Remaining in the emerging market does not depend solely on the regulator

Maintain ranking depends on investor assessment

At the workshop "Creating motivation to upgrade the stock market" organized by Lao Dong Newspaper in collaboration with the Ministry of Finance and the State Securities Commission today (July 2), Mr. Bui Hoang Hai - Vice Chairman of the State Securities Commission - shared about the story of upgrading the stock market and solutions to develop the market in the short, medium and long term.

According to Vice Chairman Bui Hoang Hai, how to maintain the ranking after upgrading is a challenging issue. If the ranking cannot be maintained, capital may "flow" back out. This is a concern for management agencies and businesses. Therefore, to maintain the ranking, it is necessary to continue to change the law, creating conditions for investors to participate in the market.

The story of upgrading and maintaining the ranking depends on the investor's assessment of their experience in the market, not their experience with the legal mechanism. Therefore, even though the management agency has issued a legal mechanism, the story of maintaining the ranking still depends on the businesses in the market.

Overview of the Workshop “Creating motivation to upgrade the stock market”. Photo: Phan Anh

Mr. Bui Hoang Hai cited an example of a management agency allowing foreign investors to participate but enterprises do not disclose information and impose restrictive regulations. Thus, the enterprises themselves make it impossible for foreign investors to participate, thereby assessing the ability to access the market as poor. Information disclosure and information management also impose requirements but enterprises may not comply.

Regarding the pre-transaction margin requirement (prefunding), the law and the regulatory agency allow securities companies not to require prefunding, but the capacity of the securities company cannot meet it. This causes a bad investor experience in the market, negative evaluation or possible market re-evaluation.

"Another important story is that the upgrade depends on the needs and experiences of investors, and then continuously requires new requirements after that experience. To continue to maintain the ranking, the management agency needs to continue to closely discuss with the rating organization. From there, it is guaranteed and predicted that the criteria will be able to change or have higher requirements. From there, securities companies, enterprises belonging to listed organizations, and custodian banks will have to prepare the necessary things, continue to meet increasingly high requirements" - said the Vice Chairman of the Securities Commission.

Upgrading from frontier to emerging is more than just a name change

Also expressing his views at the Workshop, Mr. Nguyen Khac Hai - Director of Law and Compliance Control, SSI Securities Company - emphasized that in the overall strategy for developing Vietnam's stock market by 2030, the Government 's goal by 2025 is to upgrade Vietnam's stock market from a frontier market to an emerging market according to Decision No. 1726/QD-TTg dated December 29, 2023. With the remaining time not too long, in the immediate future, the authorities are focusing many resources to ensure that the criteria for upgrading to a secondary emerging market (Secondary EM) from FTSE Russell are met.

There are currently around $90 billion in passive funds (ETFs) invested in the FTSE EM index family, such as the Vanguard FTSE Emerging Markets ETF (total assets) $76 billion. With the upgrade to emerging markets, according to our preliminary estimates, ETF inflows could reach $1.6 billion, not including active inflows (FTSE Russell estimates total assets from active funds to be 5 times that of ETFs).

Mr. Nguyen Khac Hai said that upgrading from frontier to emerging is not just a name change, but a change in quality and capital flows will come mostly from professional foreign institutional investors. Being upgraded to emerging market by FTSE will be a good opportunity for the Vietnamese stock market to receive attention from MSCI, in the context that the list of stock markets with the opportunity to be upgraded to emerging is quite limited (Vietnam currently has the highest share in the MSCI frontier basket).

Back to the reality, FTSE Russell puts Vietnam on the watch list for upgrading to Emerging Market in 2018, with specific and detailed assessments of the conditions that Vietnam needs to fulfill to be upgraded. Quantitative criteria are not a big obstacle for Vietnam because there are enough representative stocks in the market. On the contrary, the group of qualitative criteria is the main barrier, with the biggest obstacle for FTSE Russell to decide to upgrade related to clearing activities, payment countertransfer (transfer of shares at the time of payment) and handling of failed trades.

The solution to these requirements is to adopt the central counterparty (CCP) model. However, implementing the CCP model is expected to take some time due to the need to adjust many related regulations, including those governing the activities of custodian banks.

Therefore, in the immediate future, the Ministry of Finance and the State Securities Commission have proposed a solution in which securities companies will provide payment support for foreign institutional investors (Non-Prefunding Solution - NPS). On March 20, 2024, the Ministry of Finance posted information to solicit opinions from units, organizations and individuals on the draft Circular amending and supplementing a number of articles of the circulars regulating securities transactions on the securities trading system; clearing and settlement of securities transactions; activities of securities companies and information disclosure on the stock market (including: Circular 119/2020/TT-BTC; Circular 120/2020/TT-BTC; Circular 121/2020/TT-BTC; and Circular 96/2020/TT-BTC) to realize this solution.

From the perspective of member securities companies, both short-term and long-term solutions create pressure on capital or the need to upgrade the system when the responsibility and risk from the securities company are very large.

Mr. Nguyen Khac Hai listed a number of solutions to improve the service provision capacity for foreign investors of securities companies in the market.

First, securities companies need to supplement capital resources. In the CCP model or NPS service, the responsibility for payment of transactions to investors belongs to the securities company, so it is inevitable that securities companies must prepare large capital resources to limit payment risks. In Vietnam, we see that most securities companies have plans to increase capital in 2024 and 2025, as a preparation for this "big game".

Second, the risk management system of securities companies must be upgraded to limit payment risks and operational risks, especially when implementing NPS solutions or in the longer term when day trading or short sell products are operated.

Third, develop a synchronous system of operations and provide products and services to foreign investors. A major obstacle for foreign investors is the level of access to information in English of listed companies according to world standards. Securities companies support the connection between listed companies and foreign investors through English research and analysis reports and corporate access services. At SSI, we are also regularly providing these products and services to foreign investment funds.

Finally, securities companies will have to upgrade their systems to connect online with foreign investors to improve order execution capacity. At the conference on implementing the task of developing the stock market in 2024, the World Bank representative estimated that Vietnam could attract foreign capital flows of about 25 billion USD in the short term. The increasing market size along with the development of products that allows investors to increase capital turnover such as short sell, day trading leads to an increase in the number of trading orders, requiring the capacity to receive and process trading orders of investors in general for securities companies to become urgent.

Readers can watch the full video of the Workshop "Creating motivation to upgrade Vietnam's stock market" HERE

Source: https://laodong.vn/lanh-doanh/tru-hang-sau-khi-len-thi-truong-moi-noi-khong-chi-dua-vao-co-quan-quan-ly-1360753.ldo