Derivatives market to up investor confidence

Việt Nam’s stock exchange is poised to take its next step forward with the opening of the derivates market next month. This is expected to help investors hedge against risks and increase their confidence in the local securities market. Nguyễn Thành Long, Chairman of the Hà Nội Stock Exchange, speaks to Vietnam News Agency about the market’s preparations and expectations.

What are the advantages and difficulties in developing a derivatives market in Việt Nam?

Since Việt Nam lags behind other countries in developing the derivatives market, we can learn from their experiences, as stated in the derivatives market development plan approved by the Prime Minister via Decision 366/2014/QD-TTg dated March 11, 2014.

As per the decision, we will build a central derivatives market that is governed by the Government in the early stages, thus avoiding the creation of a highly risky one.

We must also follow an active, suitable roadmap to introduce different types of derivative products to the market, from the simplest to the most complicated ones, and create common securities products based on international standards.

The condition of Việt Nam’s common securities market has improved by restructuring it. The derivatives market, with stocks of companies as fundamental assets, will be supported by higher common market trading liquidity and the quality of finance and risk management by market members – brokerage firms and commercial banks – who will function as trading and clearing members.

The valuation of the stock market has reached 53 per cent of the country’s GDP, the highest since the stock market started operating in 2000.

Trading value has also increased to reach VNĐ5.8 trillion, four-fold the figure in 2011. The bond market has also been valued at 36.9 per cent of the GDP, with a daily trading value of VNĐ8.63 trillion – nine times that of 2011. Though the number of securities firms has fallen 30 per cent, the remaining ones, especially members engaged in market trading and clearing, have improved their financial quality.

The derivatives market is being developed based on stable demand in the market.

Investors can register to trade derivatives with their common stock accounts.

The number of trading accounts has reached more than 1.7 million since the stock market came into operation in 2000. More importantly, investors have improved their understanding of stocks and market trading when compared to 2000.

Basically, derivatives products are more complicated than common stocks and local investors are certainly not used to them. But simple mechanisms based on the user-friendly trading platform will help them shorten the time needed to get used to new products and boost the demand for derivatives products in the future.

However, we have also encountered some difficulties in developing the derivatives market as these are new, complicated products and trading mechanisms. So we need to raise awareness of investors and market members about the products and about market management by learning from international practices.

In the early stages, some businesses may not be able to participate in the trading and supply services. That will slow the development of the derivatives market down, especially that of Government bond futures.

How is Việt Nam’s derivatives market different from others in the world?

There is no difference between Việt Nam’s derivatives market and others. We have developed a strict, comprehensive legal framework for the market operation by drawing lessons from international financial crises. The trading, supervision, clearing and settlement systems are also launched together by international providers in this field. In addition, the products are designed to meet international standards and Vietnamese investors’ demand, and there is no limit of foreign ownership on the derivatives market.

What do you expect from this market?

The derivatives market, as a new component of Việt Nam’s securities market, will help provide add-ons and complete the structure of the financial market in general and the securities market in particular. Local businesses and the Government will be able to raise more capital from the securities market, decentralise potential risks and meet the demands of economic development.

The nascent derivatives market is also a new tool that will help investors reduce potential risks, raise their confidence in the local securities market, extend their investment period, keep market volatility low and give legal entities more options to raise money for their investments.

Having an additional tool to reduce the chance of risks when share prices change, will strengthen investor confidence and lure more investors into the market, making it easier for businesses to issue shares.

Diversification of securities products, especially those that help investors avoid risks, will draw more short- and long-term foreign indirect investment capital, increasing the liquidity and quality of the securities market, the financial sector and the country’s economy, thus improving the nation’s credit worthiness for foreign investors.

In addition, the derivatives market is also a solution to speed up the restructuring of the securities market. More specifically, more professional institutional investors that have good understanding of derivatives products and market will be present in the market. Their participation is expected to help the derivatives market operate safely, steadily and sustainably, avoiding non-market volatility caused by individual investors acting on the herd mentality.

The birth of Việt Nam’s derivatives market will also have positive impacts on the restructuring of securities trading institutions.

Those that are qualified to take part in the derivatives market will have to further improve their operations and meet higher requirements on capital, corporate governance, risk management, human resource management and information technology in order to raise the quality of market trading for investors.

Besides, the launching of the derivatives market is the foundation for the creation and operation of the derivatives clearing and settlement centre, which follows the Central Counterparty (CCP) model, ensuring that the financial system is secure and stable to deal with risks and crises.

In reality, some institutions and individuals have launched some derivatives products under civil agreements like gold futures contract to dodge the law. This reflects the demand of the market and investors in diversifying the products.

In the context of integration, we need to develop a legal system and the derivatives market to better manage the stock market in accordance with international practices, ensuring fair and transparent operations that serve the best interests of investors, especially individual investors.

How have we prepared for the launch?

We can say that all preparations for the launching of the derivatives market have been completed. We have issued policies, created a legal framework, built infrastructure, installed needed technology, developed products and trained investors and market members. There are six to eight securities firms that have been selected as market trading and clearing members, and they will be able to meet investors’ demand when the market starts trading.

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