The situation of repurchase agreement procedure at PetroVietnam Finance Corporation and recommendation for future development

Vietnam is a developing country and on process of modernization and industrialization. There are plenty of potential sources to make investment. Therefore, it is really challenging for any investment institutions to decide where to put funds on. PetroVietnam Finance Corporation under the control of Vietnam National Oil and Gas Group is one of the leading investment institutions. Strategic development of the petroleum industry from 2015 to 2025 will quickly make PetroVietnam Finance Corporation or PVFC the most essential Industry-Finance-Commerce Group, which completely develops activities in domestic and abroad. With the prestige and scale of PVFC, it can approach various sources of fund with large volume, specifically capital investment, equity and also various trust funds. It also helps PVFC a great deal in diversification on the capital market and always gets funds from an available source even when market is bad. Nevertheless, in the current context of economic integration and Vietnamese economies in general, the investment climate in has many opportunities as well as challenges. In detail, for the securities market of Vietnam, securities investment also faces a greater challenge. In addition, the problem of managing capital is also worth mentioning. Therefore, to manage portfolio and capital effectively as well as archive strategic goals of PVFC in the finance sector is extremely important. Repurchase agreement transaction is one of the most developed investment activities of PVFC due to its benefit to the investor and the Corporation. However, some limitations and risks still present along with the systematic risks associated with securities. On financial markets, this kind of transaction is developing and plays an important role as in the way that investors can be more active and flexible in choosing the tools to participate the market. Eventually, after taking careful consideration about the usage of repurchase agreement, I’ve chosen “The situation of repurchase agreement procedure at PetroVietnam Finance Corporation and recommendation for future development” as my graduation thesis.

TABLE OF CONTENTS

ABBREVIATIONS

LIST OF TABLES AND FIGURES

EXECUTIVE SUMMARY

INTRODUCTION

1 Rationale

2 Research objectives

3 Research methodology

4 Research scope

5 Research structure

CHAPTER 1: THEORETICAL FRAMEWORK 1

1.1 Securities trading 1

1.1.1 Concept of securities trading: 1

1.1.2 Risks incurring in securities trading 1

1.2 Repurchase agreement operation 3

1.2.1 Concept of repurchase agreement operation: 3

1.2.2 Uses of repurchase agreement transaction 4

1.2.3 Types of repurchase agreement transaction 6

1.3 Vietnam securities market 9

1.3.1 Concept of Vietnam securities market 9

1.3.2 Role of securities market: 15

Chapter 2: CURRENT SITUATION OF REPURCHASE AGREEMENT PROCEDURE AT PVFC 19

2.1 Overview of PetroVietnam Finance Corporation, Ho Chi Minh City Branch and investment department 19

2.1.1 Foundation history and development of PVFC 19

2.1.2 Function, mission, power and obligations of the corporation 20

2.1.2.1 Functions: 20

2.1.2.2 Power and obligations: 20

2.1.3 Businesses: 21

2.1.4 Overview of PVFC – Ho Chi Minh City Branch 22

2.1.4.1.Historical foundation, function and mission of the branch: 22

2.1.4.2 Organizational structure: 24

2.1.4.3 Business performance in period from 2005 to 2009 25

2.2 Current situation of repurchase agreement procedure at PetroVietnam Finance Corporation 26

2.2.1 Procedure of repurchase agreement of PVFC 26

2.2.1.1 Conditions conducting repurchase agreement 26

2.2.1.2 Procedures implemented securities trading period 29

2.2.1.3 Repurchase agreement contract (Repo contract): 33

2.2.1.4.During the time of contract performance: 39

2.2.1.5.Handling maturity contract 41

2.3 Evaluation of repurchase agreement procedure: 43

2.3.1 Current achievement: 43

2.3.2 Limitation and reason 45

2.3.2.1 Inefficient securities assessment and stock picking: 45

2.3.2.2 Valuation of securities: 46

CHAPTER 3: ENHANCING THE REPURCHASE AGREEMENT PROCEDURE AT PVFC 47

3.1 Orientation for future development of PetroVietnam Finance Corporation 47

3.2 Solution for PetroVietnam Finance Corporation 48

3.2.1 Using fundamental analysis to make assessment of securities: 48

3.2.2 Valuation of securities 52

3.3 Recommendation 55

3.3.1 Recommendation to State Securities Commission 55

3.3.2 Recommendation to government 56

3.3.2.1 Better implementation of auditing process 56

3.3.2.2 Supporting SSC in the information collecting operation and regulating the repo operation 57

3.3.2.3 Standardize the legal framework 57

3.3.2.4.Controlling the fluctuation of interest rate: 58

CONCLUSION 59

REFERENCES 60

PVFC: PetroVietnam Finance Corporation

Repo: repurchase agreement

SSC: State Securities Commission

LIST OF TABLES AND FIGURES

Figure 2.2 Business performance of Ho Chi Minh City branch in the period of

2005-2009

25

Tables

Table 1.1 Key indicators for the STC over the period of 2000-2005 12

Table 2.2 Business performance report in period from 2005 to 2009 25

Table 2.5 Comparison of SSG with a target number of units of the same

industry

31

Table 2.7 Comparing the competitive advantages of repo over regular loan 44

EXECUTIVE SUMMARY

Investment activities are one of the most beneficial activities for any companies

Nowadays investment activities are attracting more and more participations from everyclass of society such as: businessmen, workers, housewives and even students.Investment institutions are also trying to broaden types and applications of investmentactivities in order to efficiently supply the demand of as many customers as possible.One of the most developed and recent kind in Vietnam is repurchase agreement Thiskind of transaction leverages as well as reserves the capital of customer by temporallyholding the ownership of the customers’ assets then allowing them to buy back in thefuture with the price and term stated clearly in a repo contract.

Chapter 1 is theoretical framework which give the reader basic knowledge ofsecurities, stocks and securities market of Vietnam This chapter will draw a generalpicture of securities investment activities of Vietnam, such as their benefits toinvestment institutions along with investors Risk incurring in the process ofinvestment will also me mentioned in order to give a better background to the reader

Chapter 2 will give information about PVFC as a whole corporation with itsdeveloped investment activities Moreover, this chapter also gives readers knowledge

of the process of repurchase agreement procedure and its application at PVFC Someassessments will also be stated, which include achievements and limitations

After taking a look at repurchase agreement procedure and giving assessment,chapter 3 contains some suggestions to improve the repurchase agreement transaction

at PVFC as well as some recommendations for the Government and State SecuritiesCommission in regulating repurchase agreement activities

With the prestige and scale of PVFC, it can approach various sources of fundwith large volume, specifically capital investment, equity and also various trust funds.

It also helps PVFC a great deal in diversification on the capital market and always getsfunds from an available source even when market is bad

Nevertheless, in the current context of economic integration and Vietnameseeconomies in general, the investment climate in has many opportunities as well aschallenges In detail, for the securities market of Vietnam, securities investment alsofaces a greater challenge In addition, the problem of managing capital is also worthmentioning Therefore, to manage portfolio and capital effectively as well as archivestrategic goals of PVFC in the finance sector is extremely important

Repurchase agreement transaction is one of the most developed investmentactivities of PVFC due to its benefit to the investor and the Corporation However,some limitations and risks still present along with the systematic risks associated withsecurities On financial markets, this kind of transaction is developing and plays animportant role as in the way that investors can be more active and flexible in choosingthe tools to participate the market

Eventually, after taking careful consideration about the usage of repurchaseagreement, I’ve chosen “The situation of repurchase agreement procedure atPetroVietnam Finance Corporation and recommendation for future development” as

my graduation thesis

2 Research objectives:

Research objectives of thesis are reflecting the current situation of procedure ofrepurchase agreement operation at PVFC and giving some recommendation andimprovement for PetroVietnam Finance Corporation The three main points include:

 Gathering knowledge and analyzing the current situation of procedure ofrepurchase agreement operation, such as: how a repo contract be formed andhow it works during the time of contract and when it matured

 Evaluating the current procedure of repurchase agreement operation atthe PVFC which clearly states which are the achievement and the limitationwhich could be improved

 Recommendations for future development of repurchase agreementoperation

3 Research methodology:

In order to answer the research questions, secondary data will be mostly used in thereport such as: PVFC annual report of the most recent five years, PVFC prospects andrepurchase agreement of PVFC Besides, some securities textbooks and Internetmaterial will also be used

4 Research scope:

Due to the limitation of time, this thesis only focuses on researching onrepurchase agreement operation in the near future

5 Research structure:

The thesis will be divided into three chapters:

 Chapter one: Theoretical framework

 Chapter two: Current situation of repurchase agreement procedure atPetroVietnam Finance Corporation, Ho Chi Minh City Branch

 Chapter three: Enhancing the repurchase agreement procedure of PVFC

CHAPTER 1: THEORETICAL FRAMEWORK 1.1 Securities trading

1.1.1 Concept of securities trading:

Securities is evidence confirming the rights and legitimate interests of owners

of property or capital of the issuer Securities expressed in the form of certificates,book-entry or electronic data Another definition of securities is a means of agreementand may be replaced, representing a financial value

Trading securities is the act of buying and selling securities with the intention ofmaking a quick profit Brokerage firms and investment advisers recommend buyingsecurities for the anticipated long-term appreciation of the company Trading securitiesinvolve the same stocks and bonds available to all investors on public exchanges Thedifference is trading securities are timed by investors to buy low and sell high in shorttime frames While all securities can be traded in this way, some securities have anatural ebb and flow that can be traded more regularly

1.1.2 Risks incurring in securities trading

Business risks have two basic types: external and internal Internal business riskarises from operational activities of the company Each company has a differentinternal risk and level of success of each company expressed through performance

The company also bears the risks coming from outside forces, depending on factors ofbusiness environment such as loan expenses, the budget cuts, increased import tariffs,the deterioration of the cycle business.

Sales of some of the steel industry, automobile tends to stick to the businesscycle, while sales of other industries tend to go against State policies are also part ofthe external risks The monetary policy and fiscal policy could affect income throughimpacts on costs and funding sources

Market risk

Stock prices can fluctuate dramatically in a short period of time despite thecompany's earnings remaining down, just because of the views of investors aboutstocks in general or a group of stocks particular

Market risk arises from the reaction of investors to tangible or intangible events.Investors often react based on real events and tangible events such as economic,political, social, but sometimes there is nothing but the psychological problems

Interest rate risk

Interest rate risk is one of the systematic risks, also known as distributed riskwhen investing in the stock market Interest rate risk refers to the uncertainties inmarket value and income in the future, which cause fluctuations in the common interestrate

Basis risk

Basis risk is the risk that investment offset position in a hedging strategy doesnot change in the direction opposite each other The imperfect correlation betweeninvestment-offset positions has created the losses or potential interest in a hedgingstrategy and therefore further increase the risk for the investor

Exchange rate risk (Risk Transfer)

Risk occurs when the foreign debt can not be paid in the currency (foreign

currency) at the request of creditors.

Purchasing power risk

Risks occur from the fluctuations in the purchasing power of money investing instock market Purchasing power risk is the impact of inflation on investment If theinvestor is considered as an intermediate consumer account, we can see that whenpeople buy shares, he had lost several opportunities to purchase goods or servicesduring the time of stock ownership If during the period of holding shares, the price ofgoods and services increased, investors have lost a part of the purchasing power

Financial Risk

Financial risk is related to the risk from capital structure of a company Thepresence of debt in capital structure will be used to pay interest obligations to creditorsbefore paying dividends to shareholders It has major impact on shareholders’ income.Financial risk is the risk can be avoided to the extent that managers have discretion toborrowing or loan

By borrowing, the company has changed the flow of income for common stock.Specifically, the use of debt ratio causes significant consequences for those who holdcommon stocks, which are an increase of the fluctuation in their income, effect on theirexpected income and increasing in their risks

Liquidity risk

Risk of banks has to sell assets to meet immediate cash needs For example,depositors may require cash immediately

1.2 Repurchase agreement operation

1.2.1 Concept of repurchase agreement operation:

A Repurchase agreement, also known as a Repo or Sale and Repurchase

agreement, is the sale of securities together with an agreement for the seller to buyback the securities at a later date The repurchase price will be greater than the original

sale price; the difference effectively representing interest, sometimes calls the reporate The party who originally buys the securities effectively acts as a lender Theoriginal seller is effectively acting as a borrower, using their security as collateral for asecured cash loan at a fixed rate of interest.

A repo is equivalent to a cash transaction combined with a forward contract.The cash transaction results in transfer of money to the borrower in exchange for legaltransfer of the security to the lender, while the forward contract ensures repayment ofthe loan to the lender and return of the collateral of the borrower The differencebetween the forward price and the spot price is effectively the interest on the loan whilethe settlement date of the forward contract is the maturity date of the loan

Repurchase agreement transaction, also known as Repo transaction, is atransaction to buy/sell securities with a specific term This type of transaction enablesinvestors to buy and sell their own securities (bonds, stocks) within a certain time

When investors have demand for capital within certain time, but do not want tosell their securities, they may sign a purchase contract with a term with an investmentcompany or security company, which committed to buy back the number of securitiessold in the future with agreed upon price at the time of signing

1.2.2 Uses of repurchase agreement transaction

For the buyer, a repo is an opportunity to invest cash for a customized period oftime (other investments typically limit tenures) It is short-term and safer as a securedinvestment since the investor receives collateral Market liquidity for repos is good,and rates are competitive for investors Money funds are large buyers of repurchaseagreement s

For traders in trading firms, repos are used to finance long positions, obtainaccess to cheaper funding costs of other speculative investments, and cover shortpositions in securities

In addition to using repo as a funding vehicle, repo traders "make markets" These

traders have been traditionally known as "matched-book repo traders" The concept of

a matched-book trade follows closely to that of a broker who takes both sides of anactive trade, essentially having no market risk, only credit risk Elementary matched-book traders engage in both the repo and a reverse repo within a short period of time,capturing the profits from the bid/ask spread between the reverse repo and repo rates.Presently, matched-book repo traders employ other profit strategies, such as non-matched maturities, collateral swaps, and liquidity management

With the repurchase agreement transaction, investors have access to additionalcapital provided by an investment company or securities company, while the liquidity

of the securities owned by investors will be raised up The buying and selling are done

on the market depends on supply and demand relationship which benefit for bothinvestor and the company

The utility gives the investor:

The real repurchase agreement service contributes to market liquidity, increasing theefficiency of business capital for investors and giving investors a number of benefitsfollow:

 Investors still have ownership of shares on redemption of shares sold after acertain period In other words, investors do not have to sell stocks at low priceswhen necessary capital

 During time of contract, the investor is entitled to dividends and other benefitsarising from stocks

 The company gets stock prices relatively high, close to the market value ofshares traded on the market, so investors will take advantage of the maximumcapital investment spent

 Investors also provide detailed information relating to stock in the repurchaseagreement contract

1.2.3 Types of repurchase agreement transaction

There are three types of repo maturities: overnight, term, and open repo.Overnight refers to a one-day maturity transaction Term refers to a repo with aspecified end date Open simply has no end date Although repos are typically short-term, it is not unusual to see repos with maturity as long as two years

Repo transactions occur in three forms: specified delivery, tri-party, and held incustody The third form is quite rare in developing markets primarily due to risks Thefirst form requires the delivery of a prespecified bond at the onset, and at maturity ofthe contractual period Tri-party essentially is a basket form of transaction, and allowsfor a wider range of instruments in the basket or pool Tri-party utilizes a tri-partyclearing agent or bank and is a more efficient form of repo transaction

Due bill/hold in-custody repo

In a due bill repo, the collateral pledged by the (cash) borrower is not actuallydelivered to the cash lender Rather, it is placed in an internal account ("held incustody") by the borrower, for the lender, throughout the duration of the trade This hasbecome less common as the repo market has grown, particularly owing to the creation

of centralized counterparties Due to the high risk to the cash lender, these aregenerally only transacted with large, financially stable institutions

Tri-party repo

The distinguishing feature of a tri-party repo is that a custodian bank orinternational clearing organization, the tri-party agent, acts as an intermediary betweenthe two parties to the repo The tri-party agent is responsible for the administration ofthe transaction including collateral allocation, marking to market, and substitution ofcollateral In the US, the two principal tri-party agents are [The Bank of New YorkMellon] and Morgan Chase The size of the US tri-party repo market peaked in 2008before the worst effects of the crisis at approximately $2.8 trillion and by mid 2010

was about $1.6 trillion As tri-party agents administer hundreds of billions of US$ ofcollateral, they have the scale to subscribe to multiple data feeds to maximize theuniverse of coverage As part of tri-party agreement the three parties to the agreement,the tri-party agent, the repo buyer and the repo seller agree to a collateral managementservice agreement which includes an "eligible collateral profile" It is this "eligiblecollateral profile" that enables the repo buyer to define their risk appetite in respect ofthe collateral that they are prepared to hold against their cash For example a more riskadverse repo buyer may wish to only hold "on-the-run" government bonds as collateral.

In the event of liquidation event of the repo seller the collateral is highly liquid thusenabling the repo buyer to sell the collateral quickly A less risk averse repo buyer may

be prepared to take non investment grade bonds or equities as collateral, these may beless liquid and may suffer a higher price volatility in the event of a repo seller default,making it more difficult for the repo buyer to sell the collateral and recover their cash.The tri-party agents are able to offer sophisticated collateral eligibility filters whichallow the repo buyer to create these "eligible collateral profiles" which cansystemically generate collateral pools which reflect the buyer's risk appetite Collateraleligibility criteria could include asset type, issuer, currency, domicile, credit rating,maturity, index, issue size, average daily traded volume, etc Both the lender (repobuyer) and borrower (repo seller) of cash enter into these transactions to avoid theadministrative burden of bi-lateral repos In addition, because the collateral is beingheld by an agent, counterparty risk is reduced A tri-party repo may be seen as the

outgrowth of the due bill repo, in which the collateral is held by a neutral third party.

Whole loan repo

A whole loan repo is a form of repo where the transaction is collateralized by aloan or other form of obligation (e.g mortgage receivables) rather than a security.Equity repo

The underlying security for many repo transactions is in the form of government

or corporate bonds Equity repos are simply repos on equity securities such as common(or ordinary) shares Some complications can arise because of greater complexity in thetax rules for dividends as opposed to coupons

Sell/buy backs and buy/sell backs

A sell/buy back is the spot sale and a forward repurchase of a security It is twodistinct outright cash market trades, one for forward settlement The forward price isset relative to the spot price to yield a market rate of return The basic motivation ofsell/buy backs is generally the same as for a classic repo, i.e attempting to benefit fromthe lower financing rates generally available for collateralized as opposed to non-secured borrowing The economics of the transaction are also similar with the interest

on the cash borrowed through the sell/buy back being implicit in the differencebetween the sale price and the purchase price

There are a number of differences between the two structures A repo istechnically a single transaction whereas a sell/buy back is a pair of transactions (a selland a buy) A sell/buy back does not require any special legal documentation while arepo generally requires a master agreement to be in place between the buyer and seller(typically the SIFMA/ICMA commissioned Global Master Repo Agreement (GMRA)).For this reason there is an associated increase in risk compared to repo Should thecounterparty default, the lack of agreement may lessen legal standing in retrievingcollateral Any coupon payment on the underlying security during the life of thesell/buy back will generally be passed back to the seller of the security by adjusting thecash paid at the termination of the sell/buy back In a repo, the coupon will be passed

on immediately to the seller of the security

A buy/sell back is the equivalent of a "reverse repo"

Securities lending

The general motivation for repos is the borrowing or lending of cash Insecurities lending, the purpose is to temporarily obtain the security for other purposes,such as covering short positions or for use in complex financial structures Securitiesare generally lent out for a fee Securities lending trades are governed by differenttypes of legal agreements other than repos.

Reverse Repo

A reverse repo is simply the same repurchase agreement from the buyer'sviewpoint, not the seller's Hence, the seller executing the transaction would describe it

as a "repo", while the buyer in the same transaction would describe it a "reverse repo"

So "repo" and "reverse repo" are exactly the same kind of transaction, just describedfrom opposite viewpoints The term "reverse repo and sale" is commonly used todescribe the creation of a short position in a debt instrument where the buyer in therepo transaction immediately sells the security provided by the seller on the openmarket On the settlement date of the repo, the buyer acquires the relevant security onthe open market and delivers it to the seller In such a short transaction the seller iswagering that the relevant security will decline in value between the date of the repoand the settlement date

1.3 Vietnam securities market

1.3.1 Concept of Vietnam securities market

Vietnamese stock market, formally known as the Securities Trading Centre(STC), located in Ho Chi Minh City, was launched on July 28th 2000 At the openingtrading session, only two individual stocks with a total market capitalization of VND444,000 million (about USD 27.95 million) were traded on the market Over five years

of operation (at the end of 2005), the number of listed companies has increased to 32with a total market capitalization of 6,337,478 million VND (398.96 million USD).Although the market has significantly grown over the period, it is still rather thin

The State Securities Commission (SSC)

The State Securities Commission, officially established in November 1996, isresponsible for the organization, development and supervision of the country’ssecurities market Before February 2004, the SSC had operated as an organ directlybelonging to the Prime Minister During this period, the SSC could not well regulatethe market due to some structural weaknesses Consequently, the

Prime Minister decided, on February 19th 2004, to hand over the task of managing theSSC to the Ministry of Finance The Government hopes that the transfer would help toimprove the performance of the market, which has not been performing well since itsestablishment in July 2000

The Securities Trading Centre (STC)

The Securities Trading Centre is an organization under the control of the SSC Itsoperating expenses are partly covered by the government budget The STC assumesresponsibilities of organizing, executing and supervising securities trading activities onthe Centre Specifically, according to the Decree 144/2003/ND-CP issued by theGovernment on November 28 2003, responsibilities and rights of the STC include thefollowings:

 Organizing, managing and supervising the trading of listed securities

 Managing the securities trading system

 Managing and supervising the listing of securities

 Managing and supervising the information disclosure activities of listedcompanies

 Managing and supervising activities of the members of the SecuritiesTrading Centre

 Organizing, managing and conducting the market information disclosure

Securities companies

By regulation, securities companies can be established in either joint stock orlimited liability ones Moreover, the main businesses of the securities companies couldconsist of brokerage, owned-trading19, securities investment portfolio management20,underwriting, and financial and securities investment advisory Securities companies,which are licensed by the SSC as brokers or dealers, are eligible to register as members

of the STC Importantly, only members of the STC have been permitted to tradesecurities through the trading system of the STC

Vietnamese stock market was launched on July 28th 2000 with just two firmslisted, Refrigeration Electrical Engineering Joint Stock Company (REE), and SaigonCable and Telecommunication Material Joint Stock Company (SACOM) The market’sgrowth by number of listed companies so far has been rather slow In fact, at the end of

2000, merely five joint stock companies were listed, and joined by only five more in

2001 The year of 2002 was recorded as the most successful year of the STC, but just afurther 10 companies to be listed By end-2005, a total of 32 joint stock companieshave been given permission to float their shares on the STC

Especially, all of listed firms (except Kinh Do Food Joint-stock Company andKinh Do Corporation) are former SOEs that were previously restructured byequalization Of these, 20 companies, accounting for 62.5 percent, are operational inthe manufacturing sector, and the rest are in the trading and services sector

The slow pace in progress of the STC in term of the number of listed companies couldresult from the following reasons First, the main reason could be that most of jointstock companies are not willing to disclose their financial information once their sharesare listed They fear that when the financial information is publicly disclosure, theircompetitors can exploit the information

Consequently, their business can be suffered Second, many companies have notrealized benefits of listing on the stock market yet They think that the benefits of

listing they can get are less than the risk they have to face Finally, the slowness ofequalization program and related policies could be a reason that affects on thedevelopment of the STC In addition, many equitised firms are small in term of capital,

so they do not meet the capital requirement by the STC for listing

Table 1.1 shows key data related to the STC for the period covering the openingyear (2000) through to December 31st, 2005 During this period, with thegovernment’s considerable effort in development of the stock market, the marketcapitalization has increased significantly and continuously, but the market has beenrather thin Indeed, the market capitalization had increased from 444,000 million VND(27.95 million USD) at the first trading session (July 28, 2000) to 2,650,197 millionVND (166.84 million USD) at year-end 2002, and to 6,337,478 million VND (398.96million USD) on December 31st, 2005

Moreover, the data in Table 1.1 reveal that the market capitalization on GDP ratiohas been negligible although it has been fairly improved year by year Specifically, thisratio increases to 0.55 percent in 2004 from 0.24 percent in 2000

Table 1.1: Key indicators for the STC over the period of 2000-2005

The thin market is also reflected by the fact that trading value on the STC has

been tiny During the first year of trading, the average daily trading value on the

STC is only VND 1,385 millions (USD 0.09 million) The average daily trading valueincreases significantly in 2001 to the value of VND 6,128 million (USD 0.39 million).However, it remarkably declines in two consecutive following years (2002 and 2003).Specifically, the average daily trading value has a decrease about 47 percent each yearfor the period of 2002-2003 Then, the average daily trading has quickly recovered.Indeed, the average daily trading value reaches VND 6.80 billion in 2004 and VND13.12 billion in 2005

Another indicator to refer to the thinness of the STC is trading value on GDPratio This ratio has been negligible, and continuously declined over the periodof 2000-

2003 Indeed, it decreases from 0.20 percent in 2000 to 0.07 percent in 2003 Smalltotal market capitalization and commensurately small trading volume make theVietnamese stock market as the smallest one in the Southeast Asian region

Figure 1.1: Market capitalization of the STC for the period from July 28th, 2000 to December

31st, 2005

During the year following the STC’s opening, the prices of all listed shares

moved up daily Consequently, the VNINDEX considerably and continuouslyincreased, moving from an initial base level of 100 to the record level of 571.04 onJune 25th, 2001 The main reason to explain for the stock price’s steep ascent is theexistence of an acute imbalance between supply and demand for shares Since then,however, with the government’s great effort in creating commodities for the market bystimulating joint stock companies to list their stocks on the STC, the market index hasfairly declined In fact, the VNINDEX has slipped down continuously from the top of571.04 to the bottom of 130.9 on October 24th 2003 After falling to the bottom, theVNINDEX has recovered and kept fairly stable at the level above 200 since January

2004 As of December 30th 2005, the VN-Index achieved the level of 307.50 points.The trend of VNINDEX changes over the period from opening date to December 30th

2005 is graphically presented in Figure 1.2

Figure 1.2: VNINDEX changes over the period from July 28th, 2000 to December 31st, 2005

1.3.2 Role of securities market:

 Mobilizing capital for the economy: When investors buy securities issued bycompanies, some of their idle money is put into production and businessactivities and thereby contribute to expand cooperative production Through thesecurities market, and government authorities at various localities also raisedfunds for purposes of investment and economic infrastructure development,serving the needs of society

 Provide the environment for public investment: the stock market provides thepublic with a healthy investment environment with abundant opportunity tochoose The securities markets are very different in nature, duration and risk,allowing investors to select suitable tools to participate the market

 Create liquidity for securities: Due to securities market, investors can converttheir securities into cash property or other securities when they want Liquidity

is one of the characteristics of the securities that attract investors These arefactors that show the versatility, safety of investment Securities market operatesmore dynamic and effectively As a result, the liquidity of the securities traded

in the market is higher

 Assessment of business activities: Through the securities, activities ofenterprises are reflected in a general and precise way, making comparison andevaluation of activities of the enterprise quickly and convenient, which alsocreates an environment of healthy competition to improve the efficient use ofcapital and stimulate the application of new technologies, innovative products

 Create an environment where the government implemented macroeconomicpolicies: The indicator of the securities market reflects the dynamics of theeconomy in a sensible and accurate way Securities prices rising shows investorsare expanding, growing economy; reverse stock prices will indicate the negativesigns of the economy Therefore, the stock market is called the barometer of the

economy and is an important tool to assist the Government in implementingmacroeconomic policies Through the securities market, the government canbuy and sell government bonds to generate revenue to offset budget deficits andinflation In addition, the Government can also use a number of policies andmeasures to impact on the securities market-oriented investments to ensure thebalanced development of economy.

1.3.3 Recent development of Vietnam securities market

The period 2000-2005 marked the start-up of the securities market The birth ofthe Ho Chi Minh City Securities Trading Center (now Ho Chi Minh City StockExchange-HOSE) drew particular attention from investors and accumulated initialexperiences paving the way for the birth of the Hanoi Securities Trading Center (nowthe Hanoi Stock Exchange-HNX) on March 8, 2005 The securities market remainedsmall in size in this period with a total market capitalization of less than five percent ofthe gross domestic product (GDP) Besides, the period featured incomplete operationalmechanism and low management capacity of the domestic securities market The poortechnical infrastructure badly impacted on the stock trading system and the capacity forinformation processing and market forecasts

Vietnamese securities market ushered into a period of phenomenal growth from2005-2009 The market capitalization/GDP rate in 2009 (38 percent) was far exceededthe 2010 target that was set in the Vietnam securities market development strategy(10.15 percent of the GDP)

Securities trading companies and securities investors rose sharply in number inthe period There were only six securities trading companies with chartered capitalaveraging VND50 billion in 2006, in 2009 Vietnam was home to 105 companies withchartered capital averaging VND175 billion Many securities companies had charteredcapital in excess of VND1 trillion such as the Saigon Securities Incorporated (SSI)

with VND1.533 trillion and the ACB Securities Company with VND1.5 trillion.

Alongside phenomenal growth, the securities market was marked with positivechanges in market management with the Law on Securities coming into force fromJanuary 2007 Also in 2007, the Ho Chi Minh City Securities Trading Center waschanged into the Ho Chi Minh City Stock Exchange to become more active inmanagement and push up the market development Despite facing bad implications ofthe global economic recession the average share trading volume at HOSE still reached

13 million units/trading session Stock transactions were made online and theapplication of continuous order-matching method had boosted market transactions Asthe Government economic stimulus package worked well and initial signs of economicrecovery seen in late 2008 made the stock market rally Total market capitalizationamounted to VND620 trillion in late 2009, equal to 38 percent of the GDP

The outcome the Vietnamese securities market has achieved in the past decadehas been positive, however reality shows that right when the stock market reached itspeak, limitations still existed such as the low liquidation rate led to the supply-demandimbalance and volatile share prices The market could not develop in a sustainablemanner as there were a few long-term investors and investors' behavior was heavilyinfluenced by the ‘mass psychology’ Intermediate organizations that aid the securitiesmarket development remained limited in number and relevant legal framework wasinsufficient The Law on Securities fails to cover activities in the securities marketcomprehensively as there were not clauses pertaining to the transactions of derivativeproducts and short sell etc

The securities market is expected to continue acting as an effective raising channel for the economy from now until 2020 The main development targets

capital-of Vietnamese securities market from 2011-2020 are to increase on scale, improve theservice quality and maintain order and security Besides, efforts will be made to raisemanagement efficiency, increase supervision, effectively protect investor legitimate

rights, sharpen competitiveness and deepen international integration.

By 2015 the total market capitalization is expected to account for 65-70 percent of theGDP, increasing to 90-100 percent by 2020

To achieve these goals, it is important to strengthen the securities marketoperation, increase market transparency and information fidelity, and improvesecurities companies' capacity and quality, paving the way for increased marketliquidity

Besides, accelerating the pace of equalization at state-owned enterprises is alsonecessary to boost the securities market development Businesses from assortedeconomic sectors must be made viable to attract medium and long-term capital forinvestment development through the securities market Alongside the securities marketdevelopment, the institutions concerning diverse other markets such as the monetarymarket, the foreign exchange market, the derivative securities market and the insurancemarket needs improvement to ensure smooth operation of the financial market Inaddition, the securities market players must actively integrate into the internationalfinancial market to better their competitiveness

Chapter 2: CURRENT SITUATION OF REPURCHASE AGREEMENT

PROCEDURE AT PVFC

2.1 Overview of PetroVietnam Finance Corporation, Ho Chi Minh City Branch and investment department

2.1.1 Foundation history and development of PVFC

Figure 2.1 Logo of PetroVietnam Finance Corporation

PetroVietnam Finance Corporation (PVFC) is a non-banking credit institution and themember of Vietnam National Oil and Gas Group, which was founded according to Actnumber 04/2000/QĐ – VPCP on March 30th, 2000.The Corporation officially startedoperating on December 1st, 2000

2.1.2 Function, mission, power and obligations of the corporation

 Manage and supervise the petroleum/hydrocarbon exploration and productionactivities following contracts with petroleum contractors and subsidiaries,organizations and other individuals

 Directly do business in accordance with the Vietnamese related laws for profittargets Economic relations between Petrovietnam and its subsidiaries, affiliatesand are stipulated in economic contracts

 Implement rights and obligations of the owner at the subsidiaries and affiliates;

 Organize the implementation of business plans among Petrovietnam Oil andGas Group

 Implement other activities that the Government entrusts directly to PetrovietnamGroup

2.1.2.2 Power and obligations:

 PetroVietnam Finance Corporation is a legal unit with its own seal and separateaccounts, which was granted the chartered capital, independent accounting,financial autonomy and responsible for the results of business operation andcommitment

 The Corporation is obliged to preserve and develop chartered capital allocation

as well as pays its own credits loan under the credit agreement and commitment

to the Petrovietnam Group

 The Corporation has to register as a legal business unit and operates in businesssectors which have been registered,

 The Corporation also has to take responsibility to Petrovietnam Group and StateBank of Vietnam for results of its operations and to their customers for thecorporation's services

 It is also responsible for inspection of Petrovietnam Group, State Bank ofVietnam and other state agencies having jurisdiction

 The Corporation has to construct plans, annual business strategy submitted toPetrovietnam Oil and Gas Group

 The Corporation is obligated to pay taxes and the budget in accordance withcurrent legislation

2.1.3 Businesses:

Table 2.1 Operating businesses

DetailInvestment Activities

Corporate InvestmentIndividual InvestmentCommission Investment Investment AdvisoryCooperative Investment Investment Cooperation Projects

Stock and Valuable Notes TradingFund Arrangement and Corporate

Credit

GuaranteeFactoringCorporate Credit ServiceCorporate Fund Arrangement ServiceIndividual Credit

Individual LendingIndividual Capital MobilizationTransferring currencies from WesternUnion and collecting foreign currencies

Deposit AdvisoryVerification Financial Advisory

Equitization AdvisoryGold Trading

Securities Trading

2.1.4 Overview of PVFC – Ho Chi Minh City Branch

2.1.4.1.Historical foundation, function and mission of the branch:

In order to widen the network of PVFC, on the 21st of November 2003, PetroVietnamFinance Corporation founded Ho Chi Minh City branch When it was just founded, thebranch had only four departments with 30 employees in which almost everybody didnot have much experience in monetary finance sector However, nowadays, the branchhas nine departments and about 180 employees with experience and knowledge

Function of Ho Chi Minh City branch:

PetroVietnam Finance Corporation, Hochiminh City Branch is a direct unit ofPetroVietnam Finance Corporation Therefore, the branch operates in accordance withthe Corporation’s activities and manages the South area

Mission of Ho Chi Minh City branch:

Hochiminh City branch has mission of exercising financial businesses with legalpermission from State Bank of Vietnam:

 Providing credit demand for PetroVietnam Oil and Gas Group, members of theGroup and other subsidiaries, individuals

 Receiving term deposit of PetroVietnam Group with time to maturity at leastone year

 Issuing Treasure bills, bonds and valuable papers to mobilize capital fromdomestic and abroad

 Negotiating, signing contracts and foreign loans, receiving and using the trustfund from domestic and abroad, including capital investment of government,corporations, and other members

 Offering short, medium and long-term loans, consumption loans.

 Having authorization to receive and offer commission investment

2.1.4.3 Business performance in period from 2005 to 2009

Table 2.2 Business performance report in period from 2005 to 2009

(Unit of account: billion VND)

Figure 2.2 Business performance of Ho Chi Minh City branch in the period of 2005-2009

From the figure above, we can see that targeted net sales increased rapidly, profits frombusiness activities also followed the positive trend Through business results in fiveyears period, we find that annual sales have increased on average by 74% However,the company's net profit in 2008 felt nearly 7.3% and 0.2% in 2006, which reflex thatthe company still affected by the economic crisis of the world and the local.Nevertheless, in 2009, we witness a year of working efficiently and overcoming theperiod of crisis, the total revenue grew dramatically, reaching 135.3% over the period

of 2008 This is a milestone marked the record of the branch operation

2.2 Current situation of repurchase agreement procedure at PetroVietnam Finance Corporation

2.2.1 Procedure of repurchase agreement of PVFC

2.2.1.1 Conditions conducting repurchase agreement

• Time to maturity does not exceed six months

Whenever a customer wants to make a repurchase agreement with PVFC, their securitymust be considered whether it is eligible or not According to the list of authorizedpurchased securities by the director of PVFC, the investment department will decide ifthe customer can commit a repo contract Securities purchased prices are alsostipulated by the director of PVFC Currently, PVFC has already made a worksheet ofstrategic customers and partners Whenever a customer wants to make a repotransaction, a specialist of investment department make assessment according to thatworksheet, which contains lots of information about past transactions and theireffectiveness

This kind of worksheet is also applied to repo securities The worksheet of reposecurities clearly states which security is eligible to make transaction and the repo ratefor that kind of security