Central bank proposes two solutions for gold exchanges

Governor Giau of the State Bank of Vietnam (SBV) says that the bank has submitted to the Government two solutions to deal with speculation on the commercial gold exchanges, or ‘trading floors.’

Option One is simply to prohibit the gold exchanges because they do not benefit the society. Option Two will permit them to continue operation but require participants to provide 100 percent collateral for loans instead of several percent as currently required by gold trading floors.

On December 2, reports Tuoi Tre newspaper, a lot of speculators were flustered when they heard that the trading floors may shut down.  An investor at a gold trading floor on Nguyen Cong Tru Road in HCM City, said that she met the floor owner requesting clarification, but the owner declined to answer.

Analysts say that either of the solutions proposed by SBV will lead to much the same result

T, an investor on a bank-run gold trading floor, said the required security money level is now only five to seven percent, and speculators can thus leverage their loans by 14 to 20 times.  If the collateral requirement is raised to 100 percent, the potential gain or loss on a transaction will be sharply reduced, for speculators will only be able to ‘play’ with the sums of money they actually own.

Thus Option Two, if approved, will render the gold exchanges unattractive to speculative investors and likely put them out of business as effectively as Option One, T said.

Many regard speculation in gold to have been the root of the foreign exchange crisis that gripped Vietnam late last month.  The idea of shutting down the trading floors was first put forward a year ago. However, no gold trading floor has yet been forced to close its doors.

Asia Commercial Bank (ACB) was the first bank to open a gold trading floor. From that time forward, trading floor operators have been the object of many complaints, from breakdowns in recording and clearing transactions to restrictions on withdrawing gold from accounts.  The complaints prompted SBV to set up an interministerial task force to survey the gold trading business.

Sources say that the task force recommended that SBV prohibit the gold trading floors.  However, no gold trading floor has been forced to stop operations, because of the continued arguments among government agencies about who should manage them.

Some argued that because gold is a kind of commodity, gold trading floors must fall under the Commercial Law. This means that the Ministry of Industry and Trade would manage all commodity exchanges, including gold floors.

Meanwhile, SBV has built up a dossier that argues that gold trading is a financial business and gold floors must be established and run by commercial banks

While the government agencies have been busy trading drafts of a regulatory framework, a lot of gold trading floors have been established. The floors’ owners hurried to set up operations, believing that an official legal framework on gold exchanges may set up difficult barriers to new enterprises. Seeing so many new exchanges being established, the State Securities Commission has instructed securities companies not to set up more until a regulatory regime is in place.

It is obviously not difficult to cut the gold trading floors down to size, if that is the State Bank’s intention, comments Tuoi Tre.  All SBV needs to do is raise the collateral (or ‘margin’) level, and thus restrict loans for speculation, and prohibit the exchanges’ managers from themselves taking positions in the gold market (because one must not be both the owner of the playing field and a player at the same time).

VietNamNet/TT

Tags: Vietnam finance news, Vietnam gold exchanges