Developing Derivatives Market in Vietnam

Demand for Derivatives Market Threshold Questions in Developing Derivative Market Framework and Solutions Implementation Process... Demand for Derivatives Market10 years of Stock Market

State Securities Commission

Developing Derivatives Market in

Vietnam

Dr Nguyen Son Market Development Department

Hanoi April 2011

Demand for Derivatives Market

Threshold Questions in Developing Derivative Market

Framework and Solutions

Implementation Process

Demand for Derivatives Market

10 years of Stock Market operation; Early

demand for derivatives market

Derivatives are necessary financial assets in

market development; reflecting market depth

Diversified investment tools, hedging and extra income

In line with market development plan for 2011-2020

Threshold Questions for Developing Derivatives Market

Standardized market or OTC market?

Standardized derivative market at early stage to limit the risk

OTC market will be allowed later Both standardized and OTC

Threshold Questions for

Developing Derivatives Market

Factors when developing derivative market:

Investor need for derivatives

Efficiency in underlying asset market

Clearance and settlement system risks

Accounting for derivative products

Market surveillance/ risk between two markets

Threshold Questions for

Developing Derivatives Market

Market Model in line with market restructuring process:

Two independent exchanges

Holding Company Model with exchanges as subsidiaries

Integrated Exchange (Vietnam Exchange)

Underlying assets: Only Securities or all

other possible assets (Gold, Interest, FX,

Commodity, Securities)?

Threshold Questions for

Developing Derivatives Market

Underlying Assets:

+ Stocks;

+ Bonds;

+ Stock Indices;

+ ETF products

Derivative products:

+ Futures;

+ Options

Threshold Questions for Developing Derivatives Market

+ Physical delivery method: At expiration date, one party delivers the underlying asset and the other party pays cash

+ Cash settlement method: At expiration date, the difference value between contract and market

value is settled in cash

Threshold Questions for Developing Derivatives Market

Underlying Settlement method Foreign ownership

limitation

Comment

Stock - Cash settlement

- Physical delivery

- Foreign limitation (49%) not applicable

- Foreign limitation applicable

- Stocks used as underlying assets should have strong liquidity to avoid manipulating price

Bonds -Cash settlement

- Physical delivery

-No foreign ownership limit

- Not many investors participate in bond market

Index - Cash settlement -Foreign ownership

limitation on shares not applicable

- Overall market index is popular but (i) index components are too many and increases along the numbers of stock listing (ii) not presentable

- New index ETF - Cash settlement

- Physical delivery -Possible foreign

ownership limitation

- ETF is not available in Vietnam

Threshold Questions for Developing Derivatives Market

Investor protection mechanism in default risk

+ Margin (value difference);

+ Security Company Guarantee;

+ Guarantee Fund;

+ Cash as substitution assets

Threshold Questions for Developing Derivatives Market

Investor protection mechanism in market

manipulation:

+ Standardized underlying assets:

= Exchange;

= Trade mechanism;

= Contract size

= Cash as substitution assets;

+ Method avoiding fire sale;

+ Position limit

Threshold Questions for

Developing Derivatives Market

Clearance and settlement in derivatives

market: Central Counter Party (CCP)

- Eligibility for market members (capital, expertise, IT system);

- Master Agreement in derivative legal frame work

Implementing derivatives market in parallel with upgrading IT system (Project 04);

Initial products: derivative on indices (calculating indices for industry group of industries).

- Legal framework:

+ Amendments to Securities Law? + Decree on Derivatives Market;

+ Trading Mechanism

- Supporting tools from underlying assets:

+ Margin + Short Selling

Implementation Process:

+ Working Group (2010);

+ Preparing Decree on derivatives; regulations (2011-2012); + Training (2011-2014).

+ Forming operating system;

+ Start operations: 2013-2014.

Central Counter Party (independent or under VSD);

Calculating indices, indices for industry or group of industries.

THANK YOU!