Markets could see derivatives by 2014

In the decade since the first opening of Vietnam’s equity markets has seen a marked increase in the number of listed firms and also speed of IPOs and overall market capitalisation as well number of punters.

Nonetheless, choice of investment products is still limited to mainly shares and bonds employing simple and primitive transaction methods. The State Securities Commission (SSC) is studying a way to build up the derivatives market and allow the launch of some derivative products to diversify investment instruments and create greater liquidity in the market.

However, as is usually the case in Vietnam with its predilection for rigidness and micro control, many obstacles block the launch of derivatives any time soon.

By 2014 Vietnam should have a derivatives market in place, said Ta Thi Thanh Binh, deputy director of Market Development Department of the SSC during a conference on “Building a derivative stock market of Vietnam” co-held by SSC and Lux – Development agency on April 14 in Hanoi.

At the conference, securities’ firms said a derivative market is a natural growth aspect to the equity markets and expect the SSC to timely present a schedule to roll out derivative products.

In fact, in the past, some derivatives were traded informally without any legal basis to protect investors.

Although hoping to have this market soon, representatives from the SSC said that currently there are still some ‘obstacles’ so it will be at least until 2014 before Vietnam could see any formal trading of derivatives.

Although derivatives include many different products, there are four key product groups: forward contracts (Forwards), futures contracts (Futures), options (Options) and swap contracts (Swaps.)

Forward contracts are simple and get more attention from investors. This contract is used to negotiate to buy or sell a certain type of stock under a fixed price at a certain time in the future. The price of goods mentioned in the contract terms does not depend on the price of that stock at the time of termination of the contract. The participants are usually between financial institutions with each other or between financial institutions with their customers. The parties joining the forwards contract may meet directly to negotiate on the terms of the contract such as the price and the duration of the contract.

Future contracts, in terms of nature, like the forward contracts, are agreements between the buyers and the sellers for a certain type of securities with certain volume, in a certain price at a certain time in the future. The difference can be seen as the future contracts are usually traded on the official stock exchange, while forward contracts are traded on the unofficial stock market. The buyers and sellers involved in transactions do not directly see each other but they can conduct transactions through the system provided by the stock exchange. Parties of a futures contract do not meet any risk of credit, while the parties of the forward contract are often at high credit risk.

Swap contracts are often used in the interest rate field aiming to reduce the interest rate risk and borrowing costs.

In developed countries, derivatives allow more options to minimise risks and maximise profit while contributing to the vibrancy of the stock market. – Vietbiz24

Tags: vietnam stock, Vietnam stock market, VNindex