Enhancing Risk Control to Unleash Potential of High-Quality Brokers

Recently, according to the website of the China Securities Regulatory Commission (CSRC), in order to further improve the risk control index system of securities companies, promote the implementation of comprehensive risk management requirements by securities companies, enhance the quality and efficiency of serving the real economy, and promote the high-quality development of securities companies, the CSRC has revised and issued the "Regulations on the Calculation Standards of Risk Control Indices for Securities Companies," which will officially come into effect on January 1, 2025.

According to the CSRC, this revision of the risk control index calculation standards for securities companies is an important measure to implement the central financial work conference's requirements for comprehensively strengthening financial regulation and enhancing the service capabilities of investment banks. It strengthens regulatory guidance in four aspects. First, comprehensive risk coverage, incorporating all business activities of securities companies into the scope of risk control index constraints, enhancing the completeness of the risk control index system, and consolidating the foundation of risk control. Second, prudent and strict regulation, strictly setting risk control index calculation standards for innovative businesses and businesses with higher risks, guiding securities companies towards a capital-intensive, specialized, and steady development path. Third, strengthening risk management, reasonably improving the calculation standards based on the risk management level of securities companies, business risk characteristics, and term matching, enhancing the scientific and effective nature of risk control indices. Fourth, promoting the function of securities companies, guiding them to optimize business structure and asset allocation, increasing efforts to serve the real economy and residents' wealth management, improving capital use efficiency, and becoming an important force in promoting the healthy, stable, and high-quality development of the capital market.

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The CSRC has revised the risk control index calculation standards for the securities industry around four directions: comprehensive risk coverage, prudent and strict regulation, improving the rationality of indices, and promoting the function of securities companies. The adjustment and optimization of risk control index calculation standards show the regulatory authority's determination to actively promote high-quality securities companies to achieve high-quality development while ensuring comprehensive and effective risk regulation in the securities industry, which will have a positive and far-reaching impact on the market and institutions.

First, optimizing risk control indices is beneficial to the high-quality development of securities companies. The CSRC supports high-quality securities companies that comply with regulations and are stable by setting risk control index classification adjustment coefficients, moderately improving capital use efficiency, and better providing comprehensive financial services to the real economy. The revised "Risk Control Index Regulations" optimize and improve the risk control index calculation standards for securities companies' investment in stocks and market-making businesses, helping to guide securities companies to exert efforts in investment, financing, and trading, fully playing the roles of long-term value investment, serving the real economy's financing, and serving residents' wealth management, providing high-quality financial services for economic and social development. The optimized risk control indices are more scientific, effective, and directive. Securities companies refer to risk control indices, match terms based on business risk characteristics, and improve risk management levels, promoting securities companies to increase efforts in serving the real economy and residents' wealth management, enhancing the initiative and effectiveness of comprehensive risk management, and laying a good foundation for enhancing investment banking service capabilities. At the same time, strengthening capital constraints on key businesses reflects the regulatory orientation of strict regulation, firmly holding the bottom line of not occurring systemic risks.

Second, releasing funds helps securities companies expand capital space. The risk control indices for high-quality securities companies are appropriately optimized, appropriately adjusting the risk capital preparation adjustment coefficients and on- and off-balance sheet asset total conversion coefficients for securities companies that have been in the forefront of classification evaluation for three consecutive years, differentially enriching available stable funds, and supporting high-quality securities companies to moderately expand capital space. Thereby, guiding securities companies to optimize business structure and asset allocation, allowing high-quality securities companies to have greater flexibility in using funds, high-quality securities companies' net stable funding ratios and capital leverage ratios are relatively under pressure due to rapid business development, benefiting from the optimization of risk control standard calculations, improving capital use efficiency, and opening up the upward space for ROE. Improving capital use efficiency, high-quality securities companies are expected to achieve "higher benefits and better performance," thereby releasing hundreds of billions of funds for high-quality securities companies, enhancing the vitality of leading securities companies, increasing market liquidity, and activating capital market transactions.

Third, differentiated regulation is conducive to securities companies "doing big and strong." Compared with the "reform and transformation" of the capital market, there is still a significant gap between the "scale" of domestic securities companies and overseas investment banks. "Doing big and strong" is an urgent task for securities companies, and improving the capital use efficiency of high-quality securities companies lays the foundation for them to "do big and strong." Regulatory policies guide the capital-intensive development of securities companies, encouraging them to grow big and strong through mergers and acquisitions, and against the backdrop of increasing industry profit differentiation, the process of supply-side structural reform in the securities industry is expected to accelerate. The optimization of the risk control index system moderately relaxes capital constraints on leading securities companies and further improves their use of forms, promoting the Matthew effect in the securities industry, accelerating supply-side structural reform, and it can be foreseen that leading securities companies will "do well and strong" through mergers and acquisitions and other means in the future, accelerating the industry's supply-side structural reform.

In the long term, by relaxing the risk capital preparation adjustment coefficients and on- and off-balance sheet asset total conversion coefficients for high-rated high-quality securities companies, the capital space of high-quality securities companies can be expanded, and the higher the rating of the securities company, the greater the benefit. This systematically encourages securities companies to operate steadily, standardly, and compliantly in the long term. The revision of securities company risk control indices has broadened the capital space for high-quality securities companies and improved capital use efficiency. It is worth mentioning that optimizing risk control indices opens up the space for securities companies to increase leverage ratios, enhancing the ability to activate the capital market and encouraging high-quality securities companies to grow big and strong on the path of capital-intensive development, better playing roles in long-term value investment, serving the financing of the real economy, and serving residents' wealth management.