Derivatives hold incentive and risk

Though derivatives may help lure foreign investment, liquidity will be needed-Photo: Le Toan

Investor sentiment in Vietnam has been riding high in recent months in anticipation of the opening of the first derivatives market in the country, scheduled to be in the second quarter of 2017.

The first two products to be placed on the market will be stock index and government bond futures. Regulators believe that these two offerings are simple enough for investors and easier to control compared with other derivative tools.

Experts have noted that offering derivatives can help attract overseas investors to enter the Vietnamese market.

Trinh Hoai Giang, deputy CEO of Ho Chi Minh City Securities, told VIR that derivatives will broaden the product offerings available to foreign investors, and help Vietnam reach emerging market status. Reaching this status is important for Vietnam to lure high-quality investment flows from funds around the world.

Institutional investors within Vietnam and international investors have already expressed interest in and enquired about the derivatives market, Giang said. More developed markets in Southeast Asia such as Singapore, Thailand, and Malaysia have already launched derivatives products in the last decade, putting Vietnam at a foreign-investment disadvantage. Thailand has recorded a 70 per cent growth in its derivatives market after just 10 years of operation.

Giang pointed out that, unlike its neighbours, the Vietnamese derivatives market is at a disadvantage given its much smaller pool of stocks. Liquidity is also a problem, as Vietnam’s daily share exchange volume is only $150 million, one-tenth that of Thailand’s.

“We need to build a strong, diverse, and liquid stock market while at the same time launching derivative products, as derivatives rely on the stock market to grow. This is the only way to develop a sustainable derivatives market that can hook foreign investors in,” Giang said.

Nguyen Khac Quoc Bao, head of the Finance faculty at Ho Chi Minh City University of Economics (UEH), also stressed the importance of improving liquidity. He referred to Vietnam’s previous efforts to build stock markets for commodities such as coffee and rice, all of which have failed due to the lack of buyers and sellers. According to Bao, the derivatives market may suffer the same fate if liquidity is not developed. “There should be lots of buyers and sellers and the derivatives market must be kept busy at all times. This task sometimes falls on the shoulders of market makers, who are large financial institutions responsible for buying and selling derivatives,” Bao said.

“However, caution must be taken as some market makers can abuse these trading activities to cover fraud, as in the case of England’s Barings Bank in 1995,” Bao added.

Phung Duc Nam, a lecturer from the Financial Risk Management department of UEH, also warned that not only market makers, but also investors can see the derivatives market as a ‘gambling heaven’ due to larger margin trading. He noted that, in 1996, China had to close its derivatives market after a five-year trial run due to scandals regarding price manipulation and market bubbles. China’s derivatives market was only re-opened again in 2004, after an eight-year hiatus.