The Vietnamese Government has published a new decree (42/2015/ND-CP – ‘Decree 42’) setting the framework for the trading of derivatives and the establishment of the first derivative market in Vietnam. This development is expected to diversify securities products in Vietnam and enhance liquidity on the local securities market.
The decree contains general provisions about the role of the different players in the derivatives market which is to be established for the trading of derivative instruments including futures, 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 decree does not cover the trading of derivatives based on non-securities assets (such as commodities or currencies), which are expected to be reviewed as the market evolves. Other instruments not covered by the new decree include 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,” stated the decree.
According to Decree 42, the new derivatives market will comprise the stock exchange (Vietnam has the Hanoi and the Ho Chi Minh City stock exchanges, though there is a plan to merge the two into a single exchange); trading members (licensed securities companies with an equity capital of VND800bn/US$37m or more; and special trading members (Vietnamese commercial banks that have obtained approval from the SBV to invest in derivatives with government bonds as the underlying asset).
Other participants in the derivatives market include clearing members (commercial banks with an equity capital of more than VND5,000bn/US$232m and securities companies with an equity capital of more than VND900bn/US$42m; and market makers (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, including the obligation for each clearing member to deposit an initial margin in cash or securities with the Vietnam Securities Depository (VSD) and to top up if needed to satisfy a maintenance margin.
Clearing members will also be 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.
The Decree become effective on July 1, 2015.
Click here to read Decree 42/2015/ND-CP.