Prefunding requirement, foreign ownership limit major Vietnam stock market bottlenecks

By Dr. Nguyen Son
Tue, October 10, 2023 | 9:52 am GMT+7

Vietnam has to deal with two stock market bottlenecks – pre-funding requirement and foreign ownership limit, says Dr. Nguyen Son, chairman of the Vietnam Securities Depository and Clearing Corporation (VSDC).

According to a World Bank's report, the status upgrade from a frontier market to an emerging market will bring many benefits to the Vietnamese market.

It will help Vietnam attract net indirect foreign capital flows of about $7.2 billion. These investment sources will come from large investment funds and other foreign indirect investors.

The status upgrade will also improve the valuation of stock prices. Accordingly, stock prices will be evaluated by many investors, accurately reflecting actual needs and properly assessing the development potential of businesses. This improved valuation will have a positive impact on the government's equitization process, with the possibility of higher profits from the divestment of state-owned enterprises.

It will also increase the number of organizations and large-scale investors; diversify the investor structure, which currently has many small individual investors; improve professionalism and investor scale, thus minimizing volatility from market sentiment impacts on a large number of individual investors.

Once upgraded, more new foreign investors will pour cash into the Vietnamese stock market, positively impacting market liquidity and development towards approaching international standards and practices in business operations and corporate governance.

The status upgrade will enhance the position and image of Vietnam's capital market, which, in turn, will enhance the image, attractiveness and competitiveness of Vietnam's economy, regionally and internationally.

Measures needed

According to the assessments of two rating organizations - the U.S.’s Morgan Stanley Capital International (MSCI) and the UK’s FTSE Russell – as also World Bank experts, among 12 existing problems, two of the most important issues that need attention and resolution are pre-funding requirement and foreign ownership limit.

Regarding the pre-funding requirement, the optimal solution is to deploy a central counterparty clearing house (CCP) model and allow commercial banks and foreign bank branches to become clearing members (in addition to securities companies). This will remove foreign investors' concerns about the safety of asset storage when having to transfer assets (money and securities) out of depository banks to securities companies that are clearing members for clearing and settlement.

However, there are difficulties in implementing this solution. Even though the Securities Law and the government’s Decree 155/2020/ND-CP dated December 31, 2020 allow commercial banks and foreign bank branches to act as clearing members on the CCP system for the underlying stock market, the Law on Credit Institutions (Article 107) and guiding documents currently do not have any regulation that clearing is one of the business activities of commercial banks and foreign bank branches who are allowed to conduct the clearing and settlement of their own derivatives transactions.

Currently, both FTSE Russell and MSCI classify Vietnam as a frontier market. In particular, FTSE has placed Vietnam in the watch list for a possible reclassification from frontier to secondary emerging market status. It sets out nine criteria for a secondary emerging market, of which four relate to custody and settlement. Currently, Vietnam has met eight of the nine FTSE criteria, while the criterion on settlement is yet to be met. Before placing an order to buy stocks, foreign investors have to transfer enough money into Vietnam (pre-funding). FTSE has stated that according to international practice, financial institutional investors such as investment and insurance funds do not need to transfer money into a country before buying securities. These investors have to transfer money only after their buy orders have been successful.

The Ministry of Finance’s Circular 120/2020/TT-BTC stipulates that investors can only place buy orders when there is enough money in their account. Investors opening an account with a depositary bank can place buy orders without enough money in the account if the depositary bank guarantees or confirms payment for the investors’ transactions. However, current regulations of the State Bank of Vietnam (SBV) do not allow depository banks to grant credit to foreign investors to invest in securities. Therefore, foreign investors must transfer 100% of their money into Vietnam before placing an order to buy stocks. This is not only inconvenient for foreign investors, but also carries potential risks. They may miss investment opportunities if they have not yet transferred enough money into Vietnam to carry out transactions.

In case foreign investors have transferred money into Vietnam but cannot buy stocks, then they must bear a fee for transferring money from abroad and vice versa. In addition, foreign investors may suffer losses because of frozen capital (when transactions are unsuccessful) and exchange rate fluctuations.

Solution to pre-funding

The fundamental and long-term solution to the pre-funding requirement is to deploy a central counterparty clearing house (CCP) model. Under this, the legal documents will not require investors to make a deposit before trading, and at the same time, VSDC will be responsible for final payment of investor transactions. There are a number of reasons for the delay in implementing this mechanism.

Firstly, the CCP mechanism is being built in conjunction with the technology system provided by Korea Exchange (KRX). The KRX system is not yet operational.

Secondly, the securities and banking laws have some inconsistencies that need to be amended. Specifically, commercial banks and foreign bank branches providing securities depository services should be allowed to act as clearing members and connect with VSDC's clearing and settlement system to receive notifications of investors’ payment obligations and make transaction payments directly to VSDC for investors who are their customers.

In case the investor does not have enough money or stocks to pay for his/her transaction, the settlement responsibility will be transferred to the securities company where the investor placed the order.

On this issue, VSDC, the State Securities Commission (SSC) and the Ministry of Finance are working with the central bank to propose legal amendments to the government and the National Assembly. The amendments will be made to the Law on Credit Institutions, the Law on Securities and guiding decrees. However, this work will take a lot of time.

For an immediate solution, VSDC is working with the SSC to propose that the Ministry of Finance considers amending Circular 120 and remove the regulation that investors must deposit 100% of the money before buying stocks. Instead, securities companies must be allowed to decide whether their investors must make the pre-funding or not. In case the investors do not have enough money to pay for their transactions, the securities companies will have to make payments for them, including those opening a depository account at a depository bank and only placing orders at the securities companies.

Meanwhile, VSDC and SSC are working with associated banks and securities companies to find solutions to help securities companies control risks when applying this mechanism. This includes proposing that the Ministry of Finance supplements a regulation providing that in case an investor does not have enough money and the securities company has to pay for the purchase, the stocks will be transferred to the proprietary trading account of the securities company and it has the right to sell them to recover its debt.

Investors, securities companies and associated banks should sign a three-party contract, which stipulates that in case the securities company cannot fully recover the debt from selling the investor’s stocks, it is allowed to sell part of the investor's securities deposited at the depository bank.

The Ministry of Finance will also impose penalties such as prohibiting investors who do not fulfil payment obligations from engaging in future transactions.

In order to raise awareness among and encourage action by market players on upgrading Vietnam's stock market, as also propose solutions to accelerate the upgrade, Nhadautu.vn / TheInvestor.vn organizes a conference titled “Vietnam stock market: Status upgrade and transparency in listed firms' information disclosure,” in Hanoi on Tuesday, October 10.

The event has seen the participation of officials from the State Securities Commission, ministries, the Party Central Committee’s Economic Commission, the National Assembly’s Economic and Financial-Budget Committees, experts, and representatives of auditing firms and investment fund management firms.

Link to the conference

Comments (0)
  • Read More
Vietnam plans to cut import tax for LNG to 2%

Vietnam plans to cut import tax for LNG to 2%

Vietnam’s Ministry of Finance is drafting a decree on preferential import tax for some products, including a proposal of 2% tax rate for LNG.

Energy - Fri, March 28, 2025 | 4:31 pm GMT+7

AES’s $2.1 bln LNG power project needs solutions to meet deadline: Vietnam authorities

AES’s $2.1 bln LNG power project needs solutions to meet deadline: Vietnam authorities

The 2,250-MW Son My 2 LNG-fired power project, invested by the U.S.'s AES and state-run Petrovietnam subsidiary PV Gas, “needs solutions” to meet its deadline.

Energy - Fri, March 28, 2025 | 4:06 pm GMT+7

Over $9 bln pledged for investment projects in central Vietnam province Binh Dinh

Over $9 bln pledged for investment projects in central Vietnam province Binh Dinh

Binh Dinh province on Friday handed over MoUs on investment cooperation, in-principle approvals and investment registration certificates to 62 projects worth over VND231 trillion ($9.03 billion).

Industries - Fri, March 28, 2025 | 4:05 pm GMT+7

Vietnam's giant Vingroup eyes mullti-billion-dollar renewable, LNG power projects

Vietnam's giant Vingroup eyes mullti-billion-dollar renewable, LNG power projects

Vietnam's leading private conglomerate Vingroup is seeking the government's permission to develop seven renewable energy projects worth $20-25 billion and a $5.5 billion LNG-fired power project from 2025-2030.

Energy - Fri, March 28, 2025 | 1:09 pm GMT+7

While the buzz around a market upgrade is back, who is this milestone for?

While the buzz around a market upgrade is back, who is this milestone for?

A key issue for the Vietnamese stock market is the underdevelopment of the institutional investor base. The dominance of retail investors can create heightened volatility, which, in turn, reduces the incentive for high-quality companies to list on the stock exchange, writes Gary Harron, head of securities services at HSBC Vietnam.

Consulting - Fri, March 28, 2025 | 10:31 am GMT+7

Vietnam's private lender VIB seeks strategic shareholders: chairman

Vietnam's private lender VIB seeks strategic shareholders: chairman

Vietnam International Bank's (VIB) board of directors is now in discussions with banks and investment funds to find suitable partners for the lender, ensuring a mutually beneficial partnership that goes beyond finance.

Banking - Fri, March 28, 2025 | 8:31 am GMT+7

Vietnam tech giant FPT opens semiconductor R&D center in central Vietnam

Vietnam tech giant FPT opens semiconductor R&D center in central Vietnam

Vietnam’s leading tech group FPT on Thursday inaugurated its high-tech and semiconductor R&D center at the Danang Software Park No. 2 in the central city of Danang.

Industries - Fri, March 28, 2025 | 8:00 am GMT+7

HCMC's international financial center development to be phased out: city leader

HCMC's international financial center development to be phased out: city leader

Ho Chi Minh City aims to become an international financial center, with related development plan divided into three phases, said Vo Van Hoan, its Vice Chairman.

Economy - Thu, March 27, 2025 | 11:11 pm GMT+7

Car producers in Thailand postpone export models

Car producers in Thailand postpone export models

Car manufacturers in Thailand have decided to delay making some models for export due to U.S. President Donald Trump's new tariff policy.

Southeast Asia - Thu, March 27, 2025 | 10:17 pm GMT+7

Indonesia approves $7 bln budget for food security in 2025

Indonesia approves $7 bln budget for food security in 2025

Indonesia’s Ministry of Finance on Wednesday announced that the government has approved a budget of IRD118 trillion ($7.1 billion) for food security programs in 2025.

Southeast Asia - Thu, March 27, 2025 | 10:14 pm GMT+7

Honda Vietnam rolls out first domestically produced electric scooter

Honda Vietnam rolls out first domestically produced electric scooter

Honda Vietnam has officially launched its first domestically produced electric scooter, the ICON e:, marking a significant step in the company’s electrification and sustainable mobility strategy in Vietnam.

Southeast Asia - Thu, March 27, 2025 | 10:09 pm GMT+7

Vietnam's Quang Ngai seaport system requires over $420 mln investment by 2030

Vietnam's Quang Ngai seaport system requires over $420 mln investment by 2030

The seaport system in the central Vietnam province of Quang Ngai will need about VND10.83 trillion ($423.54 million) in investment by 2030, according to the detailed 2021-2030 development plan for local seaport land and water areas, with a vision to 2050.

Southeast Asia - Thu, March 27, 2025 | 10:06 pm GMT+7

Leading steelmaker Hoa Phat targets record revenue on partial operation of central Vietnam plant

Leading steelmaker Hoa Phat targets record revenue on partial operation of central Vietnam plant

Hoa Phat Group, Vietnam’s top steelmaker, targets a record-high revenue in 2025, driven by the expected partial operation of a steel and iron complex in the central region this year.

Companies - Thu, March 27, 2025 | 8:10 pm GMT+7

Offshore wind power developer CIP seeks long-term cooperation with Vietnam

Offshore wind power developer CIP seeks long-term cooperation with Vietnam

Copenhagen Infrastructure Partners (CIP), a major Danish renewable energy developer, is seeking to reach long-term cooperation with Vietnamese businesses in the offshore wind power sector.

Energy - Thu, March 27, 2025 | 4:16 pm GMT+7

Vietnam giant VinFast moves to expand EV service in Philippines

Vietnam giant VinFast moves to expand EV service in Philippines

VinFast, Vietnam’s largest electric vehicle (EV) manufacturer, has partnered with MGA.414 Corporation, the operator of the JIGA automotive service chain, to expand its EV service network in the Philippines.

Southeast Asia - Thu, March 27, 2025 | 3:48 pm GMT+7

Vietnam's MobiFone officially launches 5G services

Vietnam's MobiFone officially launches 5G services

MobiFone, one of Vietnam’s leading telecommunications providers, has officially commercialized its 5G services, becoming the third network operator in the country to do so.

Southeast Asia - Thu, March 27, 2025 | 3:45 pm GMT+7