Can Vietnam Securities Depository and Clearing Corporation refuse novation in derivative trading?
- What is the “novation” in derivative trading?
- Can Vietnam Securities Depository and Clearing Corporation refuse novation in derivative trading?
- What rights does the Vietnam Securities Depository and Clearing Corporation have with respect to the clearing and settlement activities of derivative transactions?
What is the “novation” in derivative trading?
According to the provisions of Clause 20, Article 3 of Decree No. 158/2020/ND-CP:
“novation” means the replacement of one of the parties of a derivative contract or transaction with another party whereby the new party shall inherit all rights and obligations related to that derivative contract or transaction of the replaced one.
According to that, a trading novation is also understood as a clearing and settlement for derivative transactions according to the concept stated in Clause 18, Article 3 of Decree No. 158/2020/ND-CP:
Definitions
…
18. “clearing and settlement” for a derivative transaction mean the acts of making margin, verifying trading results, rectifying errors, novating, clearing, determining settlement obligations, transferring money or money and underlying assets on the settlement date.
Can Vietnam Securities Depository and Clearing Corporation refuse novation in derivative trading? (Image from the Internet)
Can Vietnam Securities Depository and Clearing Corporation refuse novation in derivative trading?
According to the provisions of Clauses 4 and 5, Article 28 of Decree No. 158/2020/ND-CP on the rights of the Vietnam Securities Depository and Clearing Corporation (VSDCC) as follows:
Rights of VSDCC to clearing and settlement activities
…
4. Rights of VSDCC to clearing members:
…
g) Refuse novation for unlawful transactions as prescribed by the Minister of Finance.
5. Perform the following activities to protect investors and ensure the safety of the market:
a) Refuse novation for transactions which are conducted after VSDCC has given a notification to Stock Exchange (SE) to suspend transactions of a clearing member and a non-clearing trading member that has entered into a clearing and settlement entrustment contract with that clearing member (if any);
Thus, the Vietnam Securities Depository and Clearing Corporation is entitled to novation for unlawful transactions as prescribed by the Minister of Finance or for transactions which are conducted after VSDCC has given a notification to SE to suspend transactions.
What rights does the Vietnam Securities Depository and Clearing Corporation have with respect to the clearing and settlement activities of derivative transactions?
According to the provisions of Article 28 of Decree No. 158/2020/ND-CP, the Vietnam Securities Depository and Clearing Corporation is entitled to exercise the following rights with respect to the clearing and settlement activities of derivative transactions:
- Make clearing and settlement for derivative transactions; promulgate operational regulations after obtaining approval from SSC.
- Grant, refuse, suspend or cancel membership of clearing members.
- If a clearing member whose membership is suspended or cancelled is unable to reach an agreement on or decide a substitute clearing member, VSDCC is entitled to designate a substitute clearing member to receive rights and obligations transferred from that clearing member.
- Rights of VSDCC to clearing members:
+ Request clearing members to make margins and make contributions to the clearing fund;
+ Request clearing members to submit adequate, timely and detailed reports on trading, clearing, settlement, accounts and margins of investors;
+ Determine and adjust margins, and list of assets accepted as margins;
+ Determine and adjust position limits;
+ Execute matched sale-purchase transactions, transfer positions of clearing members that are insolvent or declared bankrupt to substitute clearing members for closing positions;
+ Determine values and methods of compensation in case a clearing member does not have enough money for settlement or securities for transfer;
+ Refuse novation for unlawful transactions as prescribed by the Minister of Finance.
- Perform the following activities to protect investors and ensure the safety of the market:
+ Refuse novation for transactions which are conducted after VSDCC has given a notification to SE to suspend transactions of a clearing member and a non-clearing trading member that has entered into a clearing and settlement entrustment contract with that clearing member (if any);
+ Close and liquidate positions of a clearing member that is insolvent, including positions of that clearing member and those of its investors;
+ Use, sell and transfer margins of the insolvent clearing member and its investors for fulfilling settlement obligations of that insolvent clearing member;
+ Use amounts contributed to the clearing fund by clearing members for fulfilling settlement obligations and making up financial losses incurred VSDCC (if any);
+ Transfer margins and open positions of clients to substitute clearing members as prescribed in Point h Clause 2 Article 31 hereof. In case of failure to do so, VSDCC shall close or liquidate positions; use, sell and transfer clients’ assets deposited at VSDCC by the insolvent clearing member for fulfilling clients’ obligations or making up financial losses incurred from clients’ open positions. Margins of clients shall be used only for fulfilling financial obligations arising from their derivative transactions.
+ Where a clearing member goes bankrupt, VSDCC shall be the creditor of amounts receivable from the clearing member, and shall be given priority to receive divided assets in accordance with regulations of the law on bankruptcy;
+ Request other clearing members to conduct matched sale-purchase transactions to close positions of the clearing member that is insolvent or declared bankrupt, irrespective of whether these are open positions of the insolvent clearing member or its investors.
- Provide account and margin management services for clearing members, non-clearing members and their clients with assurance that accounts and investment portfolios of each client are managed separately.
- Request SE and clearing members to adequately and punctually provide information about their transactions and transactions of their investors.
- Exercise other rights as prescribed in Clause 1 Article 55 of the Law on Securities and relevant laws.
LawNet
