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THE MAIN DEALERS' RISKS ON STOCK MARKETS
M. Timchenko, student
St. Petersburg university of economics
(Russia, St. Petersburg)
DOI: 10.24411/2411-0450-2019-10732
Abstract. The dealer's activity is always connected with risk. Besides, dealers' activity is directly related to the stock market. In this case, the main risk is a risk of losing money because of internal and external factors associated with securities market. So, this article will answer the question: what kinds of risks are connected with dealers' activity? A paper will be divided on to parts. Firstly, this article will study different types of risk and its factors. Then it will study the International law and practice on stock markets connected with dealer's risks.
Keywords: stock market market, stock market participants, financial risks, dealer risk, dealer.
Life is always connected with risk. We can't even predict wholly what will be tomorrow. If it even changes our live radically, it is also impossible to know what left will be after 5 minutes. This statement is suitable for a stock market, also. Stock market is considered to be a set of economic relations between sellers and buyers of securities - shares. Shares are traded on the stock exchange and over-the-counter. The terms and conditions of trading in shares are governed by the relevant legislation. Securities are special documents corresponding to the requirements established by law and certifying the obligation and other rights, exercising of them or granting is possible with the showing of the securities. Stock market is unpredictable, because stock prices are always fluctuating, and all the analytics are able just to guess what price will be tomorrow by making deep analysis of market situation. At the securities market the emitter, an organization, which produce stocks, sells them to the investors, people or organizations, which buy stocks in a company and get some profit from it. Professional participants of the stock market are organizations, which are providing their specially licensed activity on stock market. All the securities market's existence is based on their work. According to federal law "About stock market" of 22.04.1996 such licensed activity is dealer's activity, broker's activity, activity of controlling the stocks, depository activity, activity of making stockholder register and activity of providing the trade. Dealers are stock market professional participants which buys and sells
stocks, currencies and precious metals; doing its activity on its behalf and use his own money. He plays a role of intermediary between emitter and investor. It is needed to have a special license, which is given by Federal Agency of Financial Markets. According to Russian law (federal law "About stock market" of 22.04.1996) the dealer may be legal entity only. Also, the dealer provides with information his prospective or contemporary clients. The dealer set quotation price. Quotation price is the price of last purchase or selling of the stocks. The dealer's profit consists of spread and special payed commission for its services. Dealer's spread is considered to be the difference between the dealer's purchase price and the sale price. [1] Risk is possibility of occurrence of an adverse event. Dealer's risks are several types of risks, which incur losses for a dealer.
The study of the theory of risk management raises a number of difficulties associated with the presence of a significant number of scientific works offering many classifications. It should be recognized that in the economic literature devoted to the problems of entrepreneurial risk, given the variety of descriptions of risks, there is no coherent system of their classification. However, in 2000, special attention was paid to the problem of the risk nature of broker-dealer activity. The problem was developed by the doctor of economic sciences Ya.M. Mirkin, the International Association of Securities Commissions (IOSCO), has set up risk management and brokerage committees within the framework
of the National Association of Stock Market Participants. [2] This article considers the main types of risks associated with dealer activities: credit risk, liquidity risk, market risk, operation risk and political risk. [3]
- Credit risk is determined by the borrower's credit capacity and creditworthiness. So, it's the measure of the borrower's solvency. Typical kinds of this risk are the borrower's potential inability to fulfil obligations in time, like dividend payments, interest rate payments, repayments, etc. This risk can be estimated with the help of ratings, a scale for evaluating the solvency of the borrower. The rating is published by the recognized rating agencies, ranging from "AAA" (best credit rating) to "D" (worst credit rating). The higher the credit risk is - the lower the corresponding rating is and the higher is the interest rate paid on a financial instrument. A deterioration of solvency or the complete insolvency of the borrower entails at least a partial loss of the invested capital.
- Liqidity risk - the degree to which it may not be possible to sell an investment easily in order to get cash. In other words, it is the risk of losing liquidity. Liquidity is possibility of dealer to provide its work by his own money and making profit. Liquidity risk occurs when an individual investor, business or financial institution cannot meet short-term debt obligations. The investor or entity may be unable to convert an asset into cash without giving up capital and/or income due to a lack of buyers or an inefficient market. Therefore, company losses its money, terminate to accomplish its obligations and paying debts and goes bankrupt.
- Market risk is potential fluctuation in the value of a financial instrument or actives. If the potential value of the financial instrument drops, the assets shrink. It can be caused by fluctuating price on some resources. Market risk is usual for resource sphere, such as oil producing. When the oil price goes down, the assets of oil companies making less profit.
- Operational risk summarizes the risks a company undertakes when it attempts to operate within a given field or industry. Operational risk is the risk not inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and
systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems. There are examples of operation risk: cyber risk and data security, organizational changes and conduct risk. An overwhelming number of risk managers ranked the threat from cyber-attacks as their top operational risk for 2017 - the second year in a row it has topped the rankings, this year by an even larger margin. It is therefore possible that dealers' activity is threatened. And this is no surprise as the threat from cyber-attacks is not only growing, but also mutating into new and insidious forms, say risk practitioners.
- Investments abroad are subject to political risk. Insecure political, economic, and social circumstances in another country may have negative effects on all borrowers situated in that country. Country risk as finance form of exchange rate risks and transfer risk can impede or entirely prevent the international movement of payments or capital. There is also a risk that political or foreign exchange measures may prevent or aggravate the realization of investments or the payment of interest and dividends. Problems may also occur when settling orders. In the case of foreign currency transactions, such measures may also entail that the foreign currency is no longer freely convertible. For example, the prospect of a so-called hard Brexit, including a departure from the European single market, as outlined in UK prime minister Theresa May's January 17 speech, will have serious implications for the financial services industry, with London home to the European headquarters of most of the world's top banking, insurance and asset management companies.
The above classification of the financial risks of the securities market shows that there are many risks and their influence on the work of professional participants of the stock market can be called key and therefore decisive. It should be emphasized that the activities of professional participants in the securities market are associated with a system of financial risks. However, the combinations of these risks and the degree of influence on their activities may differ significantly. As each of these participants of the stock market has a certain specific feature, it is necessary to
study the financial risks that directly determine the work of each particular type of professional activity.
The problems of international legal regulation of insurance of financial risks in the securities market and financial services are quite new and underdeveloped for Russian legal science and practice. However, legal science is actively exploring these problems from the point of view of business law, contract law, legal regulation of multi-industry contracts, including contracts in the financial services market. [4]
Basel Committee on Banking supervision was established in 1930 to help to overcome the Great Depression crisis. It creates recommendations for banks and participants of stock market to avoid risk and reduce its effects. Their recommendations are widely used by dealers. They provide reunions of scientists and publish result of their research. One of them is called: "Operational risk control with BASEL II". Operational risk entails the occurrence of reputational, legal, strategic risks, which, in turn, are associated with such key banking risks as credit risk and liquidity risk. In this regard, each financial intermediary must create an operational risk management system and give it the proper significance. This book was published at 2004 and still used. According to this paper regulatory capital is a "Life jacket" for expected risks. Also, economic capital essentially corresponds to unexpected risks. Share capital is permanent. A common criterion for determining the composition of bank capital is the ability of its elements to serve as an insurance fund in case of unforeseen losses. This requirement is met by the elements that are of the most constant nature. The fixed capital includes elements of the highest quality. Additionally, capital include elements that are less permanent in nature, which can be used to cover unexpected losses. Furthermore, there is an international economic organization of developed countries that recognize the principles of representative democracy and a free market economy called «Organization for Economic Co-operation and Development» (OECD). This organization responding to the crisis by changing primary market
and Portfolio risk Management in their jurisdiction. Also, OECD invented a new method of regulation of international money action and securities too. expanded the list of operations that can be performed in relation to their foreign bank accounts in the countries of the Organization for Economic Cooperation and Development (OECD) and the Financial Action Task Force on Money Laundering (FATF). Now it is possible to transfer to the foreign bank account - no matter whether it is open in the FATF country and the OECD or not - funds from the accumulated interest income, the payment of which is stipulated by the terms of the issue of foreign securities owned by the individual. As well as other income on foreign securities (dividends, payments on bonds, promissory notes, payments while reducing the authorized capital of the issuer of an external security). But the most important thing is the fact that the organization periodically compiles and publishes statistical data in order to determine the investment strengths of leading economies, primarily among OECD member countries, as well as beyond ones. Obviously, it especially helps to reduce risk possibility during securities practices.
Dealer risk is a serious problem in the modern stock market, due to the fact that an insufficiently developed risk management system in dealer activity can have a negative impact not only on the company itself, but also lead to a domino effect on the market. Moreover, broker-dealer companies are subject to such risks as: credit risk, liquidity risk, market risk, operational risk, and country risk. In this regard, the company must clearly represent the possibility of manipulating income and expenditure items, as well as be able to use risk minimization methods: setting limits for the performance of margin trading, provision of custody services, insurance. A large proportion of the risks involved in the implementation of margin trading. The most important is the assessment of systemic risk and liquidity risk. But, since the dealer company is not able to control and reduce systemic risk, it is advisable to pay more attention to liquidity risk assessment.
References
1. http://www.iosco.org/ - The International Organization of Securities Commissions
2. Vilkova TB Brokerage activities in the securities market .: Tutorial. M.: Financial Academy under the Government of the Russian Federation. M., 2008. 114 p.
3. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263- 291.
4. Objectives and Principles of Securities Regulation, IOSCO; sep. 1998, Foreword and Executive Summary
ОСНОВНЫЕ РИСКИ В ДЕЯТЕЛЬНОСТИ ДИЛЕРОВ НА ФОНДОВЫХ РЫНКАХ М. Тимченко, студент
Санкт-Петербургского экономического университета (Россия, г. Санкт-Петербург)
Аннотация. Работа дилеров всегда связана с риском. Кроме того, деятельность дилеров напрямую связана с фондовым рынком. В этом случае основным риском является риск потери денег из-за внутренних и внешних факторов, связанных с рынком ценных бумаг. Итак, эта статья ответит на вопрос: какие риски связаны с деятельностью дилеров? В первую очередь, в этой статье будут описаны различные виды рисков и их основные факторы. Затем мы более подробно поговорим о значимости международного права и наглядно рассмотрим примеры дилерских рисков на фондовом рынке.
Ключевые слова: рынок ценных бумаг, участники фондовых рынков, финансовые риски, дилерский риск, дилер.
