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Risk Management  
HNFHC. Hua Nan Commercial Bank
Huanan Securities Co., Ltd.    
An independent risk management division is responsible for risk management for each of HNFHC's subsidiaries. Besides implementing risk policies, risk control methods and commissioning risk reports, the Risk Management Department, in an effort to integrate a risk management mechanism for subsidiaries, will focus on three areas: quantifying risk measurements, centralizing risk management and rationalizing risk returns. The ultimate goal in risk management for the financial holding companies is to seek the maximization of shareholders value via the risk capital/economic capital allocation among subsidiaries.
Categories of Risk Management
HNFHC and its subsidiaries detail risk management categories for areas of operation within and outside of its balance sheet, such as credit risk, market risk, liquidity risk, sovereign risk, operating risk, legal risk and information risk.
Policy Objectives
The goal of HNFHC's risk management is for the parent company and subsidiaries to recognize, measure, monitor and control all risks in all areas of operation. Risks are to be controlled within an acceptable level in all areas. HNFHC intends to rationalize risk return of the group under the circumstance that the group's risk capital is maintained at a level greater than risk assets.
Methods to Control Risk
HNFHC and its subsidiaries set operational rules governing relevant risk factors for every business according to the risk management policy and guidelines of the company. These operational rules are set based on the type of operation and include risk limits setting, periodic position review, and risk indicator/alarm mechanism establishment. Risk measurement and back-testing are performed in a quantitative way.
Risk Reports
The risk management divisions of HNFHC and its subsidiaries produce real-time, daily or regular risk management reports to various level of managers based on the type of operation. In addition, the board of directors is regularly briefed on the state of risk management. By doing so, managers and board members can determine whether risk management is within an acceptable level and taken into consideration when making decisions.
5. Three Major Objectives for the Future
Quantifying Risk Management
HNFHC will assist subsidiaries in creating advanced risk measurement techniques. Value at Risk (VaR) techniques will be instituted in the risk management systems of all subsidiaries. In principle, VaR techniques are easier to implement in mature capital markets. With consideration to local conditions, HNFHC's VaR techniques will be developed in phases. In the near term, simplified VaR methods will be established. In the medium and long term, VaR techniques will be implemented according to the New Basel Capital Accord (or Basel II) standard. The methodology adopted for each subsidiary will vary based on the different types of risk. For example, credit risk will focus on Probability of Default and Recovery Rate and the estimated VaR related to such. Market risk will focus on estimated VaR based on changes in the market price of various positions and related risk data. If the holding company encompasses life insurance operations in the future, VaR can be applied to insurance policy risk, including interest rate risk and underwriting risk. While operations risk is a quantifiable risk, other risks, such as strategic risk, liquidity risk, and legal risk cannot be estimated according to the VaR technique. In these cases, other means will be adopted to quantify risks.
Centralizing Risk Management
Advanced risk measurement techniques must be established in a rational management structure in order to be effective. Advanced risk estimation relies on the analysis of large amounts of information, while a rational management structure depends on the understanding of risk among managers, who combine this with company operational strategies. The concentration of management aids in reaching this goal. Another purpose of concentration is to assign risk to units that have the ability to manage risk. After risk is estimated precisely and concentrated in the hands of risk managers, active management of risk can be undertaken. Active management includes the reallocation of assets to maximize risk returns.
Rationalization of Risk Returns
The VaR of all operations will be transformed into risk capital, which will be borne by the unit that undertakes the risk. This will directly force each division to calculate risk costs as a portion of business costs, and it will impact decision-making. In addition, it will gradually improve the return on assets and return on equity of each subsidiary. In order to combine the interests of managers and shareholders, HNFHC is planning to implement a shareholder value added management framework to each subsidiary, which makes the mission of managers to create shareholder value.
Hua Nan Commercial Bank
Categories of Risk Management
Hua Nan Bank institutes risk management for all operations that are listed both on and off the balance sheet, including credit risk, market risk, liquidity risk, operational risk, legal risk and sovereign risk.
Methods of Risk Management
Hua Nan Bank's risk management methods are based on policies and directives set by the parent company. Areas that are targeted include deposits, loans, foreign exchange, international banking and investment operations, with each having specific guidelines concerning the evaluation and management of risks. Risk limitations, trading limits, risk indicators and an early warning mechanism have been introduced. In addition, evaluations and auditing of various risk positions are undertaken to ensure that risk is controlled within an acceptable level.
Risk Reports
Hua Nan Bank produces real-time, daily or regular risk management reports, based on the type of operation, to various levels of managers. In addition, the board of directors is regularly briefed on the state of risk management. By doing so, managers and board members can determine whether risk management is within an acceptable level and can put into consideration when making decisions.
Huanan Securities Co., Ltd.
Huanan Securities Co., Ltd. risk management methods are as follows:
Broking Division
The risk management office leads efforts. The auditing office audits all broking units on their operations, with the focal point primarily being designated securities and specific clients. The audits examine the credit risk, market risk, and liquidity risks associated with credit trading by clients and with specific stocks to ensure effective management. On-line management systems monitor activities during trading hours, and various reports are printed after trading hours for review in order to reduce trading risks. Employees are required to respect various securities trading laws and the handling of disputes to prevent the company from facing any penalization that would impact normal operations.
Dealing Division
Dealing Division supervisors examine market conditions and propose investment limits to the Asset and Liability Management Committee. These reports are given to the president for review, who then forwards them to the board of directors for approval. They set daily net purchase or net sale limits, and limit the cost associated with a single stock to no more than 15% of total authorized limit. A proposal must be made to the president should these limits need to be expanded. Traders can buy core holdings only after approval from the Investment Strategy Committee. Profits and losses are computed on a daily basis after the close of trading. Related data is reviewed once a month. Stop-loss selling must be executed should losses reach 20% of the cost of a single stock. Exceptions can be made, but only after approval from the president.
Underwriting Division
Stock that the company has purchased in the underwriting process must be sold should its share price fall by 10%. Exceptions can only be made after approval from the president, but continued monitoring of the case is carried out. The amount of stock purchased to underwrite cannot exceed limits set by securities regulations.
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