The Vietnamese Government has issued a new decree that lays the foundations for the trading of derivatives and for the establishment of the first derivative market in Vietnam. This development is expected to diversify securities products in Vietnam and help enhance liquidity on the Vietnam securities market. Partner Robert Fish, Senior Associate Chi Ha, and Associates Dang Vu and Ngoc Nguyen report.
- A derivatives market is to be established for the trading of futures, forwards and options where the underlying assets are shares, bonds and units traded on a Vietnam stock exchange. It is expected that the first two products to be launched in 2016 and traded on this market will be index-linked futures and Government bond futures.
- The new decree 42/2015/ND-CP (Decree 42) contains general provisions setting out the role of the different players in the planned derivatives market.
- Decree 42 is the first of a series of legal instruments to be issued this year to provide a detailed legal framework for derivative securities trading in Vietnam. Investors should continue to watch this space as it develops in 2015.
Derivative instruments have been recognised as a concept by Vietnam law since 2006 under the Law on Securities. However, the green light for the development of a regulated market for such products was not given until early last year. Under Decision 336 of the Prime Minister, dated 11 March 2014, Vietnam proposed to develop a derivatives market in phases, with the goal of full integration with international practices after 2020.
Decree 42 is the first of a series of regulations to be issued this year under that roadmap, which will lay out the essential legal framework for the Vietnam derivatives market that is scheduled to commence operations in 2016.
The following derivatives will be tradeable in the Vietnam market:
- listed options;
- forward contracts where the underlying assets are shares, bonds or units traded on a Vietnam stock exchange; and
- other listed derivative securities and other negotiated derivative securities where the underlying assets are shares, bonds and units traded on a Vietnam stock exchange.
The new decree leaves room for the Prime Minister to decide on the trading of derivatives based on non-securities assets (such as commodities or currencies) when the market evolves in the future.
However, its scope does not cover existing hedging instruments that are common to the banking sector, such as interest rate swaps and foreign currency swaps. These types of derivatives remain to be regulated by the State Bank of Vietnam (SBV); for example, those under Circular 01/2015 that the SBV issued in January 2015 on interest rate swaps.
The new derivatives market will comprise the following participants:
- The Stock Exchange, having the right to set up the exchange(s) for, and manage the trading of, derivatives. Vietnam currently has two stock exchanges: HNX (or the Hanoi Stock Exchange) and HOSE (or the Ho Chi Minh City Stock Exchange), though there is a plan to merge the two into a single stock exchange in the near future.
- Trading members, being licensed securities companies with an equity capital of VND800 billion (c.US$37 million) or more. Trading members are allowed to trade on their own account and provide brokerage services to investors trading in derivative securities.
- Special trading members, being Vietnamese commercial banks that have obtained approval from the SBV to invest in derivatives with Government bonds as the underlying asset (eg bond futures).
- Clearing members, being commercial banks with an equity capital of more than VND5,000 billion (c.US$232 million) and securities companies with an equity capital of more than VND900 billion (c.US$42 million) who are, in each case, existing depository members of the Vietnam Securities Depository (VSD) and are licensed to provide clearing and settlement services by the State Securities Commission (SSC) and the SBV (as applicable).
- Market makers, being trading members or special trading members who are also clearing members and who sign an agreement with the Stock Exchange to become market makers and enjoy specific incentives given by the Stock Exchange for such a role.
Decree 42 set out the overall mechanism for the clearance and settlement of derivatives transactions and risk management. The VSD will be the central clearing house for all listed derivatives transactions. Settlement can be in cash (via payment banks) or in the underlying securities (via the depository accounts at the VSD).
Each clearing member is obliged to deposit an initial margin in cash or securities with the VSD and to top up if needed to satisfy a maintenance margin. Clearing members are also required to contribute into a clearing fund and a provisional settlement risk fund maintained by the VSD, which will be used to settle payment obligations when a clearing member or its client becomes insolvent.