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MINISTRY OF FINANCE
STATE SECURITIES COMMISSION OF VIETNAM
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SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom - Happiness
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No.: 428/QD-UBCK
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Hanoi, 11 July 2013
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DECISION
ON ISSUING REGULATION ON
GUIDING THE ESTABLISHMENT AND OPERATION OF RISK MANAGEMENT SYSTEM FOR FUND
MANAGEMENT COMPANY AND SELF-MANAGING SEPARATE SECURITIES INVESTMENT COMPANY
CHAIRMAN
OF STATE SECURITIES COMMISSION OF VIETNAM
Pursuant
to the Securities Law dated 29 June 2006;
Pursuant
to the Law amending and supplementing a number of articles of Securities Law dated
24 November 2010;
Pursuant
to Decree No. 58/2012/ND-CP dated 20 July 2012 of the Government detailing and
guiding the implementation of some articles of the Securities Law and the Law
amending and supplementing some articles of Securities Law;
Pursuant
to Decision No.112/2009/QD-TTg dated 11 September 2009 of the Prime Minister
defining the functions, duties, powers and organizational structure of the State Securities Commission of Vietnam directly under the Ministry of Finance;
Pursuant
to Circular No. 212/2012/TT-BTC dated 05 December 2012 of the Minister of
Finance guiding the establishment, organization and operation of fund
management company;
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Considering
the recommendation of Director of management Department of fund management Companies
and securities investment Funds
DECIDES:
Article 1.
Issued with this Decision is the Regulation on guiding
the establishment and operation of risk management system for fund management
company and self-managing separate securities investment company.
Article 2. This Decision takes effect from
the signing date.
Article 3.
Chief of Office, Director of management Department of
fund management Companies, securities investment Funds, fund management
Companies, self-managing separate securities investment companies and the
relevant parties are liable to execute this Decision.
CHAIRMAN
Vu Bang
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GUIDING THE ESTABLISHMENT AND
OPERATION OF RISK MANAGEMENT SYSTEM FOR FUND MANAGEMENT COMPANY AND
SELF-MANAGING SEPARATE SECURITIES INVESTMENT COMPANY
(Issued with Decision No. 428/QD-UBCK dated 11 July 2013 of the Chairman of State Securities Commission of Vietnam)
Chapter 1.
GENERAL PROVISIONS
Article 1. Scope of regulation and subjects of
application
1.
This Regulation guides the establishment and operation of risk management
system in operation of fund management companies and self-managing separate
securities investment companies (hereafter referred to as company) established
and operating in Vietnam.
2.
The Board of Directors, Member Board or owner of fund management companies or
Board of Directors of self-managing separate securities investment companies
and other relevant organizations and individuals are responsible for building
the system, issue procedures, organize and supervise the risk management under
the guidelines in this Regulation.
Article 2. Explanation of terms
In
this Regulation, the following terms are construed as follows:
1.
Board of Executives consists of Director (General Director), Deputy Directors
(Deputy General Directors).
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3Entrusting
customer means the funds, individuals and organizations entrusting their
capital and assets to the fund management companies for management in
accordance with regulations of law on securities.
4.
Personal documents consist of information provision Form specified in Annex 1
issued with this Regulation, valid copy of ID card, Passport or other legal
personal identification.
5.
Risk are events which uncentainly occur during business activities causing loss
of revenue, profits, capital, the material and other material and non-material damage
or not achieving business target of the companies or target of entrusting
customers.
6.
Operation risks mean risk occurring due to technical errors, system errors and
operational procedures, human errors during operation or due to short of
business capital incurred from expenditures and losses from investment or other
objective causes.
7.
Prestige risk means the risk the company must face in case of loss of prestige,
trust and credit of investors and customers even in case of objective causes.
8.
Liquidity risk means when the companies or entrusting customers cannot sell or
convert the assets in the portfolio into cash with rational value due to liquidity
shortage.
9.
Payment risk means when the partners cannot make their payment on schedule or
cannot transfer their assets on schedule as committed.
10.
Market risk means risk occurred due to volatility of market value of assets and
financial tools.
11.
Compliance risk means the risk to be faced by the company in case the company
or its employees breach or do not comply with regulations of law specified in
the charter of company or fund charter, internal rules, operational procedures
and regulations including regulations on occupational ethics.
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13.
General risk value is the agggregated result of risk values for company or
portfolio of entrusting customers. The risk aggregation must ensure all risks
are fully calculated without duplication. In a simple linear model, the general
risk value is equal to the total constituted risk values.
14.
Risk appetite is the types of risk and risk levels which the company or
entrusting customers are willing to accept to achieve investment targets. The
risk appetite is shown both in quality and quantity, including the constituted
risk appetite and general risk.
15.
Risk limit is a maximum risk accepted by the company or entrusting customer.
The risk limit can be allocated as per each type of risk for the whole company,
each department, transaction, work position and entrusting customer.
16.
Risk threshold is the value level established by the company for warning when
the risk value approaches the risk limit. The risk threshold can be shown as
per the absolute value (currency unit) or relative value (the percentage
compared with risk limit).
17.
Risk concentration state is a state concentrating mainly on one or a number of
key risks whose losses can seriously affect the company.
18.
Risk acceptance ability is the ability using the owner’s equity, expectation
profits and financial resources available to offset at any time all key risks
and underlying losses accepted by the company.
19.
Available capital is the owner’s equity which can be converted into cash within
ninety (90) days. The available capital shows the ability to be ready for
offsetting losses whose risks can cause to the company.
20.
Fund means the investment fund or securities investment company entrusting its
capital to the fund management company for management, in which the term of
member fund refers to the separate securities investment company.
21.
Fund representative Board is the representative Board of securities investment
fund and Board of Directors of the securities investment
company entrusting its capital to the fund management company for management.
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1.
The risk management shall comply with the provisions in Clause 11, Article 24
of Circular No. 212/2012/TT-BTC dated 05 December 2012 of the Minister of
Finance (Circular No. 212/2012/TT-BTC).
2.
The fund management companies and self-managing separate securities investment
companies shall carry out their risk management for their business activities
under the guidelines in Chapter II of this Regulation.
3.
Depending on the scale of operation, type and entrusting customer, the fund
management companies shall carry out their risk management for the portfolio of
entrusting customers as guided in Chapter III of this Regulation.
4.
Annually, the strategies, policies and procedures for risk management of the
company must be re-assess, adjust and supplement in accordance with the operational
scope, scale and conditions of the company and market background.
5.
Level, scale, scope and type of risk must be within the limit established and
approved by the companies and entrusting customers. The decisions on risk
management must be clear, rational and consistent with strategies, targets and
financial capacity of the companies and risk acceptance level of the entrusting
customers.
Article 4. Risk management system and risk management
personnel
1.
The companies must establish their synchronous, effective and comprehensive
risk management system including the following components:
a)
Organizational structure of risk management
The
companies should set up their separate organizational structure of risk
management, including components and personnel for activities of risk
management, integrated and operated pararelly in the organizational and
operational structure of the companies.
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-
For work of risk management in business activities of the companies: The Board
of Executives, Board of Directors and Member Board or owner shall decide the
organizational structure system of risk management; approve and issue
strategies and policies on risk management. The Board of Executives is
responsible for inspecting, supervising and implementing risk management under
the approved strategies and policies;
-
For the risk management of the entrusted portfolio, including investment funds:
The fund representative Board and the entrusting customers shall decide or
authorize the fund management company to decide the strategies and policies on
risk management. The fund management companies shall inspect, supervise and
implement the risk management for the entrustment list, including investment
funds.
b)
Strategies and policies on risk management
The
companies need to issue strategies and policies on risk management in order for
the staff to know and apply consistently in their whole companies.
-
The risk management strategies including the general risk management strategies
and constituted risk management strategies in accordance with the guidelines in
Article 9 of this Regulation;
-
The risk management policies, including the risk management procedures shall
comply with the guidelines in Article 11 of this Regulation.
-
The strategies and policies on risk management must ensure the consistency with
the organizational structure of risk management, scale and scope of operation,
investment fields and types of investment asset of the companies. The
strategies and policies on risk management are made in writing and kept at the
head office of the companies and shall be provided for the State Securities
Commission of Vietnam upon written requirement.
2.
The members of Board of Directors and Member Board or owner in charge of risk
management; members of Board of Executives in charge of risk management; head
and operational employee of risk management department (if any) should have
certificate appropriate with risk management or qualifications meeting
requirements for risk management in accordance with internal rules the
companies.
3.
Within seven (07) working days, from the day of establishment or change or
supplementation of staff of risk management, the companies must provide the
State Securities Commission of Vietnam with the list under the form specified
in Annex 02 issued with this Regulation enclosed with personal record of staff.
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RISK MANAGEMENT FOR ACTIVITIES OF COMPANIES
Article 5. Responsibility of Board of Directors, Member
Board or owner
1.
The Board of Directors, Member Board or owner must establish and control the
whole risk management system at their companies as follows:
a)
Decide the organizational structure of risk management of their companies,
including the constituted departments, organizations and personnel for risk
management; duties, responsibilities and relationship in risk management of
such departments, components and personnel.
b)
Approve, issue and adjust strategies and policies on risk management of their
companies;
c)
Inspect, supervise and assess the compleness, effectiveness and effect of risk
management system
2.
The Board of Executives, Board of Directors and Member Board or owner must take
all responsibilities before the general meeting of shareholders and Member
Board for risk management.
3.
Depending on operational scale, the Board of Executives, Board of Directors and
Member Board or owner shall assign a member in charge of risk management or
establish a risk management sub-Board. The structure, condition and criteria
for personnel of such risk management sub-Board shall comply with the internal
rules of the companies.
4.
The members in charge of risk management or the risk management sub-Board (if
any) must:
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b)
Inspect and assess the compliance with the risk management procedures of
operational departments and staff; annually coordinate with the risk management
department (if any), the internal auditing department (if any) and the internal
control department to review and assess the completeness, effectiveness and
effect of risk management system; report the operation and operational
effectiveness of risk management done in the year to the Board of Executives,
Board of Directors and Member Board or owner; recommend corrective plan of
shortcomings and restrictions to improve the risk management system.
c)
Analyse and give warning of underlying risks and risk precautions.
d)
Give advice to the Board of Executives, Board of Directors and Member Board or
owner in issuing strategies and policies on risk management.
5.
In case of establishment of risk management sub-board, the Board of Executives,
Board of Directors and Member Board or owner need to issue the operation rule
of such sub-Board , including regulations on its rights and duties, meeting
organization (regular and irregular), conditions, form of meeting, voting and
adoption of sub-Board’s decision; minutes and sub-Board’s decision; mechanism
of coordination and cooperation, share and security of information between the
risk management sub-Board with other operational departments in their
companies.
Article 6. Responsibility of Board of Executives
1.
The Board of Executives shall take responsibility before the Board of
Directors, the Member Board or the owner for the implementation of risk
management, particularly as follows:
a)
Prepare draft of strategies and policies on risk management to be submitted to
the Board of Directors, the Member Board or the owner for approval and issue;
b)
Implement strategies and policies on risk management after they have been
approved and issued by the Board of Directors, the Member Board or the owner,
c)
Supervise to ensure the implementation of risk management in accordance with
the strategies and policies on risk management; the full compliance with
regulations and procedures for risk management; personnel assignment in line
with requirement and financial resources for risk management; regular updating
and dissemination of knowledge and experience of risk management to the staff
of companies.
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2.
The Board of Executives shall assign one of its member to be in charge of risk
management.
3.
Depending on the operational scale, the Board of Executives can establish a
risk management department or requires the internal control department to
implement duties specified in Clause 4 of this Article. The personnel
structure, conditions and criteria for personnel of the risk management department
shall follow the internal rule of the company.
4.
The risk management department:
a)
Studies, develop and prepare draft of strategies and policies on risk
management for the Board of executives to submit it to the Board of Directors,
the Member Board or the owner for approval and issue; builds internal models
for risk management;
b)
Aggregates information and supervise the operational department in
implementation of risk management to ensure the underlying risks in activities
of each operational department and of the whole company shall not exceed the
risk appetite and risk limit; supervise the management of risk appetite and
compliance with risk limit; directly implement the management of operation
risk, prestige risk and compliance risk;
c)
Defines, identifies, determines the quantity and tests the risk stress;
controls underlying risks; allocates the risk management resources; implement
and supervise the compliance with risk management policies and risk management
procedures, daily risk settlement to ensure the compliance with risk management
policies; receives, monitors and aggregate reports on risks and risk settlement
from operational departments on market risk, payment risk; coordinates work of
risk management between departments in the company;
d)
On a monthly basis, makes report to the Board of Executives on issues related
to risk management and risk limits exceeded and settlement solutions taken;
makes the biannual report to the Board of Executives on operational
effectiveness of risk management system of the company.
Article 7. Responsibility of the internal audit
department and internal control department
1.
The internal audit department must participate in risk management as stipulated
under Point b and c, Clause 3, Article 9 of Circular No. 212/2012/TT-BTC.
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3.
The internal control department shall directly (in case of no risk management
department established) or coordinate with the risk management department to
help the Board of Executives to ensure the risk management must comply with the
approved policies and procedures for risk management and other regulations of
law.
Article 8. Responsibility of operational departments
1.
The operational departments shall:
a)
Comply with the policies and procedure for risk management in all of their
activities.
b)
Aggregate information, analyse it and recommend the strategies of constituted risk
management; coordinate the study of building of strategies and policies on risk
management, recommend the underlying risk appetite and risk limit in their
activities; formulate risk concepts, techniques of identification, determines
the quantity (value) and establishment of limit of each constituted risk;
c)
Control and supervise the risks occurring in operation at their department;
report the risks to the Board of Executives through the risk management
department (if any), recommend and carry out the risk settlement plan.
2.
The heads of operational departments must directly implement or assign one or a
number of experienced employees of their departments to be in charge of
(full-time or part-time) of implementation of risk management in such
departments; supervise and control transantions and operations of their
departments in order to identify, prevent and manage the risks as per internal
rules and operational procedures for risk management to ensure the consistency
with the approved policies and risk appetite of the company.
Article 9. Strategy of risk management
1.
The strategy of risk management is an overall risk management plan of the
company drafted by the Board of Executives and approved by the Board of
Directors, the Member Board or the owner. The strategy of risk management is
then concretized by the risk management policies, including the risk management
procedures daily performed.
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a)
Mục tiêu quản trị rủi ro Targets of risk management;
b)
Definition and classification of risk groups and constituted risk groups;
c)
Basic principles of risk management;
d)
Risk appetite and risk limit under the guidelines specified in Article 10 of
this Regulation;
dd)
Mechanism of organization of risk management includes the personnel
organization, responsibilities and obligations of departments and personnel
related to the risk management, the decentralized approval mechanisms of risk
appetite, risk limit and risk settlement mechanisms.
e)
Method of assessment and quantity of risk (as per standard model, internal
model or both) and the principles of completion of such methods.
f)
Method of risk settlement; fully and in detail defining the preventive solutions,
mode of settlement; mechanisms of information aggregation, report and
supervision of risk management activities.
3.
The risk management strategies must be re-assessed periodically, at least once
a year to ensure the consistency with business plan of the company and the
actual context of the market.
4.
The risk management strategies need include the contents to early detect and
fully control the key risks to be submitted to the competent level of the
company.
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1.
The companies need to define the risk appetite in the form of statement of risk
appetite. The form of statement of risk appetite is carried out under the
guidelines in Annex No.03 issued with this Regulation. The risk appetite of the
company need to meet the following conditions:
a)
Demonstrating the company's philosophy of risk, consistent with the principles,
vision, core values, business strategy, objectives and business development of
the company;
b)
Demonstrating the willingness to accept the certain levels of risk to achieve
the operational target of the company, particularly clearly identifying the
acceptable types of risk and clearly identifying the acceptable risk value (if
possibly quantified)
c)
Fully covering the operations of the company, in the short term, average term
and long term; consistently with the actual capacity of supervision and
management of risk of the company, including the personnel, experience and
technical infrastructure for risk management;
2.
The risk appetite is established with the risk limit. The risk limit Form complies
with the guidelines in Annex 04 issued with this Regulation. The risk limit can
be quantified or defined by the qualitative method. Depending on the
operational scale and needs of the company, the risk limit can be allocated to
each business operational department, each type of product, length of term and
concentration degree of a hold position…
3.
To ensure no excess of risk limit, the Board of Executive must establish the
risk thresholds which are lower than the approved risk value. In case of excess
of thresholds, the operational department must notify immediately to the risk
management department and the Board of Executives to have a settlement plan in
a timely manner. The monitoring, supervision, report, explanation, approval and
implementation of solution to risk settlement comply with the risk management
procedures of the company.
Article 11. Risk management policies and risk
management procedures
1.
The risk management policies need to be developed in writing to ensure any
individual and department in company can access, grasp and know well their
duties in risk management of their company.
2.
The risk management policies must be consistent with the risk management
strategies and specific conditions of the company, including the business
strategies and plans, organizational structure, professional levels of risk
management, services and customers of the company. The risk management policies
consist of the following contents:
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b)
The risk appetite is allocated as per types of risk, management structure of
risk appetite (procedures for monitoring, identification, assessment,
explanation, consultation, report, approval and settlement), monitoring
mechanisms of risk appetite (control of implementation of management of risk
appetite, reporting form, reporting frequency, subjects reporting and receiving
report), mechanisms of review and adjustment of risk appetite (review
frequency, individuals and departments involved in review…).
c)
The limit of each type of risk, procedures for establishment of risk limit,
mechanism of management of risk limit (role, responsibility of individuals and
departments related to the recommendation, establishment and adjustment of risk
limits);
d)
The method of general assessment and quantification of general risks and each
constituted type of risk, standard model, internal model or combination of both
as guided in Annex 05 issued with this Regulation;
dd)
The structure of general risk management and constituted risk, including
personnel departments involved in risk management; responsibility and
obligations of each individual, department ensure that all risks shall be
undertaken by individuals and departments, fully identified, strictly assessed
and monitored, reported, consulted from relevant parties and explained to the
competent level for timely approval, settled under the approved plan and in
orders and procedures specified in the risk management procedure.
e)
The risk management procedure consists of internal regulations in order to
identify, determine the quantity (analyze and quantify if possible, test the
risk stress and test back the chosen model), monitor, supervise (reporting
regulation, risk reporting frequency, risk stress testing frequency), control,
reduce, prevent and deal with the underlying risks.
f)
The risk management procedure needs to be regularly reviewed, updated, adjusted
in a timely manner to ensure high efficiency.
3.
Depending on the operational scale and needs of the company, the risk
management procedure can be developed for the whole company, for each
constituted risk, operation, department or work position. The risk management
procedure is guided in detailed in Annex 05 issued with this Regulation.
Chapter 3.
RISK MANAGEMENT FOR FUNDS AND PORTFOLIOS
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1.
Except for cases specified in Clause 2 of this Article, the fund management
companies shall develop the risk management strategies and policies for funds
and portfolio of entrusting customers as guided in Article 13 of this Regulation
and proactively implement the risk management procedure under the risk
management strategies and policies in order to achieve the investment target
within the scope, limit and field of investment specifiedin the fund charter,
the investment management contract and other regulations of law.
2.
The member fund representative Board and the entrusting customers in management
of portfolio can decide by themselves the risk management strategies and
policies for their member funds and portfolio. In this case, the fund
representative Board can appoint a member in charge of the risk management of
its fund or establish a risk management Board. The fund management company is
responsible for implementation of risk management procedure under the approved
risk management strategies and policies.
3.
The employees operating funds and department managing assets for funds and
portfolio of entrusting customers are responsible for monitoring, identifying,
determining quantity and reporting to the risk management department (if any)
and the Board of Executives on the underlying risks in the portfolio of funds
and customers under the approved risk management procedure. In case of excess
of risk thresholds, the company shall carry out the settlement plan to adjust these
risks lower than such threshold. In case of excess of risk limits, the company
is responsible for consulting the fund representative Board and the entrusting
customers (if the company has no right to decide) on dealing with arising
risks and implement the settlement of risks under the approved risk management
procedure.
Article 13. Risk management strategies and policies
1.
The companies must develop the risk management strategies and policies in
accordance with the investment targets, portfolio and types of fund, scope of
investment, fund charter, management contract and risk acceptance level of the
entrusting customers. The risk management strategies and policies must be
regularly updated at least once a year to ensure the consistency with the
actual conditions of market and asset list of funds and customers.
2.
The risk management strategy, risk appetite, risk management policy for funds
and portfolio of entrusting customers shall comply with the guidelines
specified in Article 9, 10 and 11 of this Regulation.
Chapter 4.
INFORMATION REPORT AND STORAGE
Article 14. Report to the State Securities Commission
of Vietnam
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a)
Information on management and operation of the company;
b)
Thông tin về hệ thống quản trị rủi ro Information on risk management system;
c)
Quantity reporting indicators;
d)
Other attached documents.
2.
The reporting form to be sent to the State Securities Commission of Vietnam is
guided in Annex 06 issued with this Regulation.
3.
The report and the attached documents are made into an original set with an
electronic file to be sent to the State Securities Commission of Vietnam.
Article 15. Information storage
1.
All documents related to the risk management, including the risk management
strategies, procedures and policies, reports, minutes and resolutions of the
Board of Directors, the member Board or the owners, the risk management
sub-Board, the risk management department, decisions of the General Directors
and other documents on risk management must be fully stored and provided for
the State Securities Commission of Vietnam upon written requirement.
2.
The time for document storage guided in Clause 1 of this Article is ten (10)
years as stipulated in Clause 4, Article 40 of Circular No. 212/2012/TT-BTC.
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IMPLEMENTATION ORGANIZATION
Article 16. Implementation organization
1.
The fund management companies must complete the organizational structure and
develop the risk management system in accordance with their companies, the
funds and the portfolios under their management; issue the risk management
strategies, policies and procedures and make report to the State Securities
Commission of Vietnam before 31 March 2014.
2.
The amendment and supplementation of this Regulation shall be decided by the
Chairman of the State Securities Commission of Vietnam./.
ANNEX 01
FORM OF INFORMATION
PROVISION FORM
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund management
companies and the self-managing separate securities investment companies)
SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom – Happiness
---------------
Passport photo (4x6)
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….., date … month …. year …
INFORMATION PROVISION FORM
1.
Full name: Male/Female
Alias
(if any):
2.
Date of birth:
3.
Place of birth:
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5.
Nationality
6.
Place of permanent residence registration:
7
Current residence:
8.
Contact address (regular):
9.
Tel, fax, email:
10.
Educational background:
11.
Qualification:
12.
Occupation:
£ State
official £ State officer £ Other
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Specify
name of school, city and country where the school is located; name of learning
course, time and name of diploma (specify diploma(s), training program related
to criteria and conditions of title selected or appointed).
Time
Place of training/city
Training specialty
Study program
Name of diploma
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14.
Working process (details of past occupation, position, job title and working
result of each position/commendation, award and discipline if any).
Time
Working place
Job title/Position
Responsibility
Job title
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15.
Estimated job title in fund management company:
16.
Current job title in other organizations:
17.
Personal information of declarant:
Full name
Year of birth
ID Number
Permanent address
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Job title
Spouse
Father
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Mother
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Sibling:
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I
undertake that the above information is true and correct and shall take full
responsibility for its contents
Certification of declarant’s signature
Declarant
(Signature and full name)
ANNEX 02
FORM OF LIST OF RISK
MANAGEMENT STAFF
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund management
companies and the self-managing separate securities investment companies)
SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom – Happiness
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LIST OF STAFF OF RISK MANAGEMENT DEPARTMENT
To: State
Securities Commission of Vietnam
We
are:
-
Company ... (official full name in capital letter)
-
Establishment and operation Permit No.:…….issued on……….by the State Securities
Commission of Vietnam
-
Charter capital:
-
Address of main office:
-
Tel: .... Fax:...
We
would like to announce the list of risk management staff as follows:
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Full name
ID/Passport No.
Qualifications/type of international certificate of
risk management (if any)
Job title/Description of work1 or
operational department2
I
Members
in charge/risk management sub-Board directly under the Board of Directors,
the Member Board or the owner
1
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II
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1
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III
Risk
management department
1
2
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..
IV
Staff
implementing the supervision and risk management at operational departments
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2
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We
undertake that the above information is true and correct and shall take full
responsibility for its contents
Documents attached:
- Form of information
provision (full list)
Legal representative
(Signature, seal and full name)
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FORM OF RISK APPETITE
STATEMENT
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund management
companies and the self-managing separate securities investment companies)
COMPANY ….
--------
...., date... month... year ...
RISK APPETITE STATEMENT
The
company can state its risk appetite in different forms. Below are the two examples
of form of risk statement
Form
1
Company….is
willing to accept the risk (high/average/low…) to achieve the targets
(concretizing targets here). The maximum risk level which the whole company can
tolerate is….(X currency unit/X% of owner’s equity, charter capital, available
capital…). The company wishes and is willing to accept the risk level as…(Y currency
unit/Y% of owner’s equity, charter capital, available capital…Y is usually
smaller than X). When the risk level faced by company exceeds …( Z currency
unit/Z% of owner’s equity, charter capital, available capital…), the company
must consider the appropriate response measures to reduce such risk level
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Form
2
The
company can also use the form of risk appetite statement, including the desired
levels and is willing to accept the risk of the company for each type of risk.
For example:
Contents of risk
Risk acceptance levels
Low
Average
High
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2
3
4
5
Risk
of unstable income/revenue/profit
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Risk
of capacity to maintain financial/capital safety
Prestige
risk
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Level
of credit rating
…
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It
is possibly to additionally explain about acceptance level of each type of risk
and the relation with the company’s strategies and targets.
ANNEX 04
FORM OF RISK LIMIT
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
The
form of risk limit defines the risk limit and risk warning threshold for each
risk. Depending on the company’s operational scale and need, the risk limit can
be quantified and allocated to each operational department, job title, product,
term, level of concentration of a position held…The departments/organizations
and individuals must absolutely follow the assigned risk limit, not performing
any activity which makes the risk value they face greater than the risk limit.
When the risk value is greater than the risk warning threshold, take timely
remedial measures as directe in order to ensure such value does not exceed the
permissible threshold.
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Department/individual taking risk.
Risk limit
Risk warning threshold
General
risk
All
company or portfolio of funds and entrusting customers
Operational
departments…
...
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...
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Job
title or staff …
Market
risk
All
company or portfolio of funds and entrusting customers
...
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Operational
departments…
Job
title or staff …
Payment
risk
All
company or portfolio of funds and entrusting customers
...
...
...
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Operational
departments…
Job
title or staff …
...
...
...
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All
company or portfolio of funds and entrusting customers
Operational
department…
Job
title or staff ……
...
...
...
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Liquidity
risk
All
company or portfolio of funds and entrusting customers
Operational
departments…
...
...
...
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Job
title or staff …
Other
risks
(complete list)
All
company or portfolio of funds and entrusting customers
Operational
departments…
...
...
...
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Job
title or staff …
Chairman of the Board of Directors, the Member Board
or the owner
Signature and full name
…, date ... month… year …
General Director
Signature and seal
...
...
...
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(Issued with
Regulation on guiding the establishment and operation of risk management system
to the fund management companies and the self-managing separate securities
investment companies)
The
general risk management procedure can consist of steps of identification,
assessment, handling, monitoring of risk, stress testing and back testing.
These steps of risk management form a repeated, flexible procedure and
regularly reported, updated and completed to ensure the formulation of
appropriate and effective risk management procedure.
Step
1. Risk identification
1.
The identification of risks depends on the ground of company’strategies and
policies on risk management business operation. The main types of risk faced by
the companies are market risk, payment risk, operation risk and liquidity risk.
The companies may face the concentrated risk, legal risk or others.
The
basic types of risk are introduced in Annex 07 issued with this Regulation.
2.
The company can use methods such as questionnaire, scenario analysis, incident
investigation, assessment seminar, study of business procedures and factors
affecting such procedures….to identify risks.
The
relevant staff need to declare and register risks under the Form guided in
Annex 08 issued with this Regulation. The Board of Executives needs to approve
such risks (if rational) before conducting the next management steps.
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4.
The result of risk identification can be described as per the risk Form with
information about name, risk limit, relevant parties of risk, method of risk
assessment, risk monitoring and handling in the next steps. The risk Form is
guided in Annex 09 issued with this Regulation.
Step
2. Risk assessment
1.
The companies need to formulate and use appropriate method of assessment for
risks they must face. There are two methods: qualitative method and
quantitative method. Each method consists of different technical models.
2.
The quantitative models, also called as model of risk value identification are
used with priority to quantify risks. Such models can calculate and estimate
risk values such as values of market risk, payment risk, operation risk,
liquidity risk and other risks.
These
risk values can be calculated in cash or percentage over capital or available
capital.
3.
The qualitative models are used to assess the risks which are unlikely or so
difficult to quantify. For quantified risks, the qualitative model is also used
as a supplemented one to provide more information for more accurate risk assessment.
4.
The general result of risk assessment can be aggregated under the Form of
result of risk assessment specified in Annex 10 issued with this Regulation.
This Form of result allows the identification of priority level of each risk in
company’s activities.
The
detailed quantitative result for each risk is used with similar risk limits to
plan the monitoring and handling of each risk accordingly.
5.
The Board of Executives needs to calculate the general risk values for the
whole company, paying attention to the correlation between risks upon
calculation of general risk value.
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a)
The standard models specified in Circular No. 226/2010/TT-BTC dated 31/12/2010
and Circular No. 165/2012/TT-BTC dated 09/10/2012 of the Ministry of Finance.
b)
The separate models of the companies must be approved by the State Securities Commission
of Vietnam. The Annex 11 issued with this Regulation shall preliminarily
introduce one quantitative model (VaR) actually used.
Step
3. Risk handling
1.
After assessing risks, the companies need to apply appropriate procedures specified
in writing to deal with risks encountered in accordance with the company’s
policy and risk appetite.
2.
General steps to choose and implement measures of risk handling:
a)
Identification of applicable measures.
b)
Assessment of advantages and disadvantages of each measure.
c)
Selection and development of handling plan with responsibility for its
implementation, progress, forecasting result, planning and resources review and
assessment procedures.
d)
Handling of risk under the selected plan. This procedure can be repeated and completed until the
risk value is within an acceptable limit as per the company’s risk appetite.
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a)
Risk avoidance: Not doing any activity which can cause risk under handling.
This method can lead to the narrowing of company’s operational scale and
profits.
b)
Risk reduction: Applying measures to reduce the impacts of risk on the company,
reduce the potential risks or both.
c)
Risk sharing: Transferring all or a part of risk to other subjects as regulation
on risk in contract and purchasing insurance (if corresponding services) for
business activities.
d)
Risk acceptance: There is no measure to change the probability and impact of
risk. The company must ensure adequate capital to cover losses from such risks.
Step
4. Risk monitoring/report
1.
The companies need to monitor risks according to the priority from the result of risk
assessment to have appropriate handling plan.
2.
The level and frequency of risk monitoring must be corresponding to the importance
of risk and effect of handling measures adopted by the company for risk
management.
a)
Periodically or at least weekly, the risk management officer needs to make risk
reports he/she is in charge of to the Leadership in charge of risk management.
The risk management officer needs to compare the risk value and level of calculated
risk concentration with the allocated limits. Where the calculated value
exceeds the warning thresholds or permissible limits, the risk management
officer must explain and recommend the handling measures to the Leadership in
charge of risk management.
b)
Every week, the member in charge of risk management of the Board of Executives
shall make the company’s general risk report, compare the risk value and level
of calculated risk concentration with the approved limits. Where the calculated
value exceeds the approved limits, the risk management officer must report to
the Board of Executives, the Board of Directors, the member Board or the owner
and explain the causes with the handling plan
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Step
5. Stress testing
The
stress testing is the assessment of potential losses likely happening to the
company or the portfolio of entrusting customers upon unusual market volatility
in presumptive
situation.
1.
The stress testing is an important component, a useful supplementary tool for
calculating the risk values in
the risk management.
The
methods of risk value identification usually estimate the risk values in normal
business conditions, thus the handling measures of risks are based on such
estimates are not appropriate in particularly difficult conditions such as
financial crisis or other disaster conditions.
The
stress testing can help the companies to forecast their losses in particularly
difficult conditions to have timely response plans and resources as needed.
2.
The stress testing requires detailed study of characteristics of risk factors, both in terms of individual and general aspects and thorough understanding of relation
between such risk factors.
3.
There are 03 common methods of stress testing:
a)
Method of historical scenario recreates the
economic environments with particularly
difficult conditions in the past to simulate great losses which the company may
face in the future.
b)
Method presumptive scenario can fully provide on
the principle many aspects to simulate losses but such aspects are only
theoretical and not practically proven.
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Each
of the above method can have different technical models. The companies can
choose appropriate method and technical models.
Step
6. Back testing
The
back testing is a technique to test the accuracy of quantitative risk model
based on the comparison between the historical data and the general risk value
calculated by the models at the same point of time. The quantitative risk
models, for example the VaR model are usually very complex, using multiple mathematical assumptions
and statistics, with
many different parameters.
One
of the techniques of back testing for VaR model, for example is to compare the
VaR value calculated for one day with the observed loss value in the next day.
Then, the difference between these two values must be consistent with the
reliability of VaR model. Moreover, such difference must be independent in
the sense that the model must adapt quickly to the changes of market
conditions, thus the differences of today and tomorrow must be independent from
each other. The companies can develop the techniques of back testing with the
approaches consistent with their
own conditions.
The
back testing is a part of validation and risk management to ensure the risk
management is increasing completed and consistent with the companies’
conditions market context. The summary of re-assessment is described in Annex
12 issued with this Regulation.
ANNEX 06
FORM OF RISK MANAGEMENT
REPORT
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
COMPANY …..
--------
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No.:
……..(of official letter)
Subject: Risk management report
…….., date …. month …. year ….
RISK MANAGEMENT REPORT
Year/Half year: …..
To: State Securities Commission of Vietnam
Legal
representative of company
Full
name: Tel: Email:
Leadership
in charge of risk management:
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I.
Information about the company’s management and operation
No.
List
Description
1.
Board of Directors, member Board and Supervisory Board
Information
about structure of Board of Directors, member Board; working process, number
of years of experience in enterprise management and operation in the field of
securities of each member of Board of Directors, member Board;
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The
list of members of the Board of Directors, the Member Board; job title or
duties in the Board of Directors/ Member Board; management and operation
experience at securities business organizations (number of years holding
position as member of Board of Directors/ Member Board/Board of Executives);
result of implementation (achievement/violation) at such organizations.
Listing
criteria and conditions
Information
about change of senior personnel in the last three (03) years in Board of
Directors, member Board, Board of Executives and Heads of Departments
The
average rate of change in the last three (03) years of a number of personnel
changed in the year (reporting period)/number of personnel at the beginning
of year (opening reporting period)
Information
about internal operational rule of Board of Directors, member Board,
supervisory Board and Board of internal operation and control, internal audit
and other necessary rules for operation of the company.
Listing the issued documents (number, date/month/year) with brief
description of content of documents (internal rules and operational
procedures including asset allocation procedure, portfolio management
procedure, fund management procedure…)
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Detailing
the implementation time, number of participants over the total participants;
contents with required opinion and percentage of voting to adopt each
content.
The
findings in the reporting period of the internal control and internal audit
department and competent management organs related to:
-
Violation of regulations of law and regulations in the company charter;
violation of regulations of enterprise law on manager’s obligations, failure
to properly, completely and promptly exercise duties and responsibility,
beyond authority in company management, control and operation; violation of
regulations on management and use of seal;
-
Allowing company to implement the operations and supplying products which the
law has not permitted or guided.
Listing
and specifying the companies’ way of handling and settlement, remedy and
recommendations.
-
Not publicizing relevant interests or permitting the implementation of
contracts and transactions without approval from the Board of Directors, member Board or general
meeting of shareholders.
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Internal audit
Structure
of internal audit
List
of employees of internal audit department/or department performing function
of internal audit; job title or duties; number of years working at securities
business organizations, auditing/accounting organizations or state organs in
the field of securities; result of implementation (achievement/violation) at
such organizations.
Internal
audit procedure
Attached
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Listing
and specifying the companies’ way of handling and settlement, remedy and
recommendations.
3.
Internal
control
Internal
control structure
List
of employees of internal audit department/or department performing function
of internal audit; job title or duties; number of years working at securities
business organizations, auditing/accounting/law organizations or state organs
in the field of securities; result of implementation (achievement/violation)
at such organizations.
Internal
control procedure
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Personal
transations (number, value) between company staff with the funds and
customers under the company’s management.
Listing
Findings
in reporting period related to the internal control and internal controller
Listing
and specifying the companies’ way of handling and settlement, remedy and recommendations.
4.
Structure of shareholders/capital contributors
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Information
about structure of shareholders/capital contributors
List
of shareholders/capital contributor; ownership percentage; field of business
of shareholders/capital contributor as capital contributing
organizations/professional experience of shareholders/capital contributor as
individuals
Findings
in reporting period of the internal control department, internal audit
department and competent management organs related to:
-
Violation regarding cross-ownership relationship, contributed capital,
exceeding limit of ownership and implementation of unapproved transaction
under the provisions of the charter,
or regulations of
law
-
Violation of management of shareholder book, rights, obligations and
responsibility for shareholders/ capital contributors; organization of
general meeting of shareholders (order, procedures for organization, minutes,
resolution…)
Listing
and specifying the companies’ way of handling and settlement, remedy and recommendations.
5.
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List
of disputes; overlapping of function, duty in decision making between the
Board of Directors, the member Board, the Board of Executives and other
departments
Listing
and specifying the companies’ way of handling and settlement, remedy and
recommendations.
6.
Board of Executives and management and operation
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Description
of specific duties and experience in management, operation and securities
operations of each member
Listing
the members of Board of Executives, duties, type of certificate of practice,
experience in the field of securities (number of years of experience working
at positions of securities business operation: brokerage, analysis,
consultation, investment, asset management), result of implementation
(achievement/violation) at such organizations.
Organizational
structure of company;
Description
of duties and personnel of each department.
Listing
of departments, employees, type of certificate of practice (if any), job
title.
The
findings in reporting period of the internal control department and competent
management organs related to:
-
The Board of Executives, fund operator, head of departments and staff of
company failed to fulfil their responsibilities and fully comply with
regulations of law on enterprises and securities (including regulations of
enterprise law on manager’strategies and policies on risk management
obligations), operational procedures, rules and regulations in the company
charter.
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Listing
and specifying the companies’ way of handling and settlement, remedy and
recommendations.
7.
Operational and business activities
Supplied
products (open-end fund, closed-end fund, real estate fund, exchange-traded
fund and exchange-portfolio fund
Listing
the number of funds, type of fund, investment targets, number of investment
management contract, number and type of entrusting customer (value of
mobilized capital/net assets under management of each organization and
individual).
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Listing
the investment items in subsidiary companies, joint-venture companies other
long-term financial investment, details of business line and total investment
value.
The
findings in reporting period of the internal control department, internal
audit department and competent management organs related to:
-
Violation of regulations of law on company’s financial management such as
capital borrowing for financial investment; capital lending, allocation of
company’s capital to the relevant persons and other organizations and
individuals in any form; improper investment in real estate
-
Employees of company violate or have signs of violation of regulations of
securities law on limit of interest conflict.
-
Violation of regulations on information announcement.
-
Violation of laws on rate of investment; type of investment assets;
investment exceeding authority… and other regulations on establishment and
management of closed-end fund, member fund, securities investment companies, open-end
fund, real estate fund, exchange-portfolio fund…
-
Violation of regulations on portfolio management operation and depository of
entrusting customers’ assets.
-
Regulations on securities investment consultation operation
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The
average growth rate of revenue in the last three (03) years.
Percentage
(%)
II.
Information about risk management system
No.
List
Result
1.
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Members
in charge of risk management and other members of risk management sub-Board
(if any):
Name,
position and detailed information on type of risk management certificate (see
Note 03), number of years of experience in the field of risk management
including working time, job title, responsibility, implementation result
(achievement/violation if any)
Times
of policy and strategy assessment and approval and risk management in the
period
First
time: Date…/month…/year …
Second
time: Date…/month…/year …
….
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ĐT: (028) 3930 3279 DĐ: 0906 22 99 66
Board of Executives
Name
and position of member in charge of risk management; experience of risk
management of member in charge of risk management
Name,
position, detailed information on type of risk management certificate(see
Note 03), experience in the field of risk management (number of working
years, job position), responsibility, implementation result
(achievement/violation if any)
Times
of policy and strategy assessment and approval and risk management in the
period
First
time: Date…/month…/year …
Second
time: Date…/month…/year …
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Strategies and policies of risk management
Strategies
and policies of risk management in company
Attached
Risk
appetite of company and risk limit
Attached
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Attached
Times
of policy and strategy assessment and approval and risk management in the
period
First
time: Date…/month…/year …
Second
time: Date…/month…/year ..
4.
Information technology infrastructure for risk management
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Brief
description (name of software, manufacturer, types of risk likely
managed/controlled…)
5.
Risk management organization/personnel
Organizational
structure and personnel of risk management department (if any)
List,
names, functions, duties related to the risk management, type of risk
management certificate (if any), number of experience years in risk
management including working time, job title, responsibility implementation,
result (achievement/violation if any)
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List,
names, main functions and duties and part-time functions and duties related
to the risk management, type of risk management certificate (if any), number
of experience years in risk management including working time, job title,
responsibility implementation, result (achievement/violation if any).
The
ratio of part-time/full-time risk management officers over the total officers
of each department and the whole company.
Tỷ
lệ Ratio
The
findings in reporting period of internal control department, internal audit
department and competent management organ related to implementation of risk
management which is not good and inconsistent with the company’s actual
investment and business.
Listing
and specifying the companies’ way of handling and settlement, remedy and
recommendations.
6.
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Information
on dissemination, training and report on risk management at company in the
reporting period.
Listing
the time of implementation, performer, content and attached documents
Report
to the State Securities Commission of Vietnam on risk management
Listing
the reporting time /content of report
7.
Risk management for entrusting customers’ portfolio
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Coordinating
with the entrusting customers in development of strategies, policies and
procedures for risk management for portfolios under the company’s management
Sending
the strategy, policy and procedure for risk management to fund/portfolio;
Listing the time of meeting/discussion/update of information with entrusting
customers
Times
of review and updating of risk management policies and procedures.
First
time: Date…/month…/year …
Second
time: Date…/month…/year ..
Daily
implementation of risk management
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8.
Compliance monitoring
Times
of inspection, review and assessment of efficiency of risk management of the
internal control department and internal audit department.
First
time: Date…/month…/year …
Second
time: Date…/month…/year ..
The
findings of the internal control department and internal audit department related
to:
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-
Violation in risk management for company’s business activities (violation of
policy, risk appetite, risk limit, risk management procedure..)
-
Violation in risk management for funds and portfolios of entrusting customers
(violation of policy, risk appetite, risk limit, risk management
procedure..),
Number
of times, listing
III.
Quantitative reporting indicators
1.
Total overdue receivables, including renewed overdue receivables (opening and
closing period).
2.Total
short-term investment value after risk adjustment (opening and closing period,
see Note 04).
3.
Profits annually distributed from the establishment year to the current year.
4.
Time-weighted return ((TWR and twr, see Note 05), net asset
value (NAV) of each portfolio, open-end fund under active management.
5.
Money-weighted return (MWR and mwr, see Note 06), net asset
value (NAV) of each closed-end fund, member fund, securities investment company
under active management.
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IV.
Attached documents
1.
Strategies and policies of risk management, risk appetite and risk management
procedure of the company as stipulated in Article 9, 10 and 11 of this
Regulation.
2.
Internal rules and brief description in section I, II.
3.
Other relevant documents (if any).
Our
company undertakes that the above report is correct and complete and shall take
full responsibility before law for its accuracy and completeness.
Note:
1.
Only send documents with changes compared with the previous reporting period
and indicate no change of such documents.
2.
In biannual reports, the s of senior personnel change and average growth of revenue
in the last three (03) years are understood that in the last two years and the
first six months of the current year.
3.
Some examples of risk management certificate: Financial Risk Manager – FRM
issued by GARP, Professional Risk Manager – PRM issued by PRMIA or other
appropriate certificates as required by the company
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5.
TWR is the Time-Weighted Return.
TWRkỳ
báo cáo= (1 + R1) × (1 + R2) × … × (1 + Rn)
– 1
in
which Ri is the rate of return at the times of defining value of net
assets of fund, times of receipt/payment to entrusting customers. Use the rate
of return with the log return by the formula:
twr
= ln(1 + TWR) = loge(1 + TWR)
Then:
twrkỳ báo cáo = twr1 + twr2 + … + twrn
6.
MWR is the Money-Weighted Return. Use the modified Dietz
method to define MWR, then calculate the rate of return with
the log return by the formula:
mwr = ln(1 + MWR) = loge(1 + MWR)
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(Signature and seal)
ANNEX 07
INTRODUCTION OF BASIC
RISKS
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
I.
Market risk
1.
General introduction
a)
The concept of market risk is specified in Clause 10, Article 2 of this
Regulation. This is the type of risk regularly faced by the companies,
especially in operations of investment fund management and portfolio
management.
b)
The market risk arises due to the change of price in the market with
unfavorable trend under the impact of objective causes of market such as
volatility in international market, volatility of market indicators, change of
macro policies, interest volatility, bond interest, exchange rate…or due to
activities in the market, for example business and financial result of an
issuer likely leading to the reduction in shares of such issuer, or the sale of
a large volume of securities of a shareholder in condition of local liquidity
loss resulted in price reduction of such type of securities…The market risk can
be divided into groups of risk such as interest risk, currency risk, securities
price risk…
c)
The companies need to follow the principles: The operational staff only carries
out the investment transactions when clearly understand the financial products
and define, assess, supervise and control the risk management related to such
sanctions.
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2.
Policy on market risk management
a)
The market risk is managed through separate policy on market risk management.
This policy must define the scale (value) and risk level like occurring in each
market state (as guided under Point c below), with the timely and appropriate
response plan on the basis of balancing between the investment targets and
market risk (risk acceptance level).
To
develop a complete policy on market risk management, the following factors must
be paid attention to: economic and market conditions; financial capacity;
portfolio and investment structure of companies and entrusting customers. Such
information must be continuously and regularly monitored.
b)
The companies must have method for assessing and identifying the value in line
with each market risk classification such as interest risk, currency risk,
securities price risk (liquidity risk is also associated with the risk market
but separated and managed separately in this Regulation). The identification of
market risk value should be done in combination with the process of daily risk
management of the companies. The scale (value) of market risk can be identified
in the form of relative and absolute value. The absolute value is converted as
per currency unit to show the underlying / volatility of portfolio and company.
The relative value is calculated based on the standard indicator showing the
profit volatility compared with expectation/average value of profits of
portfolio and company.
The
establishment of scale (value) of market risk must be done continuously and by
various methods in accordance with the different presumptive situations as
follows:
-
With the presumption of normal market operation, one of the model identifying
the market risk value regularly used as a VaR model which is introduced in
Annex 1. This method is also combined with other statistical techniques such as
EWMA (Exponentially Weighted Moving Average), GARCH (Generalized AutoRegressive
Conditional Heteroscedasticity), EVT (Extreme Value Theory), PCA (Principal
Component Analysis)… to give more reliable results.
-
With the presumption of volatile market, the companies can apply model of
stress testing to define the underlying market risk in unexpected and unusual
situations of market or the whole economy in the country and abroad which can
cause great loss to finance, personnel, material facility and information
system…
c)
The models and quantitative methods of risk management mentioned above must be
regularly reviewed and re-assessed and tested in order to update and adjust
parameters in the model to be consistent with reality.
The
companies can use the Risk-Adjusted Performance Measure, RAPM to assess and
compare the operation of individuals and asset management departments
effectively and rationally. A number of examples of risk-adjusted performance
such as Sharpe ratio, Jensen’s Alpha coefficient and Treynor ratio.
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-
Procedure for market risk management: needs to be established fully and
comprehensively with the contents such as nature of market risk, grounds for
risk identification, appropriate detailed structure of risk limit, information
management system for control and supervision and report on market risk…
-
The risk management system need to define levels of volatility of market; scale
and underlying severity of loss corresponding to each level; possibility of
risk occurrence and resilience. The parameters to identify the risk scale must
be daily tested and adjusted to ensure the consistency with the portfolio
structure and volatility of factors generating the market risk.
-
The risk management procedure and system are managed and implemented by the
risk management department and relevant departments (investment, analysis…).
3.
Handling of market risk
The
control and handling of market risk are of great importance and complexity. The
design of a policy to reduce the market risk usually accompanies with the
design of investment policy. A number of methods can be used to reduce the
market risk are:
a)
Selective hedging: This method usually choose a number of unwanted market risks
for reduction by using the hedging tools, usually long and medium term.
b)
Temporary hedging: This method is usually used in case of occurrence of
short-term market incidents.
c)
Capital adequacy assurance to cover the market losses possibly occurring (for
the company’s market risks).
d)
Compliance with regulations of law, the company’s policies and procedure for
risk management
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II.
Payment risk
1.
General introdcution
a)
The concept of payment risk is specified in Clause 9, Article 2 of this
Regulation.
b)
The payment risk is the risk arising when the partner does not want or is not
able to follow its commitments in contract resulted in certain financial
losses. The payment risk can arise from transactions in and out of the balance
sheet or upon implementation of financial tools such as derivative securities
or partner’s failure to make timely payment of contributed capital for share
purchase or transfer of securities delinquently as committed…The payment risk
usually occurs separately or with accompanied market risk and relevant risks.
Thus, the management of payment risk needs to be done uniformly and is the
constituent of common risk management policies.
2.
Payment risk management policy
a)
The payment risk management policy includes the limit of total payment risk, total
of maximum receivables and loans, payment risk thresholds; responsibility and
obligations of relevant departments (transaction departments and departments
approving, maintaining and managing the receivables; decision authority for
payment limits; standard of payment risk acceptance and acceptable securities
collateral.
-
The payment risk acceptance level must be consistent with the risk acceptance
level and business targets of each company, taking into account the company’s
business cycle in the operational fields, business nature, portfolios and
relevant risks of market segments.
-
The credit risk management structure is established in accordance with the
company’s model and nature to ensure the convenience for supervision,
management and implementation of risk management. There must be procedures for
control and supervision of payment risk levels, especially the separation
between the department forming credit (investment/business department) and
department monitoring and managing the payment risk.
-
Supervision and control of payment risk are done through the credit financing
procedure, risk reduction, supervision and re-assessment of receivables,
classification of credit, customer/partner, provision appropriation, management
and control of arising risks.
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The
receivables at risk are often managed as per each partner with close
relationship with the two remaining components, for example the probability of
default from partner, history of debt repayment of such partner and debt
recovery rate from partner…
The
probability of default from partner is often calculated by the credit rating
coefficient of such partner. This coefficient can be provided by third parties
or calculated by the company itself as per its own model.
The
debt recovery rate is a very significant factor of loss distribution of payment
risk. This rate changes as per the priority, guarantee level, economical cycle
and bankruptcy law in the host country. This rate is difficult to estimate, has
great difference and is affected by the business cycle.
On
the basis of loss distribution, the company can estimate the risk value using
the quantitative models such as VaR model, stress testing and other statistical
calculation models.
3.
Risk handling
The
company must ensure the payment risk is appropritately dispersed. The payment
risk management procedure must have risk limit associated with each partner so
that such risks do not threaten the company’s healthy financial condition. A
number of methods of payment risk handling are:
a)
Using the clearing agreements, including bilateral clearing and centralized
clearing (multilateral) to reduce debt risk;
b)
Requiring partner to deposit/mortgage assets;
c)
Limiting debt for partner especially the one with low credit.
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dd)
Requiring the guarantee of a third party in case of loss.
e)
Using the relevant derivative products (if any in market) such as CDS (Credit
Default Swaps), CLN (Credit-Linked Notes), TRS (Total Return Swaps), Credit
Options, CDO (Collateralized Debt Obligations).
III.
Operation risk
1.
General introduction
a)
The concept of operation risk is specified in Clause 6, Article 2 of this
Regulation.
b)
The operation risks arise during operation and service supply at the company.
The causes may be the limit of internal procedure and human factors during
implementation, incompatibility of system, other objective causes or losses in
business resulted in shortage of business capital and losses for the company.
The
operation risk consists of: (i) risk of information technology system (IT
risk). The causes are the incompatibility of system or technical errors
incidents resulted in the failed or interrupted transactions. The IT risk needs
to be identified for all dangers and losses appearing in IT system such as
intranet, internet, external connection port, hardwares, softwares,
applications or human factors. The IT security risks also should be concerned
to ensure the security and integrity of system; (ii) Security risk in the operational
areas, system security, electricity, fire and explosion safety and other risks
that can occur (iii) Risks due to inconsistent implementation of procedures
with the company’s internal regulations and operational structure resulted in
the inaccuracy in establishing the risk management system.
2.
Policies on operation risk management:
a)
Formulation of liquidity risk list including the frequency and severity of each
risk.
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The
risk level related to the IT system directly related to the operation and
services provided for customers needs to be quantified and analyzed regularly.
Where the specific risks are not quantified, such risks must be identified
through steps of knowing about their underlying effect and possible reverse
outcomes. The risk management is the first priority, then followed by the
cost-benefit analysis and implementation of decisions to reduce risks.
c)
Review, updating and assessing risks. When developing and designing IT system,
the risk management system integrated into this system should be taken into
account in order to reduce costs and raise the effectiveness of risk management
procedure. The inspection, monitoring and network security measures should be
carried out regularly. The company should pay attention to the security of
data, system and customers’ information.
d)
Formulation of result of operation risk assessment.
3.
Risk handling
For
each type of risk identified and analyzed, there must be measures to reduce
them and plan for management and handling in line with the requirement and risk
tolerance level. This management must include the active assessment of loss and
damage in case the risk factors become true. The costs of risk management
should be calculated, balanced to be consistent with the benefits and
efficiency from the risk management.
A
number of methods can be used to reduce the operation risk, including:
a)
Operation risk not as purely financial risk. Depending on the specific
characteristics, the company should have appropriate risk management plan.
b)
The company must ensure all members must strictly comply with policies and
strategies of risk management in particular and other regulations in general to
limit the arising errors and reduce losses from operation risk.
c)
The company must develop a provision plan for emergency situations and can use
the model of stress testing to ensure the continuity of business activities.
This provision plan must prepare necessary resources including but not limited
to personnel, finance and information system ready for difficult conditions
such as natural disasters…;
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-
All internal activities and procedures for operational processing, including IT
system and other supporting systems;
-
Operations possibly at risk and ways of handling and reduction of such risks.
-
Needs of an early warning system to allow company’s effective intervention and
prevention of risk.
dd)
For outsourcing activities (if any), the company must ensure its partners
absolutely follow the company’s relevant policies and procedures. The company
must not provide services and sell products on the internet without necessary control
measures and network security assurance.
IV.
Liquidity risk
1.
General introduction
a)
The concept of liquidity risk is specified in Clause 8, Article 3 of this
Regulation.
b)
The liquidity risk arises when the company or its customers meet difficulties
in cash flow and face the insolvency resulted in early asset disposal with
transfer of losses in books to losses in fact due to the failure to dispose
their assets at the current market price or to maintain the cash flow in line
with their investment and business targets. The reasons may be due to the
depth, breadth of market. For example the disposal of a type of securities with
large volume can affect or lead to the lower price in the market.
The
liquidity risk can be regarded as a part of market risk.
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c)
Short-term liquidity includes the daily needs of cash with general business
conditions. When studying the long-term liquidity, it is required to consider
the possibility of occurrence of unusual bad business conditions and the value
of assets cannot be implemented with current market price.
2.
Policies on liquidity risk management:
-
In the policies on liquidity risk management, the company must define the
actual cash flow and value of liquidity risk during the time of asset holding
and investment. The value of liquidity risk is defined on the basis of sensitivity
analysis and price volatility of the portfolio at any time during the holding
period.
To
identify the price volatility in each point of time of the holding period of
time, the company can use the extrapolation method. The company also needs
fully understand and know about market and is able to identify the value of
market risk level. All main market risks whose value must be identified and
aggregated on the basis and possible widest scope.
-
A number of calculating tools of liquidity risk can be, including:
a)
Liquidity rates from financial statements.
b)
VaR (Value at Risk) introduced in Annex 08 of this Regulation.
c)
LaR (Liquidity at Risk) operated similarly to VaR to define the cash flow related
to the assets and obligations to pay debt in and out of the accounting balance
sheet. The LaR models are under development and completion.
d)
Assessment done on the basis of difference in cash in and out, term, exchange
rate and derivative products…
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3.
Risk handling
A
number of methods can be used to handle and reduce the liquidity risk,
including:
a)
The company should make plan to ensure the liquidity, including:
-
Continuously monitoring debts and analyzing the company’s solvency.
-
Identifying the current financing possibilities, negotiation of loan
commitments and financing possibilities within corporation and company.
-
Regularly reviewing and inspecting the above financial capacity/cash flow in
both general conditions and special conditions.
-
Identifying limit norms for some markets or products or diversity of investment
products to ensure the limit of deficit of cash flow and capacity of additional
capital mobilization to cover the temporary shortage of business capital;
d)
The company needs to implement activities in order to control the cash flow,
particularly:
-
The difference between the cash flow in and out of assets and debts.
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-
Monitoring of assets with high liquidity and potential cost quantification and
financial loss to be accepted upon required rapid sale of assets.
-
The cost of financing and identification of other financial tools with
corresponding costs.
c)
Establishment of centralized and dispersed limits for both assets and debts in
the balance sheet, limit of difference of cash flow in and out, financial leverage
rate…Regular review and adjustment of such limits to ensure the company’s
compliance without exceeding such limits.
d)
Stress testing for bad cases possibly occurring. The past scenarios when the
company suffered great losses due to bad liquidity can be followed or other
presumptive scenarios.
dd)
Having appropriate management plan, especially in the frozen market conditions.
e)
Use of deposit and collateral with appropriate liquidity.
f)
Maintaining the available capital to cover the loss of liquidity possibly
occurring.
V.
Other risks
Besides
the main risks mentioned above, the company can face the following risks. Each
type of risk has different methods to identify, assess, monitor and handle. In
many cases, these risks can be integrated with each other or other types of
risk faced by the company. The company must develop the management policies and
procedures consistently with such risks.
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The
legal risks occur when a contract can not be implemented due to legal reasons.
The legal risks also happen when the company fail to comply with legals
regulations and operational rules and procedures… for example risks occur when the
company supplies the fund and portfolio management services to customers or caries
out its investment not in accordance with portfolio structure approved by the
customers or the asset transaction of the Fund or the portfolio management
operation is not suitable…The violation of regulation of law may be
intentionally or unintentionally or other objective reasons (for example
violation of regulation on investment restriction the cause of which is the
market volatility and out of the company’s control or intentional violation of
regulations of law on investment limit and structure or failure to separate the
company’s assets with those of its customers.
Preventive
measures: Establishing a legal department or hiring the legal consultation
services for company to to ensure the contracts signed with its partners may be
done. Controlling the activities of internal control department to ensure no
violation of laws upon supply of services to the entrusting customers…
2.
Transaction risks with relevant persons (insider trading risk)
Interest
conflicts from the transactions with parent companies, the parties related to
the persons practicing the fund management, the board of executives, company
staff and partners having contractual relation with the company under the
agreement on portfolio management services or with relevant persons banned from
doing transactions under current regulations of law shall cause the insider
trading risks).
3.
Personnel risk
The
personnel risks occur when there is a shortage of senior personnel or personnel
having certificate of fund management practice resulted in difficulties or
failure to maintain activities or risk from staff who do not follow internal
rules (code of conducts about personal investment, regulation on access to
internal information and information security, regulation on information
allocation…) and rules of occupational ethics.
ANNEX 08
FORM OF RISK
REGISTRATION
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
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Department:
Information on risk
Risk description
Preventive action/risk handling
ID
Time of risk identification
Risk identified by
bởi Risk managed by
Risk description
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Frequency assessment
Impact assessment
Priority assessment
Prevention/risk handling
Action origin
Action date
1
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…, date ... month … year …
General Director
(Signature and seal)
ANNEX 09
FORM OF RISK
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
Risk details
Code
of risk type
Unique code of risk type under the company’s classification
Code
of risk subtype
Unique code of risk subtype
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Proposal
date
Risk
description
Brief description of risk
Employee
in charge
Employee in charge such risk
Risk assessment
Possibility
of risk occurrence
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Impact
of risk
Description and assessment upon risk occurrence and approach used to
identify such impact (financial analysis, forecasting analysis…)
Priority
level
Description and assessment of priority level for identified risk
Risk handling
Risk
prevention
Brief description of necessary activities to prevent such risks.
Risk
handling
Brief description of necessary activities to reduce impacts upon risk
occurrence
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The
parts of risk assessment and risk handling closely related to the risk
management procedure
The
attached documents (if any): List documents attached to this risk table.
…, date ... month … year …
General Director
(Signature and seal)
ANNEX 10
FORM OF RESULT OF RISK
ASSESSMENT
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
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Impact
Very low
Low
Average
Major
Serious
Frequency
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Average low risk
Average high risk
Serious risk
Serious risk
Serious risk
Remarkable possibility of occurrence
Average low risk
Average high risk
Average high risk
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Serious risk
With possibility of occurrence
Low risk
Average low risk
Average high risk
Serious risk
Serious risk
Low possibility of occurrence
Low risk
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Average low risk
Average high risk
Serious risk
Rare occurrence
Low risk
Low risk
Average low risk
Average low risk
Average high risk
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-
For example of risk frequency: The lowest frequency can be less than 01 time/1
decade, then 01 time/1 decade, 01 time in several years/1 year/month…to the
highest frequency with several times/1 week.
-
For example of impact level: Maybe from the lowest effect level with loss of
less than 1% of portfolio value to the higher effect levels with loss of 3%,
5%, 10% of portfolio value. The loss level from 15% or more for example could
be corresponding to the very serious effect.
…, date ... month … year …
General Director
(Signature and seal)
ANNEX 11
BRIEF INTRODUCTION VaR
MODEL
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
I.
Introduction
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The
VaR (Value-at-Risk) model is a method of identifying the maximum risk value (based
on historical data or simulative data) possibly occurring with a certain
probability in definite period of time for the companies or portfolio of
entrusting customers in case of no abnormal market volatility.
The
VaR is a model of risk quantification in cash often used to assess the risk of
a portfolio. The result of such quantitive model, also called as VaR method is
understood as the greatest forecast loss the company may undergo in a normal
market condition, in a definite period of time with a certain probability.
2.
For example
At
the present time, the company has calculated the VaR of a portfolio to be 10
billion dong within 07 days with the probability of 99%. This is understood
that with the probability of 99%, the loss of portfolio which the company may
undergo in 07 subsequent days shall not exceed 10 billion dong. In other words,
there is still 1% of possibility (also known as the reliability of 1%), the
company may undergo a loss of over 10 billion dong.
Some
notes in the above example:
-
The value of 10 billion dong above is only an estimate value.
-
10 billion dong is not a greatest loss in all cases the company must undergo
from the portfolio because there is still 01% of possibility of loss of over 10
billion dong.
-
The probability and reliability are their complement or the total of these two
quantities is 100%.
3.
Advantages and disadvantages of VaR
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VaR
does not provide information on losses faced by the companies in particularly difficult
conditions. Thus, the companies should carry out the stress testing in such
conditions as a supplement for VaR.
II.
Some basic VaR models
1.
Analytical models
Assuming
that the yield (R) during the study period (h day, as 07 days in the above
example) complies with the standard distribution with the average value m and standard deviation s2, or
R ~ N(m, s2)
If
the market value of the present portfolio is S, the VaR in h day with the
reliability a is defined by
VaRh,a = -xaS
In
which xa is the “lower percentile” of distribution N(m, s2), or the value the probability of R < xµ is µ. Generally, µ is relatively small (0 <µ< 0.1) and xµ is also displayed in the form
xµ = Zµs + m
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The
analytical model has the advantage of being simple, easy to understand and
perform. In case of shortage of past data, such distributions shall not be
developed.
This
VaR model is appropriate for low risk level and simplelevel. When the
transaction positions in the portfolio become more complex or the relationship
between the positions is non-linear, we need better VaR models.
2.
Monte Carlo simulative model
This
model can deal with a lot of disadvantages of the analytical model¸especially
for the complex portfolios such as derivative portfolios. In general, the Monte
Carlo simulative model is more reliable than the analytical model.
The
Monte Carlo simulative model firstly defines the variables and parameters can
affect the yield and next uses the simulative techniques (using the strength of
calculation of computer programs) to create a lot of simulative results, each
simulative result is associated with one value of company’s profit/loss. These
simulative results shall create a distribution of profit/loss and VaR shall be
calculated from such distribution.
The
Monte Carlo model has a lot of advantages such as it can review a lot of risk
acts in the market, deal with non-linear risks and complex financial tools no
depending much from the past data. The Monte Carlo model used to have a
disadvantage of too much calculation, but nowadays with the development of
information technology, such disadvantage is increasingly negligible.
3.
Past simulation model
This
model is different from the above models on the characteristics that we do not
assume anything about distribution of yield. Such data shall demonstrate which
distribution is the most appropriate and VaR shall be calculated on such actual
basis of distribution.
A
variation of past simulative model is that the data which are close to present
can be attributed to the larger number than the remote data, this model is
called past-weighted simulation or weight average simulation.
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One
of the advantages of the past simulative model is that it is completely dependent
from the past so it can not be done without data or with reliable data. The
number of record of past data also affects the reliability of estimate value
VaR.
ANNEC 12
BRIEF REASSESSMENT OF
RISK MANAGEMENT
(Issued with Regulation on guiding
the establishment and operation of risk management system to the fund
management companies and the self-managing separate securities investment
companies)
The
risk management play a very important role in the companies’ development. They
have to re-assess their risk management particularly the risk management
strategies, risk appetite, risk management policies and procedures to ensure
the consistency with the companies’ reality and market conditions.
1.Parties
related to the reassessment procedure.
The
reassessment procedure is the same as the procedure for strategy and policy
development and risk management procedure implemented by the Board of
Executives and approved by the Board of Directors, the Member Board or the
owner. The Board of Executives may assign the risk management department or
establish an assessment group to carry out the reassessment which must ensure
the standardization, quality and effectiveness. In this process, the group
developing strategies, policies and procedures for risk management (development
group) must be also involved and closely coordinate.
The
relevant parties have their clear roles and responsibilities, the development
group prepares all required documents and answers all questions of the
reassessment group, provide data used to build the model if required. The
reassessment group carries out the reassessment procedure including all stages
of model management, uses appropriate methods and makes reassessment reports.
The Board of Executives reviews the reassessment reports and documents, assigns
the updating of relevant strategies, policies and procedures and submits them
to the Board of Directors, the Member Board for approval.
2
Contents of reassessment
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The
risk appetite and risk limit have been stated and identified properly? It is
necessary to change the method and update any parameter?
The
risk management policies and procedures have any problem? The models of risk
assessment need any updating, adjustment or inspection? List all problems and
give handling recommendations.
3.
Reassessment documents
Such
documents must include at least: Policies of reassessment framework,
reassessment method, reassessment forms and reports and other relevant
documents.
1 Specify
responsibility and obligation related to risk management (risk in operation of
company/risk in operation of fund (specify name of fund)/risk in management of portfolio
of customers), including: (i) development and approval for risk management
policies, risk appetite; (ii) risk supervision; (iii) receipt of risk
report/approval.
2 Specify
name of operational department