| In the early1970s, derivative financial instrument has been cast a veil of mystery with the lack of knowledge on the derivative financial market. With the collapse of the Bretton Woods system, the oil crisis, the first derivative financial instrument--foreign currency future has been developed on the market gradually. After30years of rapid development, derivative financial market has undergone amazing changes, and its size has far exceeded the size of stock market or bond market. However, derivative financial instrument receive too much praise and too much blame. Since the mid-1990s, many companies use derivative financial instrument improperly, so finally their businesses have closed down. People start paying attention to derivative financial instrument—"a sharp double-edged sword" from these painful lessons. Effective internal control system is essential for preventing and responding the risk of derivative financial instrument. Because of derivative financial instrument’s risk, such as complexity, the traditional method of internal control is difficult to adapt the need of derivative risk management. Therefore, it is necessary to understand the basis knowledge of derivative financial instrument in order to establish a sound and effective internal control system.In our country, with the improvement of China’s financial liberalization and financial deepening, especially China has joined the WTO formally, derivative financial instrument has been developed steadily and rapidly, more and more bank-based financial institutions use derivative financial instruments to manage the assets, liabilities, avoid risk, increase revenue and improve the derivative trading services to customers. More and more companies are involved in trading the derivative financial instruments in order to manage the risk positively. However, financial institutions and other enterprises have problems in the internal control of derivative financial instruments. It is difficult to meet the need for risk management of derivative financial instruments. In recent years, our country outbreak loss events continuously, such as China Aviation Oil Singapore, the State Reserve copper, CITIC Pacific, Air China, China Eastern Airlines, they all engaged in derivatives transactions, the root reason is that they lose internal control system rather than the enormous market risk of derivative financial instruments. As for regulatory authorities, they should draw the actual internal control guidelines, as for companies who engage in derivatives transactions, it is more important to execute the internal control relevant norms strictly.This paper is based on theoretical analysis. Currently, China’s enterprises who engaged in derivative financial instrument are latter than Western countries, and there are weakness in our internal control system in derivative financial instruments.This paper analyzes the internal control problems in derivative financial instruments, Including the execution of the internal control system, lack of basic control system, business professional incompetence, and analyze these problems from the five elements of internal control system. Based on the above analysis and draw on the successful experience of JP Morgan Case in derivative financial instruments, we proposed the internal control recommendations of derivative financial instruments, including create a good internal control environment, improve the effectiveness of internal control activities in derivative financial instruments, strengthen the internal and external communication of information, strengthen the supervision of the internal control for derivative financial instruments.This paper is divided into five parts, each part as follows:the first part introduce the research background and significance, literature review, research methodology and the article framework; the second part introduce the basic theory of internal control of derivative financial instrument, the third part introduces the successful experience of the JP Morgan Case; the last part put forward some suggestions for the internal controls of derivative financial instruments. |
