Risk management systems are an essential component of securities companies’ strategic management, and they must include the key elements that enable the company to identify, analyze, measure, and evaluate risks, manage them, and implement appropriate follow-up mechanisms to ensure protection against them.
What mechanism is used to manage risks in securities firms?
A lawyer specializing in securities issues at RHR Law Firm explains the answer to this question.
According to Chapter Six (Internal Policies and Procedures of the Authorized Person) of the Executive Regulations of the Law Establishing the Capital Markets Authority and Regulating Securities Activity, a securities company’s risk management policy must include the applicable mechanism of risk management as follows:
First: There is credit risk, which is the potential risk of being exposed to a counterparty’s failure to fulfil its obligations. The company must establish policies and procedures that govern how it manages credit risks within the framework of risk management systems, with a maximum amount of exposure to one party determined and evaluated on a regular basis. Also, explain the procedures that will be followed if this limit is exceeded.
Second: Market risk refers to the possibility of being exposed to fluctuations in the market value of assets. The company must establish policies and procedures that govern how the company manages the market risks to which it is exposed in various circumstances, as well as the methods used to measure these risks.
Third: Liquidity risk refers to the possibility of not having enough cash to meet the securities company’s obligations when they become due. The company must establish policies and procedures that govern how it manages the liquidity risks to which it is exposed, as well as liquidity management methods that allow it to deal with these risks in unexpected circumstances.
Fourth: Operational risks include the possibility of financial, administrative, or technical system failures, as well as human errors. The company must establish policies and procedures that govern how the company manages and categorizes the operational risks to which it is exposed, based on the nature of the company’s work.
Fifth: Determining the methods for measuring and categorizing the various risks to which the company is exposed, as well as the policies and procedures in place to manage them.
Every six months, the company’s risk management official must submit a risk report to the board of directors and provide a copy to the Capital Markets Authority. The management is in charge of approving the internal policies and procedures for risk management in the company considering to ensure the determination, classification, management and control permanently as required.
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