Ready for derivatives

Operation of the derivatives market is closely linked to the stock market. Photo by Nguyen Hien.

Ensure transparency

Sharing on the derivatives market, Mr. Duong Ngoc Tuan - Deputy General Director of Securities Depository Center (VSD) said: After 17 years of stable development, it can be said that Vietnam's stock market has accumulated medium enough and cautious for the advent of derivative securities. This market will be born to meet many of the needs of participating investors as the need for risk prevention; speculative trading needs to be based on market price fluctuations; the need for more financial institutions has a better credit rating and product diversification.

Agreeing with the needs of the derivatives market, Mr. Nguyen Anh Phong, Deputy General Director of the Hanoi Stock Exchange (HNX), said: "Vietnam's stock market has been developing for 17 years but there were only two main products including stocks and bonds. In 2013, the ETF product was added (passive investment funds mimicking a specific index) in accordance with the route of diversifying products in the financial market. Therefore, it is necessary to bring the derivatives market into operation. The main function of the derivatives market is to help investors prevent risk. When there is a tool to limit the risk, investors will be more confident in pouring more resources into the market, thus helping the Vietnamese stock market to attract more hidden resources. In addition, the value of the derivatives market is heavily influenced by the underlying stock market bases on the relationship between derivatives and private ownership. In other words, the derivatives market will help the market develop more efficiently while expressing the expectation of investors when looking at the basic market, that makes the basic prices to be closer to the market. "In our opinion, this time, when the necessary factors are gathered, the derivatives market will be a positive support for the Vietnamese stock market," Mr. Phong said.

Analyzing the difference between the derivatives market and the stock market, Mr. Duong Ngoc Tuan said: Four to five years ago, derivatives were seen as a product, but so far derivatives have been identified as a market. On this basis, policymakers fully recognize the role and risks of this market. VSD will be responsible for ensuring clearing for the market to operate smoothly and safely. This is fundamentally different from the stock market.

In addition, members of the derivatives market participating in clearing payments in the derivatives market need higher capital, technical facilities, and human resources. In terms of capital, general clearing members meeting the capital requirement of over 1,200 billion VND will be able to provide services to clients, themselves and others. The target group is a direct offset member only for their customers and themselves, the capital requirement is less than 900 billion VND. For commercial banks, the requirements are equivalent to 5,000 - 7,000 billion VND.

On the investor side, when entering the derivatives market, before opening a transaction, a margin account must be opened at the clearing members to make a deposit for the VSD. Margin assets are submitted to VSD through a clearing member, either in cash or in securities. If the money is at least 8% of the value of the basis assets, the rest may be securities but must be in the list of securities allowed as collateral under VSD regulations. After making a deposit, new investors can trade. A special feature is that when trading on the derivatives market, VSD is both the official partner of the trader and the party responsible for the transaction, in case the other party loses the ability, VSD still has to pay.

Spread the information

In preparation for the introduction of derivative products, most market participants are ready. The information for the derivatives market as well as the stock market has been thoroughly prepared by HNX and completed the disclosure of this information through data systems, websites, electronic boards. Meanwhile, VSD has also prepared and communicated to investors some concepts and mechanisms of operation in the derivatives market. Under the authority, VSD determines quarterly rates for each product and will publish it on its website and will announce it officially two days before the launch of the market. VSD will also announce the daily activities of the members. Mr. Duong Ngoc Tuan commented: Compared to the time 17 years ago when the Vietnam stock market was launched, the preparation for the launch of derivatives market was clearer and more thoughtful.

From the securities company, Ms. Nguyen Vu Thuy Huong - Director of Capital & Derivative Project Manager, Saigon Securities Incorporated (SSI), said that this project was formed two years ago, SSI has partnered with the regulators involved throughout the construction process. To date, the preparation has been completed about 80%. The most concerned business is the way to attract investors to join, therefore, SSI is using a spreading strategy, from some brokerage staff who have deep knowledge of the derivatives market will transmit. To all employees in the company and from there knowledge will be widely spread to investors.

Ms. Huong added that SSI is also building a trial trading model. After completing the preparation system for the official operation of the derivatives market, the partner will build the trial system. Information related to official market transactions will also be used for that testing system to help investors when they need to find out whether they can use the information on the official market for a trial transaction without putting real money into the market.