Funding change paves way for FTSE upgrade

The enforcement of Circular No.68/2024/TT-BTC has captured the attention of stock market investors. The regulation, effective last week, marks a significant shift by allowing foreign institutional investors to purchase shares without pre-funding and establishes a roadmap for information disclosure in English.

Funding change paves way for FTSE upgrade, Source: freepik.com

Specifically, it amends and supplements existing regulations governing securities transactions, clearing and settlement, the operations of securities companies, and market information disclosure.

A standout feature of this circular is the provision that permits foreign institutional investors to buy shares without needing sufficient funds upfront, known as the non pre-funding solution.

“The new rule generally requires investors to have enough funds when placing buy orders, with two exceptions: margin trading as outlined in Article 9 of the circular, and foreign entities investing in the Vietnamese stock market, which are allowed to purchase shares without pre-funding as detailed in Article 9a,” Circular 68 stated.

The addition of Article 9a, covering non pre-funding share purchases by foreign institutional investors, has been met with positive responses from analysts.

Nguyen Trieu Vinh, deputy investment director at Vietcombank Fund Management, noted that implementing Circular 68 could lay the groundwork for Vietnam’s stock market to be upgraded by the Financial Times Stock Exchange (FTSE) in 2025. “The 100 per cent pre-funding requirement has been the most significant barrier for foreign institutional investors, and this change could help overcome that obstacle,” he said.

Likewise, Maybank Investment Bank highlighted that these changes are a step forward, easing pre-funding requirements, managing failed transactions, and ensuring capital adequacy for securities firms.

“We expect that the FTSE could announce an upgrade for Vietnam to emerging market (EM) status as early as March 2025 in an optimistic scenario or by September 2025 under more conservative assumptions. This would set the stage for Vietnamese stocks to be included in the FTSE’s EM indices during 2025-2026,” the securities firm noted.

ACBS Securities analysts further projected that Vietnamese shares could carry a weighting of approximately 0.7-0.9 per cent in the FTSE’s Secondary EM index, attracting around $500-600 million in passive fund inflows, excluding potential capital from active funds.

Meanwhile, Ho Chi Minh Securities Corporation (HSC) observed that foreign institutional investors, now allowed to place non-pre-funding orders, are eager to make use of this new service.

“Although domestic investors and foreign individual investors do not qualify for non-pre-funding under Circular 68, their response has been positive, with expectations that the regulation will encourage more trading activity by foreign institutions and, in turn, enhance market liquidity,” HSC said. “We hope that as the legal framework matures, non-pre-funding privileges will be extended to all investors, enabling them to trade without needing full cash collateral upfront.”

On the other hand, some market experts caution that liquidity from foreign investors may not see an immediate increase, maintaining a share of 8-10 per cent of total daily trading volume. This is because the non-pre-funding mechanism primarily supports settlement processes, while the T+2.5 trading cycle remains in place.

Resolving this regulatory hurdle is also expected to act as a catalyst for reversing the outflow of foreign capital. During the first 10 months of 2024, foreign investors have remained consistent net sellers, with net sales amounting to over $3 billion on the Ho Chi Minh Stock Exchange alone.

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