Besides long-term solutions, the collateral solution is considered as a basic technical measure to solve the burden of security collateral in stock transactions and to support the market over coronavirus (Covid-19) epidemic as well as remain sustainable development goals.
This is a proposal shared by Le Hai Tra, who’s in charge of the Board of Directors of of Ho Chi Minh Stock Exchange (HOSE) to the Vietnam Financial Times on the solutions that need to be evaluated and implemented soon to support Vietnam stock market overcome the impact of the Covid-19 epidemic as well as head to sustainable development.
Collateral is one of the radical solutions to support the stock market
Based on a report by the FTSE organization in Sep 2019, the payment transaction life cycle of Vietnam’s stock market is T + 2 with the DvP model (Delivery versus Payment). However, in reality, the market is operating under the “pre-funds market” model, means that buy/sell orders are set only after users deposited sufficient money/securities on their trading account.
Besides, in MSCI’s report “Global Market Accessibility” in June 2019, for the criteria of “Clearing and payment of Securities transactions”, MSCI also stated that Vietnam’s stock market has not had any official clearing organization that can apply advanced payment risk management mechanisms as well as support overdraft facilities and pre-funding.
Le Hai Tra said that, Vietnam’s stock market is applying the pre-funding model to manage payment risks. This mechanism will create an unexpected capital turnover, increase opportunity costs or financial costs for investors and affect market liquidity. With the characteristics of (locked-in trade) in the Vietnam stock market, securities/money of trading orders after being matched has been an important security asset for the transaction. Therefore, requiring a 100% deposit in cash at the time of placing a trade order is a major obstacle to the efficiency of investors’ capital use and the liquidity of the market in general.
For example, “an investor has 10 billion dongs worth of VN30 basket in the trading account, the market falls and they want to buy at the bottom but they run out of money to place orders so they cannot trade.” Whereas 10 billion is a large number of assets becomes meaningless in this case. Thus, the value of financial assets is denied ”.
From an international perspective, there are no longer many stock markets using the pre-trading margin mechanism. According to MSCI’s “Global Market Accessibility ” in June 2019, there are only 5 markets using this payment mechanism, including Vietnam, Russia, Taiwan, Kenya, and Kazakhstan.
HOSE’s representative also added that, through research on the practices of countries in the region and the world on payment systems and payment risk management mechanisms, HOSE found that, the majority does not require margin before trading. Instead, they only need to have sufficient cash/securities balance at a time before making VSD (T + 2) transaction payments, and/or using other risk management tools such as partial settlement, partial pre-funding, securities-based lending, Buy-in/Sell-out, central counterparty clearing, payment fund and reserve fund, collateral/haircut to minimize payment risks in the market while ensuring efficiency.
“These advanced risk management will allow” failed “transactions within the regulatory framework, and build a foundation for a stronger market with enhanced obligations and responsibility of risk management for market members in parallel with increasing market liquidity ”- Le Hai Tra emphasized.
According to Tra, around the world, the majority of developed markets and some emerging markets have been using collaterals as a successful risk management measure. The International Organization of Securities Commissions (IOSCO) also lists the effective and rational use of assets as an important principle for the infrastructure of a financial market.
Specifically, special assets usually include cash, shares, and bonds. To prevent the risk of an “extreme” event such as temporary liquidity loss or high stock price volatility, markets must ensure that the value of the collateral at the settlement date is large enough to compensate transactions made by applying the haircut ratio for each type of special assets. This haircut ratio is determined based on the liquidity risk of each special asset (stocks/basket of stocks, bonds, …) and also usually based on the market fluctuation range.
This solution is nothing new in Vietnam stock market
Le Hai Tra said that Vietnam’s stock market is now using collateral for derivatives market with a discount rate: 5% for government bonds; 30% for securities in the portfolio of securities constituting the VN30 / HNX30 index; 40% for the remaining securities.
In addition, Vietnam Securities Depository (VSD) can also adjust the discount rate of assets for each type of mortgage securities based on the liquidity and risk of collateral. However, these types of collateral must not exceed 20% of the total value of the collateral.
Therefore, “this is not a completely new tool for the Vietnam stock market and should be considered and applied in the stock market. I also suggested this solution in an online meeting between the State Securities Commission of Vietnam (SSC) and 2 Stock Exchanges and VSD with market members to find solutions to support the market and investors in the negative impact of Covid-19 epidemic on March 4, ”Tra said.
Accordingly, similar to margin lending transactions, the State Securities Commission (SSC) will publish a list of securities eligible for special assets and the corresponding discount rates. On that basis, the securities company based on the assets of the investor in the portfolio and the discount rate to confirm the solvency at the payment date of T + 2, thereby determining the required level. Security deposit at the time of placing order. In case at the T + 2, investors do not fulfill their obligations, the special assets will be handled to ensure payment obligations.
“In addition to the goals and long-term solutions to the market, I think that we should soon consider and evaluate the special assets solution as a basic technical measure to solve the burden of signing. security funds in stock transactions, in order to support the market, especially in the current difficult situation, as well as sustainable development goals ”- Le Hai Tra shared and proposed.
This article was first posted on Vietnam Financial Times