Seminar revisiting the development of derivatives markets in asia – recommendation for viet nam (THỊ TRƯỜNG PHÁI SINH SLIDE)

Revisiting the Development of Derivatives Markets in Asia – Recommendation for Vietnam Outlines  Most Common Products  Derivative Markets In Asia  Key Success Factors  Case Studies  Policy Issues  Recommendations  Conclusion Most Common Products    Equity derivatives:  ETDs in Korea, India, and Hong Kong  Index futures, Index options  institutional investors, significant foreign participation Commodity derivatives:  China, Japan  Soybean, wheat, rubber, gold, and oil etc Interest rate derivatives:  Tokyo, Singapore  Migrating trend from OTC to ETD  Recent fixed income derivatives Most Common Products (cont.)    Foreign exchange products:  Major currencies traded in Tokyo, Singapore, and Hong Kong  Mostly in OTC derivatives,  Offshore markets in Singapore for minor and non-convertible currencies Credit derivatives  Tokyo, Hong Kong  Credit default swaps  Unregulated markets, hence, less transparent and highly leveraged Summary:  Equity derivatives are the fastest growing products on exchanges  Growing rapidly, partially migrating from OTC to ETD markets  Foreign exchange turnover substantial in the main OTC markets  Started from commodity and local interest rate derivatives  Added foreign exchange, credit, and equity derivative products Derivative Market In Asia  Tier 1: Japan, Australia, Hong Kong, and Singapore  Demutualized, among 16 listed exchanges worldwide  Large variety of interest, FX, equity, and commodity products  TSE promotes integration of specialized exchanges via new laws  ASX provides interest futures, equities, options , FX  SGX trades currency contracts, foreign interest rate derivatives but been stagnated  HKEx started on commodity derivatives, but now on trading equity derivatives  Tier 2: Korea, India, China, and Malaysia  In the process of being demutualized  KRX largest future exchange in terms of trading volume; offers types of derivative products, low transaction costs, very advanced IT & internet trading  NSE focuses on retail trading of equity derivatives After strengthening underlying cash market, equity futures started in 2000, interest rate futures introduced in 2003, OTC in 2004 Derivative Market In Asia (cont.)   China closed 27 out of 30 exchanges in 90’, allows commodity futures trading only  Malaysia merged 03 exchanges into the Malaysian Derivatives Exchange (now BM), trades commodity and equity futures The holding company demutualized in 2004 and the participation of foreign institutions has increased to over 40% Tier 3: Thailand, Indonesia, and the Philippines  Allow OTC derivatives trading by banks; recently considered to (re)introduce ETD markets  TFEX setup 2004, trades index futures, interest rate derivatives  JFX trades equity index futures in 2001 However, less developed market infrastructure & investor interest led to very low trading volumes  Manila Futures Exchange allows OTC derivatives trading but closed in 1997 Key Success Factors I II III Market liquidity, including fixed income benchmarks, Solid accounting and regulatory standards, including a derivatives law, Modern infrastructure at exchanges (central counterparty), and IV A tax regime that creates a level playing field  Summaries:  Best practices in underlying infrastructures exist: Australia, Hong Kong, India, Japan, Korea, and Singapore  Existing obstacles: China, Indonesia, Malaysia, the Philippines, and Thailand Case Studies  HK Futures Exchanges bankrupted in 1987 & Moscow Central Stock Exchange failed in 1994 due to weak clearing house + poor margin system  Shanghai Stock Exchange:World’s largest exchange traded million government bond futures in one day on February 23, 1995; then collapsed where price manipulation caused over $10 bn of losses in few minutes => Many valuable lessons on the preconditions that need to be met for the trading of derivatives Case Studies (Cont.)  Lessons learnt from history:  FX derivatives brought down the Thai and Indonesian currencies  Total return swaps were used to speculate on cross-border interest rate differentials  Structured notes were used to circumvent accounting rules, disclosure requirements, and prudential regulations  All these instruments were traded in OTC markets with international banks  Need for stronger regulation, with more emphasis on risk management, and sound infrastructure at organized exchanges with CCP clearing  As FX forwards used to undermine fixed exchange regimes => Derivative products should NOT be launched unless their cash markets have been well developed with market-determined prices Policy Issues   Liquidity  Economic rationale for hedging needs  Liquid cash market  Market determined prices, interest/FX rates  System stability, no moral hazard risks Regulation  Lead regulator, capital rules, reporting standards  Legal clarity: ISDA standards, enforceability  Accounting rules, transparency, disclosure  Level playing field, tax harmonized, integration Policy Issues (cont.)  Infrastructure  CCP, ISDA master agreement, close-out netting  Demutualized exchanges, strong capital, margins  SRO rules enforced, with limits, monitoring  Certified investors, code of conduct Recommendation for Vietnam I Cash Markets: liquid, efficient, integrated; benchmarks in bond markets II Regulation & Legal Framework: derivatives law, SRO function III Repo Markets: effective short, margin trading; security lending IV Intermediary Licensing: qualified participants, proper training V Taxes level playing field: avoid transaction tax VI Exchange: platform, links, capital, margins, first index futures VII Design CCP: close-out net, ISDA master, enforcement VIII Accounting: adopt IFRS, Mark-To-Market, IAS39, full disclosure IX X OTC License: regulatory approval, counterparty credit risk, swaps IR&FX Investor Base: hedging needs, products, IT, lower costs Conclusion Key Success Factors for the development of sound derivative markets in Vietnam:  Liquid cash market,  Solid product design,  Strong regulation, and  Sound market infrastructure Thank you for your attention! ... commodity derivatives, but now on trading equity derivatives  Tier 2: Korea, India, China, and Malaysia  In the process of being demutualized  KRX largest future exchange in terms of trading volume;... monitoring  Certified investors, code of conduct Recommendation for Vietnam I Cash Markets: liquid, efficient, integrated; benchmarks in bond markets II Regulation & Legal Framework: derivatives. .. started in 2000, interest rate futures introduced in 2003, OTC in 2004 Derivative Market In Asia (cont.)   China closed 27 out of 30 exchanges in 90’, allows commodity futures trading only