Risk management essential for finance sector
Risk management is now an important part of Vietnam’s financial system after some banks suffered high losses and capital deficits, and merged with other banks.
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The significant growth of the two sectors has caused worries over stability.
“StoxPlus acknowledges that all sectors of Vietnam’s economy, including the stock market, has to face a high risks regarding some factors such as foreign exchange rates and interest rates,” said Nguyen Quang Thuan, StoxPlus CEO, at the August 19 talk-show on market risk management, which was organised by StoxPlus, an associate information provider of Japan-based Nikkei Inc and Quick Corp.
Investors and traders could see the risks through recorded data and figures, however, those numbers were only as good as their reliability and accuracy, according to Thuan.
Proprietary trading (prop trading) that financial firms use to earn profits in trading stocks in their own investment portfolios may generate big losses for banks, Harry Hoan Tran, risk management expert at the Britain-based Lloyds Bank, said.
“Most banks think they can go to the market, buy some stocks at low prices and then sell them for higher prices.”
After the financial crisis in 2008, prop trading became a zero-sum game for banks, so they have concentrated on investment funds and pension funds.
“Prop trading is limited at a very low level. Banks would not make prop-trading orders if it was not for their customers,” Harry said.
According to StoxPlus, only one or three percent of trading orders during a session is prop trading.
‘People’ may also be a risk for a financial firm as they can disrupt the system, faking future and forward contracts to earn profits, according to Harry.
Financial firms should find a way to monitor traders to minimise risk.
“Front office should be able to supervise traders in the department, while middle office should be able to keep track of trading orders and transactions as future and forward contracts are not paid in real money, allowing traders to fake contract terms to make money,” said Harry.
Banks, securities firms and investment funds should calculate potential losses based on the market’s normal and volatile conditions so they can lower damage caused by volatile foreign exchange rates and interest rates.
In order to set up scenarios, market members must evaluate products and assets, address input variables, for example, investors should be able to predict how the bond market moves when interest rates change and volatile how the market is, he said.
Analytical tools for risk management are now available in Vietnam. Banks can use those tools to calculate input variables for their investments, Pham Hai Au, LienVietPostBank’s Deputy CEO, said.
Some local banks have bought analytical software programmes from Reuters Thomson, allowing front and middle offices and market risk offices to track down trading orders at the same time, reducing the risk of cheating among traders, he said.
Banks have enough capital to deal with the risks they may face, Au said, adding that the higher danger of risk, the more capital banks need.
