The risk management division is responsible for managing the risk control system, setting parameters and verifying in processing orders and or instructions, both for the interests of customers and for the interests of the Company, and carrying out securities transactions with the following provisions:
The risk management division is required to prepare Standard Operating Procedures, related to securities transactions carried out for the benefit of the Company or affiliated parties, such as shareholders, members of the Board of Directors, the Board of Commissioners and employees of the Company, and report the said securities transactions to the compliance division.
The Objectives and Policies of Financial Risk Management
The Company manages capital aimed at ensuring the Company's ability to continue its business in a sustainable manner and maximizing returns to shareholders through the optimization of debt and equity balances. To maintain or achieve an optimal capital structure, the Company can adjust the amount of dividend payments, reduce capital, issue new shares or repurchase outstanding shares, obtain new loans or sell assets to reduce loans.
The Company is also required to maintain the minimum net working capital requirements as stated in BAPEPAM and LK Regulation No. V.D.5, which among other things determines Net Adjusted Working Capital for Securities Company operating as an intermediary for securities trading, investment managers and underwriters of Rp. 25 billion or 6.25% of total liabilities, whichever is higher. If this is not monitored and adjusted, the level of working capital in accordance with regulations can be below the minimum amount set by the regulator, which can result in various sanctions ranging from fines to the cessation of some or all business activities. To overcome this risk, the Company continues to evaluate the level of working capital requirements based on regulations and monitor the development of regulations regarding Net Adjusted Working Capital that is required and prepare for an increase in the minimum required according to regulations that may occur from time to time in the future. The Company has complied with the Net Adjusted Working Capital requirements on December 27, 2019.
The Company is also required to have paid up capital above the provisions stipulated by Decree of the Minister of Finance No. 179 / KMK.010 / 2003 concerning share ownership and capital of securities companies. On December 27, 2019, the Company fulfilled these requirements.
The Company has documented its financial risk management policies. The policy set is a comprehensive business strategy and risk management philosophy. The overall risk management strategy of the Company is aimed at minimizing the influence of uncertainty faced in the market on the Company's financial performance. The Board of Directors determines the written policy on financial risk management as a whole through the input of audit committee reports.
The Company operates domestically and faces various financial risks, including liquidity, market prices, loans and interest rates. The Company's funds and interest rate exposures are managed by the Company's financial function in accordance with the policy framework approved by the audit committee. The framework describes the risks to the Company and the steps that will be taken to manage risk.
Market Price Risk
The Company's exposure to market price risk arises from counterparts that fail to meet their obligations or through trading errors and other errors. In trading transactions on the stock exchange, the Company acts as the principal and then transfers the contract to the customer. Failure of customers to accept trade will expose the Company to market price risks.
The company also faces market price risks related to available-for-sale investments. To manage the price risk arising from this investment, the Company diversifies its portfolio.
Interest Rate Risk
Cash flow interest rate risk is the risk of future cash flows for financial instruments that will fluctuate because of changes in market interest rates. The fair value of interest rate risk is the risk that the fair value of financial instruments will fluctuate because of changes in market interest rates. The Company is faced with various risks related to fluctuations in market interest rates.
Financial assets and liabilities that are potentially affected by interest rate risk mainly consist of time deposits, trade in maturing debts and loans from financial institutions. The Company monitors changes in market interest rates to ensure that the Company's interest rates are in line with the market.
Credit risk is the risk of loss that will be experienced by the Company, if the customer or the counterparty fails to fulfill contractual obligations. The Company does not have a significant credit concentration risk. The Company manages and controls credit risk by setting limits on the amount of risk to be received, the level of collateral and by monitoring exposures related to these limits.
The Company's credit risk exposures relate to the activities of associated stock brokerage in customer contractual positions that arise during trading. As such, the Company needs guarantees to reduce these risks. The types of instruments received by the Company for collateral can be in the form of cash and securities listed on the exchange.
Management has established a liquidity risk management framework for managing short, medium and long term funds and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and loan facilities, by continuously monitoring plans and realization of cash flows by matching the maturity profile of financial assets and financial liabilities.