The term “ short sale” is not deíĩned by D ecree 48/1998 either. Article 69, entitled “ Short Sale”, m akes unlawful any sale o f securities i f the seller does not actually have title to the securities at the time o f selling. It reads:
O rganizations or individuals are p ro h ib ite d fr o m selling any secu rity in any fo rm i f the o rg a n ừ a tio n s or individuals do not o\vn such security at the tim e the transaction is effected.
Ovving to the failure in deíìning the term “ short sale”, this provision cannot explain in vvhich situation the seller can bc deem ed to own securities.280 It simply prohỉbils all persons, not only securilics íìrms, from selling short in any circumstance. A ccording to a government oỉììcial, an entire prohibition o f short salc is an innovative creation o f Vietnam in order to prevent speculative short sales, the sort oi' activity that resulted in the East Asian lìnancial crisis o f 1997.281 A queslion arising here, o f c o u rs e , is vvhethcr speculative short sale was the only or even the main eausc that led to Ihat crisis.
2X0 S e e Rule 3 b-3 issued by the u s SEC, for e xampl e . T h i s Rule g i v e s a deí ì ni ti on o f “ S h o rt Sal e’’: "The le n n 'short s a le ’ m eu n s a n ỵ s a ìe o f a s e c u r ily w h ich the s e l l e r cloes n o t ow n o r a n y sa ìe xvhich is c o n su m m a te d b y the clelivery <)f II s e c u r ity b o r r o w e d by, o r f o r th e a c c o u n t of, the seller. A p c r s o n s h a ll b e d e e m e d lo ow n a s e c u r ily i f (! ) he o r h is a g e n l h a s tilìe to it; o r (2) he has p u rclìu seil. o r ha.s en lerecỉ in lo an im c o m lilio n a ì c o n lra c l, biruling nn b tìlh p a r tie s íh e re to , to purcha.se il buI ha.s no! y e l re c e iv e cl it; o r ( ĩ ) he o w n s a s e c u r ity c o n v e r íib le in to o r exch tu u Ịcable f o r il a n d h as len tlerecl su ch s e c u r ity f o r c o n v e rsio n o r e x c h a n g e ; o r (4) he h as an uplitìiì lo pn rch a.se o r u c q u ire li a n d has e x e r c is e d su c h r iẹ h ts o r w cirra n ts: P r o v ìd e d , h o w ever, llia t a p ư rso n shcill b e cleem ctl lo o\vn s e c u r ilie s o n /y to the ex len t th a i he h a s a n el /u n g p o s itio n in such s e c u r itie s . ”
See Vu N g o e Nhung, “ Hoan thien thi truoim c l unm khoan Viet nam nham thiet lap nen tai chinh v u n g manh va liicu qua” [ Compl e l i on ol"Vielnam Securities Market in order to Establish a Strong and EHec t i ve Pinancial FoundationJ, (Paper presented at the c o n í e r e n c e on "F inance a n d thư D e v e lo p m e n l o f V ieliuim S ectirilie.s M u r k e t", lield by the Pinancial Research Institute, Pinance Ministry, in I lo Chi Minh City, 01 1 May 22, 2 0 0 1 ) , 3. S e e also tlie a ppe ndi x o f the above- mentioned paper “Tliu gui o i m A n d y Gcnt, Toiiíỉ liiani doc Ngan hang 1 l o n g K o n g & 1 huong Hai tai V i e l na m” ỊLctlcr to Mi\ A n d y Genl, General Di rector o f Honsỉ K o n g & Shanghai Bank in Viet nam], 9.
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Econom ists seem to attribute the lìnancial crisis to tw o main íầctors: (1) dom estic policies and practices, and (2) the developm ent o f the global financial system, currency speculation and the behavior o f large institutional investors.282
T he íorm er derives from a num ber o f issues such as: vveaknesses o f fínancial institutions, and o f regulatory 01' overseeing systems; a high num ber o f risky investm ent projects conducted in the tìeld o f real estate and in the stock market;
ineffective corporate governance and supervision; a credil boom by which corporations incurred high dollar-denominated short-term private ciebt, and w eaknesses in legal structure as well as political accountabilities.283
T he latter factor is said to have its 1'OOt in the com bination o f deregulation and liberalization o f the íìnancial sector in most o f the countries that were worst affccted hy the crisis; the increasing interconnection o f the market and speed o f transactions through Computer technology; the developm ent o f large institutional
íìnancial players; and the speculation or short term investment that could m ove in and out very quickly across national borders.28'1
Here, causes o f the crisis are classiíìed into domestic and international ones and as such, problems vvith íìnancial sector can be íbund in both areas, in parallel with other non-íìnancial problems, and under various forms. Although risky investment prọịccts in the stock market are mentioned, similar risky prọịects in reaỉ eslate can also be scen. Pnrthermore, risky investment prọịects in the stock markel wcrc Iiol the single lìnancial problem. Others such as Ihe credit boom, corporate hio,h đebts, and the combinalion o f deregulation and 1 iberalízation o f the financial sector in relevant counlries, can also be ibund. As such, it is unclear whether spcculative short sale, which vvas only onc o f the financial problem s, dominated.
For the purpose ol' our sludy here. perhaps the interim report o f the E m erging M arkels Coinm itlee, IO SC O, e,ives a clearer picture o f causes that led to the íinancial crisis. The report observes such causes írom a different approach. bv w hich all problems concerning lĩnancial market are Rrouped into one o f the three main causes o f the crisis. Thcse three main causes are: (1) m acroeconom ic issues, (2) stm ctural issues, and (3) lìnancial markel issues.283
2ỉi2 S e e N o e l e e n Hezei'and Martin Khor, “The Asian Pinancial Crisis: Caus e s , Co n s e qu e n c e s and W a ys l 'orv\ard" ínip ://\v\v\v.\vorỉdhank.oru/dc\Toi uni/six ,akei' hcvy.cr.himl. visited N o v . 4, 2002.
283 íbid.
2X4 I b i d .
:x' S e c " riie Ca u s cs o f ihe Asian Pinancial and l ỉ c onomi c Crisis”. extracted íVoni an interim reporl ''Cnuses, l . l ì ccl s and RcíiulaloiẠ Implications o f t h e Pinancial and E c o n o m i c Turbulence
T c n v a r d s a W e ỉ l P u n c t i o n i n g, S e c u r i t i c s M a r k e t in V i e t n a m : C- h a p t e r j j j.
The first cause refers to (a) C a p i t a l flow surges that coulcỉ generate beneĩits to developing countries, but could also bring along with them signiĩicant risks, especially in the absence o f necessary pre-conditions to ensure the sound deploym ent o f private Capital f l o w ; (b) the fact that large C a p i t a l inflows received by m any em erging m arkets in the early 1990s, along vvith the credit boom, enabled rapid and sustained econom ic expansion, which, in turn, led many o f these countries to run signifícant current account cỉeílcits; (c) the loss o f competitiveness arising from exchange rate policies adopted by most o f the afflicted countries, vvhich is also found to have been a crucial factor that caused the crisis; and (d) the coníluence o f all the above-m entioned factors.286
The second cause (slructural issues) consists o f (a) the deregulation and liberalization o f the íìnancial sector in the economies worst afflicted by the crisis;
(b) thc underdeveloped debt markets that caused the worst-afflicted economies to over-rely on banking íìnance; (c) the íầilurc in regulating and supervisiríg financial institutions; (d) the inadequate disclosure and vveak corporate governance that resưlted in signilìcant problems in the íìnancial and corporale sectors o f the worst-
arnicted countrics; and (e) distorted lendina decisions as a result o f a conAuence o f the above-m entioned factors.287
I he third cause (1'inancial markel issues), as pointed out in the report, is com posed oi' the three Ibllovving íầetors: (a) the currency markct actỉvity or the Sharp currency devaluation cxperienced by the South East Asian countries; (b) the use o f O T C instruments, especially derivatives and otT-balance-sheet items, that very likely lrige;ered the crisis most scverely; and (c) the fínancial conlaeion that rcsulted IVom an increasinoly global and inte°ratcd íìnancial systein.288
A ccording to the report, the crisis vvas clearly a consequence oi' various lầctors. 11' spcculative short salcs lay in the so-called "use o l'O T C instruments”, it was merely onc oí' the issues thai occurred in the lìnancial market, and the íìnancial markel issues vvere, in lurn, merelỵ onc o f the thrcc principal causes that lcd to the Asian llnancial crisis. Therefore, speculative short sales vvere obviously not the only cause - incỉeed nol even onc o f t h e principal causes - that triggered the
íìnancial crisis in Asia in the late 1990s.
in Hmc rgi n” Markcts” by the Emergiim Markets Commi t i ec, IOSCO. http://risk.irci.ch, visited Nov. 4, 2 0 0 2 .
Ibid.
:s7 Ibid.
-ss Ibid.
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C oncerning the beneíìts generated by. and h an n s resulting from, short sales, there h ave been contrary schools o f th ou sh t. It mie,ht be useíul to quote the Report o f the us Senate Committee on B a n k in s and Currency:
The prop o nents o f sìĩort seliin g contend. that it is a necessary /e a tu re o f an open m a rket fo r securilies; thai in a crisis short
sellers are useful in niainta in ing an o rd erly m arket; and thai their activities serve as a cushion to b rea k the fo rc e o f a decline in the p ric e o f stocks. Its opp onen ts assert that short sellỉng unsettles the mcirket, Ịorces liquidation, depresses prices, accelerates declines, a n d has no econom ic value or ju s tific a tio n 289
T h e u s SEC, while proposing rules and seeking public opinion on short sale ree;ulation, points out tvvo important beneíìts vvhich short sales provide for the market, namely market liquidity and p ric in s effíciency.290
M arket liq u id ity: when market protessionals eỉTect short selling transactions, they are oíTsetting temporary imbalances in the supply and d em an d for securities and thus are creating substantial market liquidity. Through securities professionals, shorl sclling activities enrich the trading supply o f stock, vvhich in turn lessens the risk w hen inveslors might have to pay an artiiìcially hioh price ovving to a tem porary sliorlagc in supply.2J1
P ricing ef]ìciencv. in an eỉTicient markct, prices íully m an ilcst aỉl interests o f purcliasers and sellers. When cnlcring inlo a securities transaction, both the purchaser and the shorl seller expect to proiìt ỉVom the d iíìe re n c e between the buying and the selling price. Usually a short seller in a security trusts that the securily is overvalucd and so its price vvili faỉl. By en g agin g in short sale transaction, that seller iníorms the market o f his/her evaluation o f liiture securities price períbrm ance, \vhich in lum, conlribules to securitỉes pricing effíciency. By em p loy ina shorl sales to tiain proỉìt IVom priec di\ ero,ence betw een a stock and a
289 S e e Stock E x ch a n g e Practices, Report o f Senale C o m m . On Banki ng & Currency, s. Rep. No.
1455, 7 3 d Cong. , 2d Se s s . 50 ( 1934) . Ọuoted in i . oui s Los s & Joel S e l i g m a n , F im d a m e n la ls o f S e c u r i t i e s R e^ ula/ion, (4lli nd. 2 0 0 ! ) , 797. Hereinaiìer, I.oss and Sel i gman.
2)0 S e e " P r u p o s e d R n le s" (SBC), (Action: Conccpt Release; Request for Co mme n t s. Oct. 28.
1999), 17 CTR Parl 240, ỊRelease No. 34-42037; r-ilc No. S7 24-99] RIN 3235-A1I84, Short Sales. 6 4 F R 5 7 9 9 6 . <1 . c \ i s N e \ i s > . ! lcrciiialìcr, "Pro/ìosưcl Riiles " ( SBC) .
- ’1 Ibid.
T o v v a r d s a W e j j P u n c t i o n i n g S e c u r i t i e s M a r k e t in V i e t n a m : C h a p t e r 111
derivative security (e.ạ. a convertible security or an option on that stock), arbitrageurs also add to pricing efíìciency.292
The u s SEC, although recognizing the above-mentioned beneíĩts generated by short sale, has stressed that short sale can also be utilized as a manipulative tool on securities market.
Loss and Seligman, while considering opposite schools o f thought over the advantages and disadvantages o f short sale, also conclude that it is impossible to íìnd out vvhere the truth lay between these extreme views.293 Regardless o f such a controversy over short sale, in practice, the Dutch, Prench, G erm ans, British, and even the A m ericans, have all more or less eliminated the prohibition o f short
1 . 294
sales.
Today short sales are oữen controlled rather than prohibited. Both the Japanese and the A m ericans seem lo follow this approach. The Securitỉes and Exchange Low o f Japan reads:
N o p erso n sha ll do the acls set fo rth beloxv in violation o f the pro vision s o f a Cobinet order.
(Ị) To make the sale of, or the placem ent or acceptance o f an order for the sale of, a security w ithout owning, or by b o r r o w i n s u c h security (including such case as m ay be prescribeci by o Cabinet orcler as One com parable therelo), or
(2) To m ake the placem ení o f an order to buy a security forthw ilh xvhen the p rice o f such secu rity has risen /rơ m thai at the time o f the placem ent o f snch order a nd is equal to or obove the limil price set bv him self/herself, or lu sell a secnrity /orl/nviih when the p rice o f such secu rity hcis /a llen [rom that fíl tlie time o f the placem ení o f such order and ịs equol to or beknv the lim ií price set bv him self/herseỊf.29:>
m I bi d.
See Lo s s and Sclimnan, above II. 289, 797.
29-' Ibid, 7 9 5 - 796.
' ÍS A11. ỉ 62: items ( I ) and (2).
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Pursuant to this provision, in Japan, short selling is only prohibitevỉ \vhcre thc price of the relevant security drops (that is vvhen the security can be s o td ai a price lower (han the previous preceding selling price).
In the u s , short sale regulation has been adoptecỉ sin c e 193ƠS under the Securities Exchange A ct o f 1934 and the SEC's Rules. The short sale reoulation is twofold: regulation o f short selling by corporate insiders an d ihat by others Corporate insiders are prohibited from selling short their co rp o ra te security if the seller or his/her principal does not own the sold security; or e v c n i f he/she does own the security but does not deliver it vvithin 20 days from tho selling dạte or does not deposit the security in any usual channel o f tra nspo rtá o n \vithin 5 days after the sale is consum m ated.296
The second part o f the short sale regulation even reaches every person who engages in a short-selling transaction.297 However, such a tra n sa c ù o n vvill only be deemed unlawful vvhere the prices o f the relevant securities are iallino 298 In other words, short sales only become illegal in a declining m arket; in an advancing markct, they are permissible. The purposes o f short sale regulation in the u s were mentioned in an SEC report in 1963, including: (1) to permii short sale in an advancing market; (2) to eliminate the use o f short sale in drivino the exchange markets dovvn; (3) lo avoid short selling in acccleratine, a dow n\\;\rđ irend in stock
• „ s 299
price.
The controversy over posilive and negative aspccts o f slìort sale has continued. Recently, in the u s , the SEC has sought public com m ents on the neccssity o f short sale regulation and the cxtenl lo vvhich slion salc should be regulated. By this open request for commenl, the SEC aims to lìnđ out the most appropriate remilatory structure íor short sclline. One o f the eiiìlu proposed concepts related lo the regulation o f short sale o f securities is tho elimination o f Ru le ÍOa-Ị.300
296 S e e S ecu riíies E x c h a n ^ e A c t o f 1934 s 1 6 ( c ) , 15 usc s 7 8 p ( 2 0 0 2 ) ; s e e a l s o K u l c 1 6 ( c ) . 297 See S e c u r itie s E x ch a n g e A c l ọ f l 9 3 4 s 10(n) 15 u s c s 78j ( 2002) .
298 S e e t h e u s S E C r u le: R u l e I O a -1
m See "Report o f Special Study o f Securities Markets ol ’ the S e c i u i i i e s and Exchan<’e Commi ssioiì", I I.R. Doc. No. 95. 88l!ì Coim.. Ist Sess. ( 1963) , at Pt.2, 2 51 .
'00 Scc "P ro p o se cì R id cs " ( s 1.C'). íibovc 11. 290.
T o v v a r d s a W e Ị Ị F u n c t i o n i n u S e c u r i t i c s M a r k e t in. \ ỵem a m : C h a p t e r III
2. Shoukl Extension of Credit and Lending Sccurities ( M a r t i n Trading) bc Entirely Banned?
Article 72 makes it unlawful if securities firms and their a sso eiates engage in credit transactions and lending securities. This Article is too b r ì e ĩ i o °ive a clear m eaning o f “extension o f credit” and ‘ie n d in g securities” . It reads:
O rganizations that engage in securities busìntrss a n d persons who practice in the area o f securilies tra d e rnust not extend credit a nd lending securities.
This m ight be an equivalent to the provision concerning “P urch asiu ii Securities on M a rg in ” under the ưs Securities an d E xchange A ct o f 1934. Hoxvever in the ưs,
the term “margin transactions” refers to securities purchased on orcdit.301 In that sense, Article 72 has failed to deíìne the prohibited activities, sincc it cannot make any connection betvveen “extension o f credit” and "lending secu rìties” . It simply bans speciíìed persons ỈVom engaging in two such areas o f business: (1) extendino credit and (2) iending securities. As such, its m eaning cannot bo construed as the prohibition o i'e x te n d in g credit íor the purchase o f securities, althouoh that might have been the intention o f the lavvmakers.
In practice, in other countries, the purchase o f securities on credit is not usuallv prohibited but is pul under control. That is because maraiiì Irading to somc extcnl, has a ôood impact 011 market liquidity and promotes a hoalihy market. As obscrved by some economists:
m argin trading m usl be d efen d ed not on the v>rounds thai it efficiently a n d ingeniously assists the specnltỉtor, but rather thai it encourages the extra Irading xvhich ch nnạes a thin and onem ic m arket into a ihick a n d healthv one:" '
Hovvcver, there are a number o f reasons vvliv margin tradins, c a n n o t be totally deregulated. A ccording to the us SÉC report, an cnlire ỈYeedoni in thc extension oi' crcdit for purchasing securilies has been Ibuncl delrimental lo ilic exchange.303
’01 S e e Tl i o ma s Lee Hazen, The L aw oJ'Sacurilie.s R eịỊiilalion , ( 1 98 5 ) , 2 8 5 . lkTeiiuifter Tliomas Le e Hazen.
,0" Se e J. Patrick Raincs and Charles G. Leathers, E c o n o m i s t s a n d the S lo c k \h ir k c i ( 2 0 0 0 ) 1 12.
Se e De an Purbush, Annette Poulsen, “ S y mp o si u m on the Regulation o! Socondary Trading Markets: P r o ma m Trading, Volatilit). Portlblio Insurance, and ihe Rolc 1)1' Specialists and Markel Makcrs: Harmoni/.iii” Maiíiins: the Remilation o l ' Ma rg i n Lc ve l s in Siuck Index Putures Mar ke l s ” . ( 1 9 8 9 ) 74, C orn ư ll L im Rcvìch' 873, 876.
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Loss and Seligman also give three reasons for control o f margin trading under the A m erican law. The fírst is to prevent a situation w here the nation’s credit resources, which vvould otherwise have been available at normal interest rates for more desirable uses o f local commerce, industry, and agriculture, could be drained by m uch higher rates into loans for securitics speculation in the stock market. The second is to protect the margin purchaser from a risk the purchaser might encounter by purchasing securities mainly on credit. And the third is to achieve a stable economy and to avert over íluctuation in the market.304
The ưs securities regulation thus does not ban m argin trading but allows such a tradỉng \vithin certain thresholds.305 A margin requirem ent o f 50% o f the market value o f the purchased securities has been m aintained for years. A purchaser can thus enter a margin transaction by borrovving up to 50% o f the market price o f the securities he/she is going to buy. In extending credit to a custom er in a margin transaction, broker-dealers are required to disclose initially and periodically the credit terms in margin transaction.30’
A similar provision to that o f the us is adopted in Japan, where margin trading can only be eíTected by a securities com pany if its custom er deposits a specilìed sum o f money. Article 161-2, Securities a n d Exchange Low> reads:
A securities com pany shcill, in connection with such trcmsoction as m ay be p rescrib ed by an ordincince o f the Cobinet OJfice incliicỉinq a m argin tra n sa d io n a n d others, receive fro m its custom er in accordonce with the p rovisio ns o f an ordinonce o f the C abinet Office the depo sit o f a sum o f m oney no smciller than an am ount a rrived at by m ultiplying the m arket p rice o f the secu rity by such ratio as the Prime M inisíer m ay fi x bv taking into consideralion the assurance o f /a irn ess o f the sale or p u rch a se o f, or o ny other fo rm o f
trcmsaction in, a security.
■w S e c Lo s s and Seliíìinan, above II. 289, 803.
'"5R ư ạitlaiion 7’ o f the Pederal Reserve Board uoverns the e xt e nsi on o f credit by securities market intenncdiaries like broker-tlealers. Rơiiii/aiÌDii Li ol ihc Pederal Reserve Board governs the ext ensi on ofcreclit hy banks.
1n<’ S c e R u ìe I 0 b - I 6 ol tlic SI7,C’: undcr this Rulc, botli iniúal and periodic vvrilten disclosures of the crcdit terms o f niaruin loans are required.
T o v v a r d s a VVeỉỉ K u n c t i o n i i m S e c u r it i es M a r k e t in V i e t n a m : C h a p t e r Ị j i
111. TH E LA C K OF L E G A L BASES FO R IN V E S T O R S ’ R IG H T S OF A C T IO N A N D F O R M E A N IN G F U L L Y D E T E R R E N T SA N C T IO N S A G A IN S T V IO LA T IO N S