Vietnam: The legal framework for the derivative securities market is now ready

Starting from May 01, 2017, Circular No. 23/2017/TT-BTC issued on March 16, 2017 by the Ministry of Finance of Vietnam aims to amend and supplement some provisions of Circular No. 11/2016/TT-BTC regarding derivative securities to resolve legal difficulties and promote the development of this market will take effect.

On January 19, 2016, the Ministry of Finance of Vietnam issued Circular No. 11/2016/TT-BTC providing guidelines for a number of articles of the Government’s Decree No. 42/2015/ND-CP dated May 05, 2015 on derivatives and derivatives market to enhance the legal framework for the implementation of the derivatives market. However, during the implementation process, the provisions of Circular No. 11/2016/TT-BTC have caused certain difficulties for market participants in formulating technology systems and processing transactions, such as the requirement to open deposit accounts for investors at banks, regulations on payment of daily position-based gain or losses, the addition of securities lending/borrowing mechanism by the Securities Depository, and regulation on the general transaction account.

Circular No. 23/2017/TT-BTC of the Ministry of Finance of Vietnam provides the following notable amendments and supplements:

With regard to the general transaction account, immediately in Article 2 on “Interpretation of terms”, Circular No. 23/2017/TT-BTC supplements Clause 24 defining the “general transaction account”. According to this provision, general transaction account refers to a transaction account of an investor where a long or short position of a futures contract (on the same underlying asset and expiring in the same month) is opened and maintained until a clearing member requests deduction to be made under specified agreements or at the request of the investor.

In addition to specifying the general transaction account, Circular No. 23/2017/TT-BTC also supplements cases where the investor may open an general transaction account to Clause 4 Article 7 of Circular No. 11/2016/TT-BTC. Specifically, the investor may open an general transaction account when the fund management company is allowed to open one (01) general transaction account held in the name of the domestic entrusting investor and one (01) general transaction account held in the name of the foreign entrusting investor; a securities enterprise established in overseas countries is allowed to open one (01) general transaction account to act on behalf of the foreign investor to perform derivatives brokerage activities; Other situations that may occur are subject to instructions given by the Vietnam Securities Deposit (VSD)

With the issuance of Circular No. 23/2017/TT-BTC, the legal framework for the derivative securities market has been completed in a more open and supportive manner for businesses and investors.

With regard to the investor’s margin account, according to Clause 1 Article 8 of Circular No. 11/2016/TT-BTC, the clearing member shall open, for each investor, one (01) separate margin deposit account at a bank. However, Circular No. 23/2017/TT-BTC does not require this, but only requires securities companies to open a deposit account for investors in the name of the securities company. Thus, securities companies can open a general transaction account to manage the entire margin amount of investors. These margin amounts shall be owned by these investors rather than the clearing member.

With regard to the investor’s payment, Circular No. 23/2017/TT-BTC amends and supplements Points a, b Clause 1 Article 9 of Circular No. 11/2016/TT-BTC.

Circular No. 23/2017/TT-BTC supplements cases of calculation and payment of position-based gain or losses upon the trading date prior to the expiration date and upon the expiration date in 04 cases: (i) Payment of position-based gain or losses in case of positions that are already opened; (ii) Payment of position-based gain or losses in case of positions that are opened or closed within the same trading date; (iii) Payment of position-based gain or losses in case of positions that are already opened and closed within the trading date; (iv) Payment of position-based gain or losses in case of positions that have been opened within the trading date.

In case of cash payment for contract execution, the contract settlement must be completed upon completion of payment for long or short positions arising in the last trading date.

In case of payment for contract execution made in the form of transfer of the underlying asset, the investor at the writer’s side must transfer the underlying asset and the investor at the buyer’s side must pay a monetary amount for such transfer under contractual terms and conditions and regulations of the VSD.

With regard to derivative clearing and settlement operations, Circular No. 23/2017/TT-BTC amends Point b and supplements Point c to Clause 3 Article 19 of Circular No. 11/2016/TT-BTC. According to regulations, the clearing member may use securities borrowed from the system for lending and borrowing securities of the VSD to make such payment in accordance with the VSD’s Statutes.

Where the clearing member has neither enough money to make such payment nor Government bonds to make such transfer, the VSD may make cash payment for a Government bond futures contract. To that extent, the clearing member at fault shall be responsible for paying the clearing member concerned a compensation sum which is not less than 5% of contract settlement value through the VSD. The VSD shall set out regulations on determination of value and mechanism for payment of compensation.

With regard to handling the case of incapability of settlement, Circular No. 23/2017/TT-BTC amends and supplements Point d to Clause 2 Article 24 of Circular No. 11/2016/TT-BTC. Specifically, where the clearing member is incapable of making payment and obtains payment support actions from the VSD, that member shall be responsible for paying back the entire portion of asset derived from the Clearing Fund, Risk Hedge Fund and other sources which is used to discharge its payment obligations, and for incurring all relevant expenses that may arise.

Therefore, with the issuance of Circular No. 23/2017/TT-BTC, the legal framework for the derivative securities market has been completed in a more open and supportive manner for businesses and investors. Based on this, the State Securities Commission has also approved the Stock Exchanges and VSD to issue 5 regulations guiding the trading and settlement of derivative securities, as well as approved the sample derivative securities contracts for trading when the derivative securities market officially operates. This is a positive signal for the official launch of the derivative securities market in Vietnam in the near future.

Source: Vietnambiz.vn

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