Does the derivatives market attract capital from the base market?

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The advantages of T + 0 and short sale in downtick are important advantages of future contracts.

Particularly, the liquidity of the derivatives market was constantly rising, creating new records with volume reaching 164,872 contracts in the session on 6th July 2018, equivalent to VND14,705 billion, triple the number of transactions in the base market.

A report on Vietnam's fiscal and monetary market on 7thJune 2018, announced by Saigon Securities Inc., (SSI), showed that liquidity increased, daily trading held a majority in derivatives transactions.

Specifically, the daily trading volume was about 10 times as much as the open interest (OI) at the end of the day. There was also a great difference between the Vietnamese market and developed markets, where trading volume was minor compared to Open Interest due to longer-term investment trends.

Open volume was also improved with the increase in trading volume, but the increase was not significant. While the average trading volume in the recent month has increased three times from the trading volume at the beginning of the year, from 40,000 contracts to 130,000 contracts per session, the OI increased slightly from the average of more than 10,000 contracts to 14,000 contracts in July 2018

Besides that, due to the value of a contract decreasing significantly, the total value of OI was only about VND 1,200 billion, a slight increase compared to the average of VND 1,000 billion in the first months of the year. This was the total nominal value of the future contracts in transaction. The real value of the capital inflow to the market was lower due to the effect of derivative leverage.

"This value is negligible compared to the amount of assets on the base market and does not rise significantly when the market plunges. Therefore, there is not enough evidence to state that the derivatives market has attracted capital from the base market," SSI asserted

How do margin adjustments affect the derivatives market?

From 18th July 2018, the initial margin was raised to 13% from 10% by Vietnam Securities Depository (VSD) to minimize risks on the derivatives market. The raising of the initial margin means a cut of the leverage for the derivatives investors. The actual margin after adding acceptable account thresholds and the price change limit will be higher than the announced margin.

With a margin of 10% as before, the minimum actual margin for securities companies is 12.5%, which is equivalent to a leverage of 1:8. With the new margin of13%, the actual margin has to increase by more than 16% to ensure that securities companies do not violate VSD regulations, which means that the leverage will drop to 1:6.

Despite the decline in the leverage, SSI said that the advantages of T + 0 and short sale in the downtick are still important advantages of future contracts. The rise of the margin will cause that some accounts will call for additional margin. However, investors may choose additional margin to maintain the number of existing contracts or reduce the position of the contract without additional money. Therefore, the decision to raise the margin may not make a big impact on money flow in the derivatives market as well as the base market.

The change in the margin is not uncommon in the world. This is a tool for trading exchanges to regulate the market by flexibly adjusting margin in line with market developments and existing risk level. Specifically, the trading exchanges can raise the margin when the market risks increase and reduce margin when the risks decrease.

Looking back at history, the SSI said that in 2011, when the price of silver rose to nearly US$ 50 / oz, the risks increased sharply with the great price change, and the world's largest futures exchange, the CME Group, raised the margin 11 times in a year. At the same time, the Copper market was stable and the risks of futures contracts were not significant, so the stock exchanges reduced the margin twice.

Therefore, it is important to note two points about increasing the margin with derivatives trading. Firstly, it is necessary to increase the margin when the market risks increase, particularly the risk associated with price changes rather than price trends. The risk measure is not the price changes but the standard deviation. Even when the market is up and the price changes are significant, the increase in the margin can be applied to minimize the approaching to the warning thresholds or large losses for investors.

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Secondly, the margin ratio is not only one-way up, but is on rising and falling. As market volatility diminishes, the standard deviation decreases, it is also necessary to reduce the margin to increase the leverage, thereby increasing profitability and attracting investors.