THE DERIVATIVES MARKET FRAMEWORK
Overview of derivatives markets
1.1.1 Definition and characteristics of derivatives:
A derivative, as defined in the Dictionary of Finance and Investment Terms by John Downes and John Ellite Goodman, is a financial contract whose value is based on the performance of an underlying asset, index, or investment This underlying asset can include stocks, indexes, commodities, currencies, exchange rates, or interest rates Derivatives enable investors to profit by speculating on the future value of these assets, making their value intrinsically linked to that of the underlying asset.
To distinguish with other financial instruments, derivatives have their own outstanding features:
The leverage effect in trading allows investors to control larger amounts of capital with a relatively small investment, leading to significant price fluctuations in derivative instruments compared to the underlying assets While this presents the opportunity for high profits, it also entails substantial risks, making it essential for traders to understand the balance between potential rewards and exposure to loss.
No required delivery - Generally, the parties to the contract, the counterparties, are not required to actually deliver an asset that is associated with the underlying
Notional amount - The number of units or quantity that are specified in the derivatives instrument
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Minimal initial investment - A derivative requires little or no initial investment because it is an investment in a change in value rather than an investment in the actual asset or liability
Trading standardized contracts offers key advantages such as transparency, liquidity, and flexibility, leading to a concentration of order flows High liquidity allows for the seamless execution of significant buy or sell orders at any moment, enabling participants to respond swiftly to shifts in market conditions Conversely, OTC instruments provide unique benefits, including product flexibility and the anonymity characteristic of the OTC market.
Underlying - The rates or prices that relate to the asset or liability underlying the derivatives instrument
The derivatives market is a financial marketplace where participants trade instruments such as futures contracts and options, which are based on the value of underlying assets.
Investors seeking to profit from short-term price fluctuations without selling their long-term shares can utilize derivative instruments These derivatives enable transactions in the financial markets without the need for physical settlement, allowing investors to capitalize on market movements while retaining their original investments.
Arbitrage trading allows investors to capitalize on price discrepancies between two markets by purchasing assets at a lower price in one market and selling them at a higher price in another This strategy enables traders to profit from the variations in market prices, effectively maximizing their returns through informed buying and selling decisions.
Safeguard your investments from price volatility with the derivatives market, which provides tools for investors to hedge against declines in the value of their existing shares Additionally, it offers solutions to protect against potential increases in the price of shares that investors intend to buy.
Transfer risks - By far, the most important use of derivatives is the transfer of market risks from risk - averse investors to those with an appetite for risk Risk-averse
Investors utilize derivatives to enhance safety, while risk-seeking speculators engage in contrarian trades to maximize profits This approach effectively transfers risk, offering a diverse range of products and strategies that enable investors to manage and mitigate their risks.
Derivatives are powerful investment tools that allow investors to make highly leveraged bets, meaning that the potential gains or losses can be significant compared to the initial investment These financial instruments can be customized to align with specific market views, making them versatile options for speculating in various financial scenarios.
Derivatives can significantly reduce transaction costs by offering a more cost-effective alternative for executing financial transactions By trading derivatives, investors can achieve the same economic outcomes as selling stocks and purchasing bonds, often with lower associated costs This strategy allows for efficient capital management while minimizing expenses related to direct trading.
Every derivatives market relies on diverse participants, including retail and institutional traders, each with distinct trading purposes The key players in this market are categorized based on their specific needs: Hedgers seek to mitigate risk, Speculators aim to profit from price fluctuations, and Arbitrageurs capitalize on price discrepancies across different markets.
A hedger is an individual who mitigates the risks linked to asset price fluctuations by utilizing derivatives This trader engages in the futures market specifically to lessen existing financial risks.
A speculator is an individual who engages in buying and selling derivatives to profit from anticipated future price movements, accepting higher risks in the process By utilizing futures and options contracts, speculators can amplify both potential gains and losses Their role in derivatives markets is crucial as they facilitate hedging, enhance liquidity, ensure accurate pricing, and contribute to price stability Ultimately, speculators sustain market activity by taking on risks that others are reluctant to accept.
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An arbitrageur is an individual who capitalizes on price discrepancies across multiple markets by executing simultaneous transactions For instance, when the futures price of an asset significantly exceeds its cash price, the arbitrageur profits by purchasing the asset while concurrently selling futures This practice of arbitrage not only generates profits from mispricing but also contributes to market liquidity, promotes accurate and consistent pricing, and enhances overall price stability.
In addition to the key participants, derivatives markets encompass brokers, dealers, and margin-traders who act on behalf of customers All participants, whether individuals or represented entities, submit their orders for execution at derivatives exchanges This centralized marketplace facilitates information sharing and position matching, allowing all participants to trade anonymously.
Factors shaping derivatives markets
Like other markets, the formation and development of derivatives markets require the impact of many macro elements They are divided into five groups below
Table 1.4: Summary of the derivatives market affecting factors
- Synchronization of the legal system;
- Tax policy and reasonable transaction costs;
- Accounting standards and international financial reports;
- Investor protection policy and law implement
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- Micro structure of trading floor;
- Government investment in information technology;
Before developing any economic market, it's essential to assess the current institutional framework The World Bank indicates that countries with stable institutions and reliable predictive foundations attract more investment, as investors prioritize safety and trust in their portfolios This is particularly crucial in emerging markets like the derivatives market, where institutional elements significantly influence its development.
A robust legal system is essential for a thriving derivatives market, as it must protect investors, ensure fair and stable markets, promote market development, and reduce systemic risks By addressing these key requirements, the legal framework mitigates the potential downsides of the derivatives market and equips participants with the necessary knowledge to prepare effectively for their investments.
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Economic factors play a crucial role in shaping the derivatives market, driven by the practical demands of a profitable new market that meets investors' needs Addressing these investment demands necessitates the introduction of innovative products that align with societal requirements and foster developmental processes Beyond traditional markets, the derivatives market heralds a new era of trading and investment activities.
A crucial requirement for establishing a successful derivatives market is ensuring that both investors and financial institution employees possess a thorough understanding of the market dynamics Additionally, financial institutions must employ a sufficient number of qualified and experienced professionals to effectively carry out derivatives trading activities.
The information technology infrastructure is crucial for the growth and success of the derivatives market, as it enhances investor access and ensures that the market operates with confidentiality, security, and transparency.
Experience from other countries
The development of the derivatives market globally, particularly following the 2007-2009 financial crisis, highlights the critical importance of effective management Initially, futures contracts based on indices have consistently served as a foundational element for this market In many countries, the expansion of the derivatives market occurs through two primary avenues: the establishment of exchange-traded derivatives markets, which evolve from the long-standing over-the-counter (OTC) derivatives market, and the beneficial influences stemming from these developments.
Truong Hoang Lan Chi, a student from class 16A7510022, highlights that Vietnam's regulatory authorities operate within a challenging context, similar to other Asian countries like Korea and Thailand, despite the country's underdeveloped OTC derivative market This situation reflects the broader difficulties faced by Vietnam's domestic financial and macro-economic environment.
The Asia-Pacific derivatives markets, particularly in Japan, Taiwan, South Korea, Singapore, and Thailand, are solidifying their roles in the global financial landscape According to the World Federation of Exchanges, the trading volume of derivatives in these nations has surpassed that of Europe, making them the second largest market after North America, with significant growth observed in 2014 Notably, Japan and South Korea are at the forefront of this expansion By 2015, the Asia-Pacific region achieved remarkable growth, overtaking North America to become the leading market for derivatives contracts traded.
Chart 1.1: Global traded derivatives contract volume in period of 2013 - 2015
Asia-Pacific Europe North America
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In 2014, North America experienced the highest growth in trading volume, while the Asia-Pacific region saw a decline for the second consecutive year, with trading volume dropping to 7.25 billion from 7.30 billion in 2013 Meanwhile, Europe showed modest improvement, with trading volume increasing to 4.45 billion in 2014, up from 4.36 billion in 2013 and 4.39 billion in 2012.
In 2015, the Asia-Pacific region surpassed North America in global trading activity, accounting for 39% of worldwide futures and options volume compared to North America's 33% and Europe's 19% This growth was evident across numerous exchanges, with 18 out of 28 derivatives exchanges in the region reporting double-digit volume increases, while only six experienced declines Key countries contributing to this growth included India, Korea, Singapore, and Taiwan, with Japan also witnessing a resurgence, as all four of its derivatives exchanges recorded double-digit growth rates.
Therefore, Vietnam could learn useful lessons from these Asian countries to take advantages of the domestic economic situation
The Singapore derivatives market was formed in 1984 with the establishment of SIMEX; the main product in this market was the futures contract of Nikkei 225 index
In December 1999, the merger of three derivatives markets—SICOM, SIMEX, and SES—into SGX aimed to enhance management efficiency and leverage human resources SGX operates as an independent entity under the oversight of the Monetary Authority of Singapore (MAS) A strategic decision by market managers allowed SES to connect with the Chicago market, the world's oldest and most developed securities market, enabling investors to trade between these two markets without incurring costs.
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SGX establishes specific regulations for different participant categories: individual trading members must be professional derivatives traders with extensive knowledge and no minimum capital requirement, while payment members need a minimum capital of $5 million, a license for capital market services, and adherence to stringent financial standards These regulations have successfully attracted a diverse range of investors, laying a strong foundation for the rapid and sustainable growth of the derivatives market Since 2004, Singapore has introduced stock options, achieving notable success through various supportive policies, including the transition to an online electronic transaction system, exemption from prospectus claims, and lowered options listing standards.
In 1993, Korea's derivatives market officially launched, marking a significant milestone The introduction of KOSPI 200 futures in May 1996 showcased the market's potential, demonstrating its performance and the necessity for an official derivatives platform within just a month of operation This success led Korean securities regulators to establish the KOSPI 200 options market in July 1997 The Korea Futures Exchange (KFE) was subsequently founded in April 1999, expanding the range of traded derivatives beyond those on the Korea Exchange (KRX) The KFE offers a variety of products, including Korean treasury bonds futures and options, Korean bond yields, KOSDAQ 50 futures, and KRW/USD futures and options.
Valuable insights from Korea highlight key factors for success in the derivatives market: first, the establishment of a robust legal framework coupled with initial incentives for participants, such as preferential tax treatments; second, the development of modern infrastructure to efficiently meet the demands of rapid order matching.
Student: Truong Hoang Lan Chi – 16A7510022 20 online transactions as soon as the derivatives market conducts operation; (iii) Applying margin methods when making derivatives transactions to prevent liquidity risks
The Japanese derivatives market is characterized by its complex products, professional participants, speculative transactions, and high risks, necessitating careful monitoring and timely adjustments to stabilize the market and protect investors The Tokyo Stock Exchange (TSE) enforces specific regulations to manage market fluctuations, including a 15-minute delay in transactions when futures and options contracts exceed the prices of underlying stock indexes Additionally, if the TOPIX index fluctuates beyond a designated range, trades related to TOPIX and associated securities accounts are restricted Participants in TOPIX transactions are also required to submit daily reports detailing their position changes for each trade.
China was among the first Asian countries to establish a derivatives market, focusing on innovative products like stock index futures and government bond futures Unlike other nations, China's early introduction of warrant products led to significant challenges, resulting in over a decade of experimentation and re-experimentation Key issues included market control and the risk of price bubbles, which hindered the successful development of these financial instruments.
Price control in China began with the trading of its first derivatives product, the treasury bond futures, introduced in 1992 Amid rising inflation and increasing bank deposit interest rates in the early 1990s, the Chinese Ministry of Finance supported three-year treasury bonds to safeguard investors, issuing bonds with a total face value of 24 billion yuan These bond futures contracts were designated with the code "327."
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In 1995, the trading of "327" saw Guan Jinsheng, CEO of Wanguo Securities, leading the sellers against buyers from the Chinese Investment and Economic Development Company, fully owned by the Chinese Ministry of Finance Wanguo faced a potential loss of $718.5 million if the price fell below $17.78 However, just eight minutes before the deal's closure on February 23, 1995, Wanguo unexpectedly executed a seven-million-dollar transaction, causing the price to plummet from $18.12 to significantly lower levels.
Regulators discovered that the order lacked the necessary margins and that the volume of treasury bonds exceeded the trading volume Consequently, the Shanghai Stock Exchange (SSE) invalidated all trades executed in the last eight minutes of that day In May 1995, trading of treasury bond futures contracts was suspended, leading to Guan Jinsheng's imprisonment and the dismissal of SSE chairman Wei Wenyuan.
Research on Chinese warrant products reveals that their prices consistently exceed those predicted by the Black-Scholes formula, which is based on historical volatility This discrepancy suggests that investors are engaging with derivative products that carry additional risks beyond those associated with the underlying assets Consequently, the findings indicate that derivatives fail to accurately reflect the true value of assets, contrary to theoretical expectations.
VIETNAM’S DERIVATIVES MARKET SITUATION
The need for Vietnam’s derivatives market
Vietnam's capital market includes the securities market, the bond market, and the commercial bank system
Vietnam's bond market emerged in the mid-1990s, initiated by the issuance of government bonds aimed at raising capital for socio-economic infrastructure development This market has successfully attracted foreign investment, addressing the state budget deficit Additionally, the corporate bond market provides enterprises with an efficient and flexible alternative for capital mobilization, complementing traditional credit lines from commercial banks.
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Vietnam's bond market currently features four main types of bonds: Government bonds issued by the State Treasury, Guaranteed Government bonds from policy banks like the Vietnam Development Bank and Social Policy Bank, Municipal bonds from major cities such as Hanoi, Ho Chi Minh City, Da Nang, and Quang Ninh, and Corporate bonds from businesses across various sectors As an integral part of the capital market, the bond market has been shaped and continues to evolve in response to integration trends By September 2008, the specialized bond market was fully established, with the primary and secondary markets primarily centered in the Hanoi Stock Exchange (HNX).
Following a period of decline in 2008 and 2009, government bond auctions experienced significant growth from 2010 to 2012, with auction values increasing by 211% in 2010, 186% in 2011, and another 186% in 2012 compared to the previous years Overall, from 2009 to 2014, the State Treasury successfully conducted 1,107 bidding sessions, issuing approximately 683,000 billion dong since the establishment of the specialized bond market.
As of June 2014, the bond market represented 21.9% of GDP, with the government bond market significantly dominating at 86% of the total value, equating to 19.17% of GDP In contrast, the corporate bond market remained underdeveloped, comprising only 14% of the total bond market value and accounting for just 2.73% of GDP.
Table 2.1: The size of Vietnam’s bond market
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Source: The research of Mrs Phan Thi Thu Hien - Deputy Director of Finance and
Banking Department and Financial Institutions ( The Ministry of Finance)
The Government bond market remains the dominant force in Vietnam's bond landscape, consistently showing growth in quantity In contrast, other bond types experience fluctuations year by year, particularly notable in the last two years of this period.
In Vietnam, government bond issuance has seen a gradual increase, maintaining stability over the years; however, when compared to other Asian countries, the disparity is significant, with the Philippines at approximately 33% of GDP, Thailand at 58.7%, and South Korea at 48% The primary investors in the government bond market are institutional entities, including commercial banks, insurance companies, securities firms, and fund management companies, while foreign investor participation remains minimal This bond market serves as a critical reference for interest rates and influences investment decisions and portfolio management among market participants.
Vietnam's securities market was established in July 2000 to serve as a medium and long-term capital mobilization channel for the economy and enterprises By the end of 2014, the market had made significant strides, boasting 673 listed stocks and fund certificates with a total par value of 425 trillion dong, reflecting a 19% increase from 2013 The market capitalization reached 1,128 trillion dong, accounting for 31.5% of GDP, while the average trading value per session surged to approximately 5,500 trillion dong, up 104% from the previous year Additionally, the VN-Index rose by 24% compared to 2013, aligning with regional market trends At that time, the market was supported by 43 fund management companies, including 21 foreign representatives, 85 securities companies, and 26 investment funds.
The restructuring process led to a significant decrease in the number of securities companies, falling from 105 to 85 Meanwhile, the number of fund management companies decreased from 49 to 43, as closed fund forms were replaced with more flexible and better-protected open fund forms This transition resulted in an overall enhancement of operational quality.
In Vietnam's securities market, retail investors constitute approximately 90% of the total, contributing to the market's volatility, especially during the 2007-2008 crisis when compared to the more stable markets of Thailand and Malaysia Institutional investors, such as investment funds, play a significant role in the overall asset composition of the market.
Student: Truong Hoang Lan Chi – 16A7510022 28 pension funds, and insurance companies in Malaysia, were from 80% to 100% of GDP; meanwhile, it was a negligible level only from 3 to 5% in Vietnam
The Vietnam securities market has experienced instability and is susceptible to external shocks, as evidenced by the fluctuations in its market capitalization index, highlighting its unsteady nature.
Chart 2.1: Rates of market capitalization in Vietnam from 2010 to 2014
In 2011, the average daily trading volume and value experienced a significant decline due to economic challenges and tightening monetary policies, with market capitalization dropping from 720,000 billion dong at the end of 2010 to 530,000 billion dong by December 31, 2011 This downturn was reflected in the HNX-Index and VN Index, which fell by 48.6% and 27.5%, respectively Additionally, total capital mobilization through the securities market plummeted by 90%, decreasing from 110,000 billion dong in 2010 to just 11,000 billion dong in 2011 The sharp decline can be attributed to several specific factors.
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In 2023, inflation surged from 12% in January to a peak of 23% in August, before decreasing to 18% by year-end This volatility was influenced by the government's tightening of fiscal and monetary policies, which included cuts to privatization and a reduction in the growth of payment instruments and credit.
Corporate incomes have declined due to reduced consumer spending, particularly in the real estate and construction materials sectors, where rising input prices and high interest expenses have significantly impacted profitability.
Moreover, savings deposits became attractive investment channels with deposit rates of 18% - 20%, particularly, in the first nine months of the year until before the SBV conducted disciplines in this market
Measures to restrict credit in non-manufacturing sectors, such as securities lending, have led to a significant reduction in money flowing into the securities market Consequently, liquidity decreased from an average of 1,400 billion dong per day in 2010 to just 620 billion dong per day in 2011.
Lastly, investors’ psychology about the banking sector was unstable when bad debts increased in the second half of 2011
By 2012 and 2013, the securities market showed signs of recovery, with both volume and value on the rise By the end of 2012, the total market capitalization reached 756 trillion dong, marking an increase of 226 trillion dong from 2011, with the HOSE contributing 87% of this total In 2013, the market capitalization further grew to 940 trillion dong, reflecting an increase of 184 trillion dong from the previous year, equivalent to 31% of the country's GDP.
Legal framework for Vietnam’s derivatives market
Derivatives are defined in Law on Securities No 70/2006/QH11 dated on June 29 th
The Law on Securities No 62/2010 QH12, amended in 2006, serves as a crucial legal foundation for the establishment and operation of the derivatives market.
Besides Law on securities and revised Law on securities, the Ministry of Finance also issued Circular No 74/2011/TT-BTC guiding securities trading dated on June 1 st
In 2011, new regulations were introduced that created favorable conditions for investors, allowing for margin trading, simultaneous securities trading, and the opening of multiple accounts with securities companies This circular marks a significant step toward the development of derivative products, as it recognizes margin trading and short selling as essential components for enhancing the derivatives market in the near future Additionally, the Ministry of Finance is drafting a circular to guide accounting standards for derivatives, which is crucial for preparing businesses and investors to engage in this emerging market.
On March 11, 2014, the Prime Minister announced Decision No 366/2014/QD-TTg, which approved the plan for the establishment and development of Vietnam’s derivatives market This initiative aims to create a centralized derivatives market under government management, thereby curbing unregulated activities in the free derivatives market The development of this market represents a crucial step in enhancing the structure of Vietnam's securities market, supporting the sustainable growth of core markets such as stocks and bonds, and establishing a reliable long-term investment channel within the economy.
In the derivatives market, market participants are essential for connecting supply and demand, thereby improving market liquidity As outlined in Decree No 42/2015/ND-CP, issued on May 5, 2015, by the Government, there are four primary types of members involved in this market: trading members, securities companies, and other key participants.
Student: Truong Hoang Lan Chi – 16A7510022 33 companies), special transaction members (commercial banks), clearing members, and market makers
According to Decree No 42/2015/ND-CP and Circular No 11/2016/TT-BTC, securities companies seeking to register as trading members must meet specific requirements These include possessing a derivatives brokerage capability certificate approved by the SSC and adhering to regulations regarding charter capital and equity.
To register as special trading members, commercial banks must meet specific criteria: they must already be members of the Stock Exchange trading in the government bond market, receive approval from the State Bank of Vietnam (SBV) for derivatives investment, and must not be undergoing consolidation, merger, dissolution, or be under state control, special control, or operational suspension.
To address issues encountered in the practical execution of the derivatives market as outlined in Decision No 366/QD-TTg approved by the Prime Minister, the Ministry of Finance released Circular No 23/2017/TT-BTC on March [date].
16 th 2017 for amending and supplementing a number of articles of Circular No.11/2016/TT-BTC and instructing a number of articles of Decree No 42/2015/ND-
CP of the Government on derivatives and derivatives market New amendments and supplements in Circular No 23/2017 / TT-BTC are listed as follows:
Regulations on opening investor’s margin accounts by clearing members
According to Point a, Clause 4, Article 26 of Decree No 42/2015/ND-CP, when margin assets consist of money, clearing members are required to open a monetary deposit account at a bank for management purposes Additionally, they must implement a system to monitor the balance of each investor's account However, the regulation does not clarify whether the management of each investor's funds should occur at the bank or within the securities company.
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Clause 1, Article 8 of Circular No 11/2016/TT-BTC mandates that clearing members must establish separate margin accounts for each investor at a bank However, in practice, not all banks used by clearing members meet the necessary requirements for the separate management of margin accounts and lack an effective investor deposit blockade mechanism in the event of insolvency.
Circular No 23/2017/TT-BTC introduces flexible regulations for securities companies, allowing them to open a single margin account at the bank for each investor instead of requiring separate accounts for every individual Despite this change, securities companies remain responsible for the separate management of margins for each investor.
This is one of the most important revision of Circular 23/2017 / TT-BTC in order to erase difficulties and encourage securities companies to participate in the derivatives market
Regulations on total trading accounts
Circular No 23/2017/TT-BTC introduces new regulations concerning total transaction accounts and their applicable scenarios Following this, VSD has provided comprehensive guidelines on the regulations governing trading accounts, specifically focusing on margining, clearing, and settling derivatives transactions.
A total transaction account refers to an investor's trading account that holds both long and short positions in futures contracts, which share the same underlying asset and maturity date These positions are kept open until the clearing members suggest initiating the clearing process or until the investor makes a request for it.
Total transaction accounts are utilized in specific scenarios, including: (i) foreign securities companies that establish total trading accounts for facilitating derivatives brokerage for international investors; (ii) fund management companies that manage portfolios for both domestic and foreign clients; and (iii) other cases as specified by the Vietnam Securities Depository (VSD).
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Regulations on the position limit management of investors
Circular No 23/2017/TT-BTC has amended Point c, Clause 2, Article 6 of Circular No 11/2016/TT-BTC, introducing additional measures for investors who do not close their positions within the permitted timeframe when exceeding position limits In such instances, clearing members are required to execute a counter-trading order to partially or fully close the investor's position If clearing members repeatedly fail to carry out this counter-trading, the Vietnam Securities Depository (VSD) will take responsibility for executing this action.
Regulations on position profit/ loss payment
Circular No 23/2017/TT-BTC outlines specific scenarios for determining position profit and loss, distinguishing between calculations made at the last transaction and those prior to the final trading day, as detailed in Point a, Clause 1, Article 9 of the Circular.
Current situation of Vietnam’s derivatives market
After initial setbacks with VNdirect's derivatives instruments in 2009, the government approved a securities market development strategy for 2011-2020 through Decision No 252/2012/QD-TTg, which outlined the process and objectives for developing the derivatives market To further clarify this initiative, on March 11, 2014, the Prime Minister approved the project to open and develop Vietnam's derivatives market via Decision No 366/QD-TTg, establishing a structured timeline for market formation and development divided into three distinct phases.
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Between 2013 and 2015, the focus was on establishing a robust legal framework and developing the necessary material and technological infrastructure This included implementing a trading system, a clearing house for settlement, and a comprehensive monitoring and information publishing system within the Stock Exchange and SDV Additionally, efforts were made to ensure that market participants were aligned with fundamental derivatives products and to prepare all essential conditions for market operations.
From 2016 to 2020: To operate the derivatives market
Post-2020, the derivatives market aims to enhance quality by diversifying trading products, expanding market membership, and upgrading technological infrastructure The focus will be on enriching the investor base and building a unified derivatives market based on international underlying assets This approach emphasizes open, transparent, and effective operations, contributing to the overall development of the financial market.
The development of Vietnam's derivatives market is progressing into its second stage, following the completion of objectives outlined in the initial phase The market is anticipated to officially launch in June 2017, marking a significant milestone in Vietnam's financial landscape.
HNX successfully completed essential preparatory steps and launched its first products on the derivatives market The SSC announced that the market would officially commence in May 2017, featuring initial offerings of stock index futures and government bond futures contracts.
The HNX30 stock index futures contracts are based on the HNX30 index, which comprises the top 30 stocks with the largest market capitalization on the Hanoi Stock Exchange (HNX) In contrast, the VN30 stock index futures contracts derive their value from the VN30 index of the Ho Chi Minh Stock Exchange (HOSE), also featuring the top 30 stocks by market capitalization These stock index futures contracts are of significant interest to all investors, including individual investors actively engaged in the underlying stock market.
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The five-year government bond futures contract is based on nominal bonds with a five-year maturity, a par value of 100,000 VND, and a coupon rate of 5% per annum, featuring annual interest payments and a lump-sum capital repayment at maturity Targeted at professional investment institutions and commercial banks, these futures contracts primarily facilitate hedging and forecasting future interest rates in the government bond market.
The Vietnam derivatives market primarily focuses on futures contracts, as highlighted by the SSC's selection International experiences demonstrate that index futures contracts are essential for establishing a derivatives market Notably, the US launched its market with the S&P 500 index futures in 1982, while Thailand followed suit with the SET500 index futures in 2006.
In Vietnam's derivatives market, the initial focus is on stock index futures, specifically VN30 and HNX30, along with government bond futures These stock indexes are composed of a diverse range of stocks across various sectors, which helps reduce the direct risks associated with individual stocks or industries Currently, the market features several indexes, including VN30, VNMidcap, VNSmallcap, VN100, VNAllshare, and HNX30, all designed based on this diversification principle.
The VN30 Index, alongside the HNX30 Index, serves as a key underlying asset for index futures contracts Initially, to enhance market liquidity, authorities plan to launch futures contracts exclusively based on the VN30 Index Following this initial phase, additional stock index products will be introduced to diversify trading options.
The VN30-Index is a prominent stock index that represents large capitalization stocks in the market, distinguished by its quantitative criteria for liquidity and other technical factors This index employs an adjusted calculation method based on the free float stock ratio and imposes a maximum capitalization limit of 10% for each stock, making it a key indicator for investors.
Student: Truong Hoang Lan Chi – 16A7510022 40 stock in the basket Therefore, VN30- Index is one of the least distorted indicators in the market today
Chart 2.2: VN30 index from 2014 to 2016
In the period of July 2014 - July 2016, VN30 index reached the highest price of 678.59, and the lowest of 538.53
Chart2.3: VN30 Index in April 2017
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As of early 2017, the VN30 index showed minimal fluctuations from prior periods On April 28, 2017, it opened at 678.59, closed at 680.49, reached a peak of 683.14, and recorded a low of 677.21.
The increasing failures in index futures transactions are often due to the control exerted over the index, particularly when it is calculated based on capitalization values, which can be heavily influenced by a few large-cap stocks Significant price fluctuations from these stocks can impact the value of index futures contracts, making it crucial for the chosen index to be resilient to protect retail investors' interests The VN30-Index, known for its stability over extended periods, helps mitigate unnecessary market risks, providing investors with a clearer understanding of potential fluctuations.
The Vietnam Derivatives Market Initiatives (VNDMI) is a new project launched by four specialized associations: IFRC, VCREME, HCMIU, and HNX, aimed at enhancing the effective use of derivatives instruments This virtual derivatives market serves as an online trading platform that simulates a real trading environment, providing participants with a risk-free opportunity to learn and trade derivatives related to equities, bonds, rates, and commodities By allowing users to test their trading knowledge and market skills, this initiative leverages the expertise and experiences of its partners to improve the overall derivatives market in Vietnam, offering valuable software tools and practical experience for users of all levels.
VNDMI aims to be the world's first comprehensive portal simulating the derivatives market in Vietnam, offering essential tools and data to help users understand and familiarize themselves with market products As a preparatory step for Vietnam's derivatives market, VNDMI will serve as a valuable training resource in universities and professional organizations, with the potential for further development and new applications.
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Chart 2.4: The operational module of VNDMI
SOLUTIONS FOR VIETNAM’S DERIVATIVES MARKET
Training and propagating activities
Between 2015 and 2016, significant efforts were made to promote basic knowledge about derivatives and the derivatives market through various channels, including SSC's electronic portal, published magazines, and TV channels, alongside intensive training programs Since April 2015, practitioner training has focused on new material, and extensive workshops in Hanoi and Ho Chi Minh City have disseminated information regarding the legal framework, trading mechanisms, and operational procedures of this market.
Although training and propagating activities on the derivatives market have been paid much attention recently, this task has not yet been completely comprehensive and popular to the public:
Knowledge and update on derivatives and the derivatives market are still limited on websites (mainly via SSC portal but the information is still limited)
The Securities Research and Trading Center (SRTC) partnered with VTV2 to launch the "Learn about the Derivatives Market" program, which aired every Wednesday and Friday at 14:00 from November 26 to December 19, 2014 Currently, the program is no longer being broadcast.
Student: Truong Hoang Lan Chi – 16A7510022 50 regular basis, although these programs like this are very necessary in the preparation state for the launch of the derivatives market
In Vietnam, renowned economic universities have yet to make derivatives a mandatory subject in their educational programs Instead, training on derivatives and the derivatives market is typically integrated into various subjects, including International Finance, Financial Markets and Institutions, Securities Market, Trading in Securities, Valuing Financial Products, and Analyzing Securities Investment.
University of Economics, Ho Chi Minh City: Banking and Finance has five majors; however, only securities major has the derivatives subject, and this subject is an optional one
Danang University of Economics: Banking and Finance has three majors, but only Corporate Finance major has the derivatives subject as a compulsory unit
National Economics University: Both Banking and Corporate Finance major do not separate in teaching the derivatives subject
From the actual situation of the propaganda about derivatives and the derivatives market, some suggested solutions:
Strengthening the dissemination of basic knowledge
In the short term, agencies should prioritize the introduction of derivative products, such as stock index futures and bond futures, through popular financial websites like cophieu68.com, cafef.vn, fpts.com.vn, and stockbiz.vn Additionally, it is crucial to air training programs for investors on television during peak viewing hours to maximize audience engagement.
Applying remote learning and online learning programs
In addition to direct training programs about derivatives, remote and online learning schedules should be applied by SSC to save costs, expand the scope and number of
Truong Hoang Lan Chi, a student from class 16A7510022, highlights the significant advancements in computer and information technology systems among market members and training facilities These improvements enable learners to easily access and utilize modern training methods.
Teaching the derivatives subject as a compulsory subject in economic universities
Universities in the economic sector should prioritize the inclusion of derivatives as a compulsory subject in finance and banking programs Additionally, other disciplines should consider offering derivatives as an optional module or integrating its content into related courses to enhance students' understanding of this crucial financial topic.
Policy mechanism
The taxation on profits from derivative investments may decrease liquidity and impede the growth of Vietnam's nascent derivatives market, particularly for instruments utilized for hedging to enhance returns rather than for speculative purposes To encourage investor participation in this relatively new market, a preferential mechanism for derivatives investment should be implemented.
Vietnam is set to launch its stock market with two initial products: stock index futures (VN30, HNX30) and bond futures This cautious yet sensible approach is necessary given the country's limited experience in this emerging market In the subsequent phase, Vietnam should quickly introduce additional derivative products, such as options, following the examples of other countries For instance, the South Korean derivatives market began trading its first stock index futures contract (KOSPI200) in May 1996, and by July 1997, the Korea Securities Authority successfully established the KOSPI 200 options market, leading to significant achievements.
The legal framework and risk management
To effectively operate the derivatives market in Vietnam, a comprehensive legal framework has been established, which includes Decision No 366/QD-TTg that approves the project for the construction and development of the Vietnam derivatives market, Decree No 42/2015/ND-CP that regulates derivatives, and Circular No 11/2016/TT-BTC that provides guidance on various aspects of the derivatives market.
Student: Truong Hoang Lan Chi – 16A7510022 52 articles of Decree No 42/2015/ND-CP, and the latest Circular No 23/2017/TT-BTC
The foundational elements for establishing a derivatives market, such as market participants, information technology, management, inspection, supervision, and clearing and settlement processes, are adequately in place However, to improve risk prevention and foster market growth, several strategies must be implemented.
Lawmakers are enhancing the legal framework governing the derivatives market, focusing particularly on the accounting for derivatives transactions Simultaneously, the government is swiftly enacting regulations that establish principles and accounting standards for financial statements involving derivative instruments, drawing from international accounting standards.
Currently, significant differences exist between International Financial Reporting Standards (IFRS) and Vietnam Accounting Standards (VAS) in areas such as the presentation of financial statements, valuation methods, treatment of financial instruments, impairment of assets, consolidation of financial statements, revenue recognition, and the accounting for fixed assets, real estate, and long-term assets held for sale Additionally, there are distinctions regarding stock-based payments.
SSC collaborates with VIASM and Fmathlab to advance financial mathematics in the derivatives market, focusing on the application of mathematical models for effective portfolio valuation and management This partnership aims to develop a reliable indicator system that accurately represents market supply and demand, serving as a valuable reference for derivatives transactions.
Student: Truong Hoang Lan Chi – 16A7510022 53
The launch of the derivatives market in Vietnam signifies the country's entry into a global community of over 40 nations engaged in advanced financial markets This development comes nearly two decades after the inception of Vietnam's securities market, marking a strategic move rather than a delayed entry To ensure success, investors, enterprises, and market participants must enhance their business acumen and ethical standards while effectively utilizing financial instruments to achieve sustainable growth.
Vietnam's financial market has increasingly integrated foreign and professional investment institutions, necessitating the diversification of financial instruments to mitigate risks, satisfy lucrative demands, and align with the standards of a modern financial market.
Southeast Asia currently has four markets for traded derivatives: Singapore, Malaysia, Indonesia, and Thailand Vietnam is set to become the fifth market for these financial products The development of the derivatives market in Vietnam is driven by demand from international financial institutions and aims to enhance the country's financial market appeal, attracting more international investment.
Financial investment institutions require risk-prevention tools to navigate markets beyond the initial state Unlike individual investors, large institutional investors face challenges in quickly adjusting positions, which can lead to significant declines in long-term portfolio value that defensive instruments alone cannot mitigate The launch of the derivatives market in Vietnam, despite initially offering only two simple products, represents a significant advancement towards meeting international standards for emerging markets.
Student: Truong Hoang Lan Chi – 16A7510022
1 Robert L.McDonald, Derivatives marketsbook third edition
2 John Downes and John Ellite Goodman, Dictionary of Finance and Investment Terms
3 John C Hull, Options, Futures, and other Derivatives book eighth edition
4 Saunders and Cornett, Financial Markets and Institutions book fourth edition
5 Cecchetti, Money, Banking, and Financial Markets book second edition
6 Law on Securities No 70/2006/QH11
7 Law on Securities No 62/2010 QH12
8 Circular No 74/2011/TT-BTC guiding securities trading
9 Decision No 366/2014/QD-TTg approving the plan on formation and development of Vietnam’s derivatives market
10 Decree No 42/2015/ND-CP of Government on derivatives and the derivatives market
11 Circular No 11/2016/TT-BTC for guidelines a number of contents of the Government’s decree No 42/2015/ND-CP
12 Circular No 23/2017/TT-BTC for amending and supplementing a number of articles of Circular No.11/2016/TT-BTC and instructing a number of articles of Decree No 42/2015/ND-CP of the Government on derivatives and derivatives market
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Student: Truong Hoang Lan Chi – 16A7510022
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