The government wants to boost derivatives market

10-Jan-2019 Intellasia | Dau tu Chung khoan | 6:00 AM Print This Post

In 2018, the implementation of new products on the derivative market was delayed, and right on the first day of 2019, the government expressed the will to overcome this situation through the message of promoting the development of the derivative market.

Overcome “infamousness”

The decrease of 9.3 percent of VN Index in 2018 compared to the previous year has “created land” for the derivatives market to gain more positive results.

According to Hanoi Stock Exchange (HNX), after more than one year of operation, the derivatives market has grown well in 2018, when the average trading volume reached 78,800 contracts per session, up nearly 7 times compared to the average in 2017. Open interest (OI) of the whole market continued to maintain the upward trend, and by the end of 2018, reached nearly 21,653 contracts, an increase of 2.7 times compared to the end of 2017.

Explaining on the sharp increase of liquidity on the derivatives market last year, the Chair of HNX’s Board of directors Nguyen Thanh Long said that there are two basic reasons: the reduction of the underlying stock market helped increase the need to prevent risks, and demand for investment increased.

In terms of risk prevention, developments in the derivative market showed that when the underlying market fell, the liquidity on derivatives market increased. Thanks to derivative instruments, the sell-off momentum has decreased.

It is said that the fall of VN Index did not stop at 9.3 percent if Vietnam did not have derivatives market. However, to confirm this, the derivative market has faced many pressures, even being “infamous” for absorbing money from the stock market, making this market fall deeper in the middle of 2018.

According to Tran Van Dung, Chair of the State Securities Commission (SSC), the decline of the underlying stock market at that time was too “bad” that for the first time in the 19-year history of Vietnam’s stock market development, the Standing Board of the government had to meet to report on stock market developments for close instructions accordingly.

In the context of a slumping stock market, there were comments that the derivatives market needs to be controlled to avoid the consequences of the “hot” development. Fortunately, with the proper management of the government and the Ministry of Finance, only one “tightening” move was applied that is to raise the deposit rate from 10 percent to 13 percent in mid July 2018. However, even a three percent increase in margin rate has caused a decline in the stock market’s liquidity, affecting investor sentiment and it took some time for the new market to rebalance.

This shows that in order to be accepted by market participants, the derivative securities have become tools for risks prevention.

It is possible that this is one of the bases for the government, for the first time, to mention the direction to develop the derivatives market, in addition to a number of other major orientations for the development of the stock market this year in Resolution No. 01/2019 of the government on the main tasks and solutions to carry out the socio-economic development plan in 2019.

Wait for three knots to be loosen

In order to promote the development of the derivative market as the government “proposed”, at least three major knots need to be loosen.

The first is a lack of institutional investors. This is what HNX is worried about when looking back at the derivatives market in 2018. Currently, almost all the majority (99 percent) of participants in the derivatives market are individual investors, although according to the development orientation, and in accordance with international practice, institutional investors often occupy the majority of derivatives market.

Practices from the market show that due to lack of institutional investors, coupled with unfavourable market conditions, the implementation of the second derivative product, futures contracts of government bonds (G-bonds), were delayed in 2018.

Many experts believe that lack of institutional investors is the most difficult problem not only for the development of the second derivative products, but also for other derivative products. If this knot does not soon have a solution, the target of implementing government bond futures contract in the first quarter of 2019 that the SSC is pursuing will not be easy to make.

Another knot is the current derivative market has a product based on VN30, while this index is facing doubts about the risk of being “distorted”, since due to small amount of stocks in the basket, there are stocks with low liquidity. The new derivative stock market has an index that limits the deployment of new products to meet the investment appetite of investors.

It is known that in order to gradually overcome these issues, HNX has started to build a new set of index of VNX200, but according to the SSC leader, the index will be put into operation at the end of 2019 at the soonest.

The third knot is that there is no incentive mechanism for fees and taxes as the international markets have implemented during the initial stage of the derivatives market. The resolution of this knot is beyond the reach of SSC, and the Ministry of Finance, but very much on the hand of the government and the National Assembly.


Category: Stocks, Vietnam

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