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Risk Management Framework

Risk Management Framework
The coverage of KGI Securities’ risk management framework mainly includes market risk, credit risk, liquidity risk, operational risk and legal risk arisen from the business activities.

To establish or amend risk management policies, procedures, guidelines, or product programs, the responsible unit needs to seek advice and comments from related departments for the draft. Compliance department then examines the appropriateness and legality of the draft before submitting to MRRPC for further review and discussion.

Risk Management Mechanism
The risk management processes of the Company include risk identification, risk measurement, risk monitoring and management, and risk reporting. The assessment and control strategies of key risks are as follows:

1. Market Risk
The Company controls and manages its market risk based on risk indicators and risk limits. The key risk indicators and limits include but not limit to notional amount, risk factor sensitivities, Value at Risk, and stop loss limits. The Risk Management department prepares market risk reports to each business unit head and the Chairperson of MRRPC on a daily basis and reports market risk status, along with stress testing results, to MRRPC periodically.

2. Credit Risk
The Company controls its credit risk by dividing the issuers and counterparties into tranches based on their credit rating and setting limits accordingly. The Risk Management department regularly reviews and monitors the credit worthiness of the counterparties and the issuer risk of the holdings.

As for foreign financial institution counterparties, the Risk Management department monitor their credit default swap spreads on a daily basis. For over-the-counter transactions, the Risk Management department calculates and controls their pre-settlement risk (PSR) and prepares PSR summary reports to each business unit head and the Chairperson of MRRPC on a daily basis.

For existing and upcoming fixed income positions, the Company manages and controls credit risk by monitoring the risk exposure in relation to each credit rating tranche, position concentration, as well as industry sector diversifications. The Risk Management department reports the credit risk status of counterparties and security holdings to COPC periodically.

3. Liquidity risk
The Treasury department manages funding liquidity risk through arranging diversified funding sources and time schedule of futures cash flows.

The Treasury department regularly reviews related financial ratios in order to maintain the liquidity of asset and liability. In addition, it performs cash flow simulation scenario analysis based on the forecast of business units’ liquidity needs and the Company’s funding capacities. Contingent funding plan is also prepared to meet possible future funding requirements.

Risk Mitigation Strategy
The Company determines the hedging instruments as well as hedging mechanism of each business unit based on the capital size and risk tolerance. To control the risks within approved level, the Company could choose to assume the risks, avoid the risks, transfer the risks, or hedge the risks. In practice, the Company manages risks by using authorized financial instruments according to market dynamics, business strategies, product characteristics, and risk management requirements.