IBM Corp. is building a risk management system for Guotai Junan Securities in collaboration with Algorithmics, a Toronto-based provider of enterprise risk solutions. IBM says that the risk system for the Shanghai-based brokerage is its first for a Chinese securities firm.
Implementation has begun, according to Colin Lawrence, IBM’s China risk management leader. “The first phase will be finished by around the end of February,” he added.
“The new system will help Guotai Junan to prepare for the future, when the index futures will be traded” on the Shanghai Stock Exchange (SSE), said Lawrence. Chinese regulators have said that financial futures, initially scheduled for late 2006, will begin trading this year on five exchanges.
With the IBM system, Guotai Junan–which has the highest revenues among the country’s 112 securities firms, according to SSE–will be able to evaluate the risks associated with any asset class, Lawrence said.
IBM and Algorithmics will also provide management consulting on how best to set limits for traders, trade index options and create operational structures. Lawrence said that IBM already has a risk management team in China working with the brokerage.
“For local securities firms, foreign experience in the field of risk management is more important than the systems themselves,” said Xie Yan, an analyst with Shanghai-based Hai Tong Securities. “Although there are some local technology companies supplying risk management systems for financial institutions, they are still far away from international vendors in operational experience.”
Foreign products also come with higher price tags, he added. Although IBM and Algorithmics declined to say how much the Chinese brokerage paid for the risk platform, Yan noted that such systems can cost tens of millions of yuan–millions of U.S. dollars–“which many small securities firms can’t afford.”
However, good risk management will help companies survive China’s turbulent markets, said Yan. Over the past couple years, Chinese regulators have worked to improve risk management at local brokerages, closing down badly managed firms and increasing customer safeguards.
“Risk management, internal controls and compliance will be some of the most important business aspects of the Chinese securities industry in the years to come,” Feng Zuo, chief compliance officer of Guotai Junan, said in a statement. “To compete in this environment, Guotai Junan Securities needs to speak the international language of risk management.” Zuo said his firm, which has long been planning to enhance its risk systems, chose IBM because of its international standards.
“On the traditional brokerage business side, the risks are mainly operational,” said IBM’s Lawrence. “The risks that we are more interested in are the risks from the buying and selling activities on the behalf of the securities firms’ own capital or their customers.”
China’s qualified domestic institutional investor (QDII) program “requires securities firms in China who wish to invest in derivatives and the overseas capital markets to establish a sound internal risk management process,” said Andrew Aziz, EVP of risk solutions at Algorithmics. “The China Securities Regulatory Commission is pushing for all financial institutions to adopt more robust risk management processes.”
Aziz said that Guotai Junan’s new system will allow the firm to comply with the QDII directive, enabling it to trade more complicated products and outside the mainland.
Algorithmics has three clients in China, according to Aziz. Its first client, state-owned China Construction Bank, uses its Algo Credit Exposure and Algo Credit Limits products to help measure and manage counterparty credit risk, and to view consolidated risk exposures across the whole enterprise.
The company will continue to work with IBM. “Algorithmics and IBM will cooperate in expanding their joint risk services into Asian markets in general and into the Chinese market in particular,” said Aziz. “As more and more Chinese securities firms move to comply with the QDII directive, Algorithmics sees a key opportunity to expand its presence in this important market.”