Non pre-funding solution effective for foreign investors on Vietnam stock market from Nov

Foreign institutions will no longer have to show sufficient funds upfront to purchase Vietnamese stocks starting November 2, a significant milestone in the country's efforts to get a market status upgrade.

Currently, foreign investors must fully transfer funds before buying stocks, a bottleneck that has hindered the upgrade of the Ho Chi Minh City Stock Exchange.

The non pre-funding solution (NPS) is stated in Circular 68 issued by the Ministry of Finance on Wednesday, which amends and supplements some provisions related to trading on the stock trading system; securities clearing and settlement; operations of securities companies; and information disclosure in the stock market.

The solution represents a significant step towards meeting the criteria of global index provider FTSE Russell to upgrade Vietnam's stock market status from “frontier” to “emerging”.

With a market status upgrade, analysts estimate that inflows from exchange traded funds (ETFs) could reach up to $1.7 billion, not including capital from active funds, whose total assets are five times greater than those from ETFs as projected by FTSE Russell.

Vietnam's stock market is currently witnessing a strong wave of net selling by foreign investors. Since the beginning of the year, foreign investors have net sold VND62.4 trillion ($2.53 billion), surpassing the total net selling value for the entire year of 2021.

The NPS could help attract foreign investment as the U.S. Federal Reserve (Fed) is expected to lower interest rates, leading to a shift of capital from stronger markets to more potential ones.

With the NPS, responsibilities of securities companies will also be increased to manage associated risks.

Specifically, the circular mandates that securities companies must assess payment risks of foreign institutional investors to determine funds required when placing stock purchase orders, as agreed upon by both parties.

Foreign institutional investors must have sufficient funds in their accounts before the depository member transfers money to its account at the clearing bank to execute stock transactions. The clearing and settlement of stock purchases shall comply with legal regulations and the rules set by the Vietnam Securities Depository and Clearing Corporation (VSDC).

If a foreign institutional investor fails to have sufficient money for a stock purchase, VSDC will transfer the payment obligation for stock purchases with insufficient money to the securities company where the order was placed (via the securities company's proprietary trading account).

“Securities firms must ensure an adequate sum of money to fulfill transaction payments as regulated. They will face penalties for non-compliance with legal provisions and VSDC rules,” the circular states.

Securities companies are allowed to transfer ownership outside the trading system, settle stock transactions, or sell shares available in their proprietary accounts via throughput on the trading system to foreign institutional investors who lack cash for payment no later than the next trading day after the shares are accounted for in the securities company’s proprietary account, ensuring compliance with foreign investors’ maximum ownership limits set by the law for those stocks.

Any losses, gains, and additional costs arising from these transactions will be settled according to the agreement between the securities company and the foreign investor.

The custodian bank where the foreign institutional investor has opened a securities custody account is responsible for settling payment deficiencies and any arising costs (if any) in cases where there is a discrepancy in the investor’s account balance with the securities company, leading to a payment shortfall for stock purchases.