sanctions of market management agencies are not enough to deter or do not take away as much as they gain from the violation. For that reason, punishments and fines from the State Securities Commission of Vietnam (SSC) fail to reduce mushrooming violations.
Mr Le Minh Tam, Director of Kim Eng Vietnam Securities Company (KEVS), said: “It is impossible to blame the surveillance capacity of the State Securities Commission of Vietnam (SSC) because its personnel are not enough to deal with violations of different scales and various forms. The key is the codes of conduct and business standards of each securities company and each investor. They must improve their own risk supervision and management of their business operations and their accounts.”
When SSC does instead
There is also an argument that only large companies need risk management units. Mr Huynh Anh Tuan, General Director of SJC Securities Corporation (SJCS), said: Unlike banks with a variety of credit products from consumer loans to mortgaged lending, securities companies only have margin trading profession related to credit operations, but this profession is very specifically defined by the SSC and securities companies do not thus need risk management units like banks. Or in other words, the SSC performs risk management for securities companies through its very specifically defined regulations.”
In fact, not many securities companies expect the SSC to provide risk management for them. For instance, the SSC stipulates that outstanding loans for margin lending at a securities company shall not exceed 10 percent of owner’s equity of such company, regardless of asset value on investors’ accounts and listed stocks (except for stocks banned from margin trading provided), each investor shall not borrow more than 3 percent of registered capital of such securities company and not exceed 5 percent of total float shares of listed organisation.
This is a very closely defined margin ratio with the purpose of minimising risks when investors use financial leverage and ensuring safety for securities companies and the market, but it turns out to be a reducer of positive effects of margin trading. Blue-chips and large-cap stocks like Hoang Anh Gia Lai Group Joint Stock Company (HAG) or Vinamilk (VNM) are equated to penny stocks because of margin ratio regulations. Assuming that an investor wants to invest in HAG, he comes to a securities company but its margin room for HAG has reached the limit 10 percent. He will have two choices: Watch the investor to go to another securities company to open an account and trade in that company or dodge the SSC’s regulations to keep the customer.
Indeed, the SSC, as a market management agency, has imposed some limits that sometimes surprise the market. For example, after the first news article about the suspected bankruptcy case of Ms Huynh Thi Huyen Nhu and a securities company was reported to suffer her entire debt in form of bad stocks on her account. A source of information said the SSC quickly required the securities company KEVS to explain whether it had Nhu’s account and how that bad debt was going on. Many securities companies were distressed by groundless rumours and the SSC took it as grounds for its very meticulous surveillance.
How is it effective?
On some popular stock forums, investors are still “posting news" about securities companies with excessive ratios for short sales and margin trading. Named securities companies also include biggest brokerage houses on both exchanges (HOSE and HNX). “It remains unknown which companies violate and how seriously they violate, but it is almost certain that the SSC has not ‘caught any named securities company in the act of violation.’ In short, with intentional situations, the SSC is unable to provide risk management for other market players,” said Mr Huynh Anh Tuan, General Director of SJC Securities Joint Stock Company (SJCS).
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The legal framework and sanctions of market management agencies are not enough to deter violations, as the do not take away as much as investors and financial institutions gain from the violation.
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Indeed, loan-based brokerage service is mushrooming. For example, two investors pass on deals to each other and a securities company is an intermediate. The securities company earns a commission but it does not commit a violation because their civil contract covers only agreements of the two investors. This is just a creation that securities companies have made to dodge the laws and make money.
Remarking on Huynh Thi Huyen Nhu’s notorious default whose value may have exceeded VND5,000 billion, a stock analyst said it is very difficult to know which companies are the “victim” of the former member of the Board of Directors of Orient Securities Company (ORS) or are hiding bad stocks in her portfolios because there is a likelihood that many big securities brokerage houses have sold such bad stocks or hidden them from their reports to market regulators. He said the value of this default needs to be determined, because this may result to a vicious circle of lending, that is, Mr A lends VND2 billion to Mr B and Mr B lends VND3 billion to Mr C and so forth and Mr N lends VND50 billion to Mr A and Mr A lends Mr B and so forth. This is an unending circle. “Investors in the case also cover financial institutions like banks and securities companies, not only individual investors,” said the specialist.
To tally, many problems related to risk management presently exist on the stock market. The stock market is likened a miniature society where people are deliberately dishonest and wilfully breach the law, State agencies cannot just rely on self-discipline and self-denouncement or wait for the denouncement against each other. A tight legal framework and strong enough sanctions, with clearly and rationally defined regulations, are what the 10-year-old stock market is waiting for, and their enactment is increasingly urgent.
L.M
Vietnamese
