Derivatives market expectations downplayed

Saturday, Jun 17, 2017 09:25

Representatives of market regulators and brokerages at the Thursday talk on the coming derivatives market. — Photo

Investors should not expect too much from the derivatives market in the early stages despite its potential benefits, said Nguyen Duy Hung, chairman of Sai Gon Securities Inc.

There are many problems and risks that must be addressed and resolved in the market, Hung said at a talk held by the business and economics site on Thursday.

Regulators, members and investors must make sure the market would not break down during its beginning phase, while legal policies must be issued to protect investors, he said.

The participation of both domestic and foreign investors is the most important element that would determine the future development and attractiveness of Viet Nam’s derivatives market, Hung said.

"If investors are not protected, it means the market has lost. Therefore, market regulators need time to prepare and shape the market and operate it properly," he said.

Potential risks could make a market break down like the global financial crisis in 2008, starting with the collapse of the US-based financial services firm Lehman Brothers Holding Inc due to the trading of stock futures, said Duong Ngoc Tuan, deputy director of Viet Nam Securities Depository (VSD).

He said that "Viet Nam might be able to address potential risks and find ways to resolve problems that arise if the domestic market is able to learn lessons from previous market breakdowns".

For example, "market members, regulators and investors must make sure the amount of margin lending or deposit must be sufficient and information technology facilities are secure", Tuan said, adding that all trading activities should be supervised and monitored closely.

Margin lending for derivatives products is different from that for common stocks. In the derivatives market, investors must deposit cash or shares at the VSD and brokerages before transactions take place.

In the common stock market, the brokerage firms will lend money to an investor to purchase a targeted stock. The investor must guarantee the loan with the targeted stock and make his payback whether or not he gains or loses from his trade. If the price of the purchased stock falls down below a specific level set by the broker, the lender will put a force-sell order on that stock to recover a part of the money lent to the investor.

In the derivatives market, when an investor carries out a transaction, the brokerage – as a market member – must take all responsibility for the trading order. If the investor fails to pay back, the market member will be the one that suffers.

Therefore, a brokerage – as a market member – needs to address and prepare for potential risks and come up with plans to resolve the problems.

However, Nguyen Anh Phong, deputy general director of Ha Noi Stock Exchange, said: “The derivatives market allows investors and all stakeholders to track trading activities daily, therefore, it is easy for them to control the risks.

“Derivatives transactions themselves are future contracts, therefore, if an investor finds he could suffer losses on his investment, he can quickly close his positions.”

The HNX is developing new future indices to help investors filter substandard stocks before making decisions. "Reducing the number of substandard stocks will help the market suffer less," Phong said.

Market regulators have developed the VN30 Index and the HNX30 Index to be the first two future contracts for the derivatives market. The VN30 Index will be launched first, containing futures for shares of the 30 largest companies by market capitalisation on the HCM Stock Exchange.

The derivatives market is expected to begin functioning in the second quarter of 2017. Six brokerage firms have been granted market membership by the SSC to operate in the market. — VNS


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