Seminar revisiting the development of derivatives markets in asia – recommendation for viet nam (THỊ TRƯỜNG PHÁI SINH SLIDE)

Most Common Products Equity derivatives:  ETDs in Korea, India, and Hong Kong  Index futures, Index options  institutional investors, significant foreign participation... Most Commo

Revisiting the Development of Derivatives Markets in Asia – Recommendation for Vietnam

Revisiting the Development of Derivatives Markets in Asia – Recommendation for Vietnam

 Most Common Products

 Derivative Markets In Asia

 Key Success Factors

 Case Studies

 Policy Issues

 Recommendations

 Conclusion

Most Common Products

 Equity derivatives:

 ETDs in Korea, India, and Hong Kong

 Index futures, Index options

 institutional investors, significant foreign participation

 Commodity derivatives:

 China, Japan

 Soybean, wheat, rubber, gold, and oil etc.

 Interest rate derivatives:

 Tokyo, Singapore

 Migrating trend from OTC to ETD

 Recent fixed income derivatives

Most Common Products (cont.)

 Foreign exchange products:

 Major currencies traded in Tokyo, Singapore, and Hong Kong

 Mostly in OTC derivatives,

 Offshore markets in Singapore for minor and non-convertible currencies

 Credit derivatives

 Tokyo, Hong Kong

 Credit default swaps

 Unregulated markets, hence, less transparent and highly leveraged

 Summary:

 Equity derivatives are the fastest growing products on exchanges

 Growing rapidly, partially migrating from OTC to ETD markets

 Foreign exchange turnover substantial in the main OTC markets

 Started from commodity and local interest rate derivatives

 Added foreign exchange, credit, and equity derivative products

Derivative Market In Asia

 Tier 1: Japan, Australia, Hong Kong, and Singapore

 Demutualized, among 16 listed exchanges worldwide

 Large variety of interest, FX, equity, and commodity products

 TSE promotes integration of specialized exchanges via new laws

 ASX provides interest futures, equities, options , FX

 SGX trades currency contracts, foreign interest rate derivatives but been

stagnated

 HKEx started on commodity derivatives, but now on trading equity derivatives

 Tier 2: Korea, India, China, and Malaysia

 In the process of being demutualized

 KRX largest future exchange in terms of trading volume; offers 9 types of derivative products, low transaction costs, very advanced IT & internet trading

 NSE focuses on retail trading of equity derivatives After strengthening

underlying cash market, equity futures started in 2000, interest rate futures introduced in 2003, OTC in 2004

Derivative Market In Asia (cont.)

 China closed 27 out of 30 exchanges in 90’, allows commodity futures

trading only

 Malaysia merged 03 exchanges into the Malaysian Derivatives Exchange (now BM), trades commodity and equity futures The holding company

demutualized in 2004 and the participation of foreign institutions has

increased to over 40%

 Tier 3: Thailand, Indonesia, and the Philippines

 Allow OTC derivatives trading by banks; recently considered to (re)introduce ETD markets

 TFEX setup 2004, trades index futures, interest rate derivatives

 JFX trades equity index futures in 2001 However, less developed market infrastructure & investor interest led to very low trading volumes

 Manila Futures Exchange allows OTC derivatives trading but closed in 1997

Key Success Factors

I. Market liquidity, including fixed income benchmarks,

II. Solid accounting and regulatory standards, including a

derivatives law,

III. Modern infrastructure at exchanges (central counterparty),

and

IV. A tax regime that creates a level playing field.

 Summaries:

 Best practices in underlying infrastructures exist: Australia, Hong Kong, India, Japan, Korea, and Singapore

 Existing obstacles: China, Indonesia, Malaysia, the Philippines, and Thailand

Case Studies

Moscow Central Stock Exchange failed in 1994

due to weak clearing house + poor margin system

exchange traded 4 million government bond futures

in one day on February 23, 1995; then collapsed

where price manipulation caused over $10 bn of

losses in few minutes

=> Many valuable lessons on the preconditions that need to be met for the trading of derivatives.

Case Studies (Cont.)

 Lessons learnt from history:

 FX derivatives brought down the Thai and Indonesian currencies

 Total return swaps were used to speculate on cross-border interest rate differentials

 Structured notes were used to circumvent accounting rules,

disclosure requirements, and prudential regulations

 All these instruments were traded in OTC markets with international banks.

 Need for stronger regulation, with more emphasis on risk management, and sound infrastructure at organized exchanges with CCP clearing.

 As FX forwards used to undermine fixed exchange regimes

=> Derivative products should NOT be launched unless their cash markets have been well developed with market-determined prices.

Policy Issues

 Liquidity

 Economic rationale for hedging needs

 Liquid cash market

 Market determined prices, interest/FX rates

 System stability, no moral hazard risks

 Lead regulator, capital rules, reporting standards

 Legal clarity: ISDA standards, enforceability

 Accounting rules, transparency, disclosure

 Level playing field, tax harmonized, integration

Policy Issues (cont.)

 Infrastructure

 CCP, ISDA master agreement, close-out netting

 Demutualized exchanges, strong capital, margins

 SRO rules enforced, with limits, monitoring

 Certified investors, code of conduct

Recommendation for Vietnam

I. Cash Markets: liquid, efficient, integrated; benchmarks in bond

markets

II. Regulation & Legal Framework: derivatives law, SRO function

III. Repo Markets: effective short, margin trading; security lending

IV. Intermediary Licensing: qualified participants, proper training

V. Taxes level playing field: avoid transaction tax

VI. Exchange: platform, links, capital, margins, first index futures

VII. Design CCP: close-out net, ISDA master, enforcement

VIII. Accounting: adopt IFRS, Mark-To-Market, IAS39, full

disclosure

IX. OTC License: regulatory approval, counterparty credit risk,

swaps IR&FX

X. Investor Base: hedging needs, products, IT, lower costs

Key Success Factors for the development of sound derivative markets in Vietnam:

 Liquid cash market,

 Solid product design,

 Strong regulation, and

 Sound market infrastructure

Thank you for your attention!