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REPORT
SECURITIES MARKET LIBERALISATION IN VIETNAM - KEY ISSUES
FOR THE SECURITIES REGULATOR AND THE DOMESTIC
SECURITIES COMPANIES
ACTIVITY CODE: SERV-2
Prepared by: Andrew Capon Federico Lupo Pasini
Duong Thi Phuong Nguyen Thi Thuc Anh
Nguyen Van Chi
This document has been prepared with the assistance of the European Union. The views expressed herein are those of the author and therefore in no way reflect the official opinion of the European Union nor the Ministry of Industry and Trade
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TABLE OF CONTENTS
1 OBJECTIVE OF REPORT ......................................................................................................................................... 4
1.1 Methodology ............................................................................................................................................................... 4
1.2 Structure ...................................................................................................................................................................... 4
2 EXECUTIVE SUMMARY ......................................................................................................................................... 5
3 BACKGROUND OF SECURITIES MARKET IN VIETNAM ................................................................................ 8
3.1 Supervisory Framework .............................................................................................................................................. 8
3.1.1 Securities Regulator ................................................................................................................................................ 8
3.1.2 Securities Law ......................................................................................................................................................... 9
4 LIBERALIZING THE SECURITIES SECTOR ...................................................................................................... 16
4.1 Liberalizing the Securities Sector in Vietnam .......................................................................................................... 16
4.1.1 Introduction ........................................................................................................................................................... 16
4.1.2 Securities as a sub-sector of the broader “financial services sector” – Vietnam’s WTO Commitments .............. 16
4.1.3 Liberalization of Financial Services in the GATS – The Regulatory Framework ................................................ 18
4.1.4 The Benefits of Securities Market in the Economy .............................................................................................. 22
4.1.5 Liberalization of Capital Markets: the Issues at Stake .......................................................................................... 24
4.2 Financial liberalization in ASEAN securities markets .............................................................................................. 31
4.2.1 Malaysia securities exchange and investor overview ........................................................................................... 31
4.2.2 Thailand securities exchange and investor overview ............................................................................................ 33
4.2.3 Indonesia securities exchange and investor overview ........................................................................................... 35
4.2.4 Conclusion on Foreign securities companies in ASEAN markets ........................................................................ 36
4.3 Challenges for the regulator from market development and market opening ........................................................... 36
4.3.1 Introduction - Adapting to market liberalization................................................................................................... 36
4.3.2 Review of regulatory powers and effectiveness .................................................................................................... 37
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4.4 Challenges for the domestic securities companies from market development and market opening ......................... 55
4.4.1 Domestic Market Conditions ................................................................................................................................ 55
4.4.2 External Sector developments: WTO Financial liberalization .............................................................................. 56
4.4.3 Joint ventures with foreign securities companies .................................................................................................. 56
4.4.4 Potential new entrants to Vietnam securities market ............................................................................................ 57
4.4.5 Domestic Securities Companies: Enhancing Compliance with Regulations ........................................................ 58
4.4.6 Opportunities for domestic companies .................................................................................................................. 62
4.4.7 Action points for Vietnam securities companies .................................................................................................. 63
5 RECOMMENDATIONS .......................................................................................................................................... 69
5.1 Recommendations for SSC to address market opening ............................................................................................ 69
5.2 Recommendations for domestic securities companies to address market opening ................................................... 74
5.3 Recommendations to enhance compliance of securities companies ......................................................................... 76
5.4 Other recommendations ............................................................................................................................................ 77
References…………………………………………………………………………………………………………………. 72
1 OBJECTIVE OF REPORT
In line with the TOR requirements, and as discussed with counterparts at the State Securities Commission
(“SSC”), the objective of this report is to assess, in the context of Vietnam’s post WTO related securities
market liberalization, the challenges posed by this liberalization to both the SSC and to the domestic
securities companies and to recommend policy changes and action points to enable the SSC and the
securities companies to prepare for these challenges.
For the SSC, we recommend policy changes to strengthen its ability to meet the challenges of market
opening in general and to strengthen its existing regulatory surveillance and enforcement powers in
particular.
For the securities companies we recommend how domestic firms can best prepare for the challenge of
foreign competition and how they should enhance their compliance with national legislation.
1.1 Methodology
The report is based on discussions with the local PTF expert at the SSC, with securities companies,
market practitioners and other market participants, as well as drawing on the experiences of ASEAN and
other international securities markets and regulations and considering the international experience of
bodies such as IOSCO, World Bank, ADB.
1.2 Structure
Following the Executive Summary below, we begin our study by providing background on the Securities
market in Vietnam, on the institutional and legal context and the market structure.
In Section 4 we analyze Vietnam’s WTO commitments regarding the securities sector and the regulatory
framework set out in the GATS; the relevant literature on the benefits of a well functioning securities
market; and the economic implications deriving from the liberalization of the securities market in the light
of the WTO framework and in the context of the much broader discussion regarding the pros and cons of
liberalization of financial services.
From this general analysis of liberalization, we then in Section 4 consider the opportunities and threats
presented to the SSC and to the domestic securities by market opening. To assist with this we first draw
on the example of neighbouring ASEAN securities markets and the experience of their domestic
securities companies in the face of similar market opening and increasing foreign competition. Finally, we
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look at the impact of Vietnam market opening to date, what is the effect of competition from foreign
securities companies already, from the over 20 already established foreign invested joint venture
securities companies in Vietnam, and what is the likely effect from the potential new 100% foreign
invested securities companies, which will be permitted under the WTO commitments in January 2012.
We also consider the challenge of compliance by securities firms with national legislation, assess the
current effectiveness and how they should improve their compliance with national legislation in order to
prepare for market opening and the anticipated higher compliance standards of foreign securities
companies.
In Section 5, following this analysis of the challenges and risks of market opening, we make
recommendations for the SSC on how to adapt to market opening and to improve the effectiveness of the
prevailing surveillance and enforcement system; we also consider some important steps which domestic
securities companies can take, if they did not do so already, to develop a strategy to prepare for greater
competition from foreign securities companies and to improve their compliance with national legislation.
The reader should note that in the time available for this report we have focused our study on the equity
markets rather than the bond market. This is due to the fact that our two core topics, surveillance and
enforcement, and the future of the domestic securities companies is more closely linked currently to the
equity market (the bond market is currently largely confined to the Government bond market). However
further development of the bond markets, corporate bonds and convertible bonds is an integral part of the
overall development requirements of Vietnam’s securities markets to broaden the range of capital market
products.
2 EXECUTIVE SUMMARY
The Vietnam securities market has made considerable progress since 2000, in particular since 2005. The
institutional and legal framework is in place and the securities market has grown to over 600 listed
companies and over US$ 30 billion in market capitalization. These notable achievements have benefited
from the strong support of the authorities to develop Vietnam’s capital markets activities.
The medium to longer term macroeconomic outlook for Vietnam also looks promising: according to
World Bank, GDP growth is expected to be in the range of 6.5% to 7.5 % for the period to 2015. Vietnam
has a large population of some 87 million, with a young workforce, and a growing pool of corporate talent
and listed companies; the local population, in particular the urban young, has growing prosperity.
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International investors already demonstrated significant interest in Vietnam, with an estimated
approximately US$ 7 billion of foreign indirect investment; this has slowed during the global financial
crisis and is still tempered currently by macroeconomic concerns, however many foreign investors also
believe that Vietnam has attractive long term prospects. This foreign capital has already benefitted many
Vietnamese companies and foreign investors have helped in some cases to raise standards by introducing
best practice to build the value of their investee companies.
Foreign involvement in the securities market is also increasing due to market opening and the arrival of
foreign securities companies. In line with Vietnam’s 2007 WTO commitments, foreign securities
companies have been permitted to form local joint ventures since 2007 and as a second step in market
opening, from January 2012, 100% foreign invested securities companies will be permitted to establish in
Vietnam.
The SSC faces a number of significant challenges. Market opening will bring the additional challenges of
regulating foreign securities companies, cooperating with foreign regulators and developing a healthy
market with strong local players able to hold their own against foreign competition. The SSC therefore
needs to address a number of areas including the following areas: strengthen its capacity with modern,
empowering IT systems, as well as with more, well qualified staff; more formal and improved
cooperation with domestic and foreign regulators; achieve faster implementation times for consultation
and approval of new laws and policies for the securities market; encourage consolidation of the
overpopulated domestic securities companies.
For SSC there are considerable challenges in surveillance and enforcement also. SSC has inadequate
powers of investigation and enforcement, resulting in an inability to adequately fulfill its surveillance and
enforcement responsibilities. In addition the compliance obligations of securities companies are not well
understood or enforced internally, training for securities company staff is required and also closer
inspection by external bodies and more accountability for senior management. Administrative penalties
have been too low, so the deterrent has not been effective; with recent changes to increase penalty
amounts and plan to introduce “ill gotten gains” recovery, this may start to improve, SSC will need to
monitor and if not effective consider further reinforcements.. A full set of recommendations for SSC for
market opening and for surveillance and enforcement is in Section 5.
For domestic securities companies this market opening will bring both opportunities and threats.
Opportunities include know how transfer of products, technology and service quality, improving the skills
and experience of Vietnamese staff; also possible partnership agreements between foreign firms and
domestic firms. Foreign securities companies will bring new foreign investors and they can also act as a
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catalyst for faster domestic market changes, such as introduction of new products, with their experience
of more complex products such as derivatives, which can assist market development. Looking at the
example of other countries the entry of more foreign securities companies has resulted in greater
competition which in turn has had the benefit of raising the standards and efficiency of the whole market.
The counter side of this is that greater competition is a threat for the domestic securities companies. They
are now faced with a number of strategic choices which they need to evaluate in order to fix an
appropriate strategy. This includes questions such as if they should seek a foreign partner, maintain the
status quo or if the shareholders wish to sell and find a new buyer. The experience of ASEAN and other
countries shows that as the securities market opens up to foreign competition, in some cases the domestic
companies form equity partnerships with foreign securities companies, in other cases they prefer to
pursue their own strategy under the control of domestic shareholders. The past experience indicates that
there is room in the market for both good domestic and foreign securities companies, however a proactive
strategy is better than a reactive one.
Domestic firms therefore need to decide now how best to operate in this more competitive and open
market. They should develop their strategy and business plans, inter alia assessing and securing their
medium term funding needs, deciding if they wish to explore the possibility of cooperating with a foreign
securities company and if so which type of cooperation they would prefer, for example equity or non
equity..
At the same time they should strengthen their infrastructure by improving corporate governance and
compliance, risk management and controls, and code of conduct, in order to build a more stable
foundation to their business, less susceptible to the risk of unexpected losses, loss of customer goodwill or
other reputational problems; this includes improving the compliance with national laws and internal
regulations to achieve a better corporate reputation and brand name. On the compliance front, senior
management need to lead these initiatives, ensure proper training of staff is done so that their staff
understand what compliance is, have a general understanding of the firm’s compliance obligations, as
well as a deeper understanding of their own department and personal responsibilities are. Our
recommendations for the domestic securities companies for the market opening challenge of foreign
securities companies and for enhancing their compliance is in Section 5.
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3 BACKGROUND OF SECURITIES MARKET IN VIETNAM
3.1 Supervisory Framework
3.1.1 Securities Regulator
The State Securities Commission (SSC) is the primary regulatory authority over the capital markets and
their participants.
Established in November 1996 SSC is responsible for the organization, development and supervision of
the country’s securities market. The history of the SSC is not within the scope of this study, it is covered
already in the previous MUTRAP report titled “The comprehensive strategy for service sector
development to the year 2020 (CSSSD) with a vision up to 2025”.
The Securities Law (see below) has stipulated the SSC being a part of the Ministry of Finance (MOF), not
an independent body. Under this model of operation, the main functions of the SSC are as follows
(according to the Decision 63/2007/QD-TTg dated 10th May 2007 by the Prime Minister):
The main functions of the SSC are as follows (according to the Decision 63/2007/QD-TTg dated 10th
May 2007 by the Prime Minister):
- Formulating and implementing strategies, plans, policies and projects to develop the securities market in Viet Nam;
- Drafting and enforcing regulations and guidelines related to securities and securities markets;
- Working out regulations on organization and operations of organized securities trading market in Viet Nam;
- Licensing and enforcing regulations over the operations of securities companies, securities advisers, securities investment funds, and securities depositaries & custodians; and their practitioners;
- Exercising surveillance, inspection and enforcement and examining the compliance of securities regulations by securities issuers, listed organizations, securities business, services providers and investors in the market.
- Training and licensing authorised practitioners for the securities industry.
In its supervision role, SSC is supported by Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock
Exchange (HNX), which act as frontline regulators of the exchanges and the market intermediaries.
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Functions and responsibilities of the SSC can be seen in the Securities Law and other under legal documents.
Some specific functions and responsibilities of the SSC include:
- Decision No.112 September 2009 which defines the functions, tasks, powers and organizational structure of SSC
- Decision No.127 December 2008 regarding supervision of the securities market
- Decision No.27 April 2007 regarding the organization and operation of securities companies, as amended and supplemented by Decision No. 126 2008/QD-BTC of December 26, 2008
3.1.2 Securities Law
Vietnam has experienced increasing interest in its securities market by domestic and foreign investors
during the last decade, in particular from 2005 onwards, and the sharp increase in securities market
listings and trading has been accompanied by a number of related regulatory challenges in order to
develop the market in an orderly and professional manner. In this context, the Vietnam Government, with
the objective of strengthening securities regulation and in anticipation of WTO requirements, introduced
The Securities Law (SL) in 2006, made effective in 2007.
The legal framework on the securities market in Vietnam includes the SL (Securities Law) and other legal
documents (in total 37 up to 2010). SL is the main legal basis for the regulation of the Vietnam securities
market. It comprises 37 legal documents. This is generally considered by the legal and market
practitioners with whom I spoke to have marked a significant improvement from the previous regulation
and to provide a more solid legal framework for the securities sector. The Securities Law takes account of
the International Organization of Securities Commission (IOSCO) principles, placing emphasis on market
surveillance and supervision, transparency and disclosure, and investor protection.
In an attempt to keep pace with market developments, a number of improvements to the SL have been
formulated by SSC, with market consultation, such as private placement and tender offer, and submitted
for the approval process through the MOF up to the Government. The amendment of and supplements to
the Securities Law were adopted by the National Assembly meeting session in 24 November 2010.
Legal framework preparation for WTO
We also understand from previous reports by experts and our discussions with the SSC that SL fulfils
Vietnam's commitments under its 2007 World Trade Organization (WTO) accession.
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In terms of legal framework preparation the Securities Law was being prepared in anticipation of WTO
requirements and so it took into account the WTO requirements. A previous MUTRAP report,
“Assistance to the Ministry of Justice and other relevant Ministries and Agencies to scrutinise national
legislation against GATS obligations and commitments”, dated June 2008, has stated that domestic legal
documents on securities services promulgated in 2006/07, in principle, are appropriate with the WTO
commitments of Vietnam and there are no more amendments that need to be made in these regulations.
At present, Decision No. 27 and Decision 35 on Regulation on organization and operation of securities
firms, fund management companies provide guidelines for implementation of the articles of Decree No.
14. However, the scope of these documents is limited to the organization and operation of domestic
securities firms and fund management companies. Therefore, to ensure the transparency as well as
prudential management in this sector, this report contains a recommendation by local experts for the
necessary promulgation of an implementation document on the establishment and operation of 100%
foreign invested securities companies, fund management companies and branches of foreign securities
firms and fund management companies with time of execution of 11th January 2012, as the current
framework is not sufficiently detailed; for example, there are some aspects, which would need more
clarification, such as translation, authentication or certification of Embassy or Consular application
documents. This document would help the mode 3 market access commitment implementation.
MARKET STRUCTURE
The equity market is built around the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange
(HNX). It is supported by the Vietnam Securities Depository (VSD) for clearance and settlement of
trades.
Key market intermediaries include: 105 securities companies (of which there are 103 securities brokers
and 2 firms provide investment advisory services only) and 46 fund management companies. The number
of securities companies is high relative to other markets and to the overall market capitalization size.
Many new domestic entrants were attracted by the strong bull market phase to apply for a securities
company licence, the sharp rise in the number of new securities companies occurred mainly in 2006 (
with biggest number of new registered securities firms in that year). This was in retrospect an unfortunate
timing in view of the sharp fall in the VN INDEX in early 2007 and the ensuing global financial crisis.
Figure 1: Number of securities companies and fund management companies
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Source: SSC July 2010
Note: (*) 1 Securities firm was de-licensed (licence revoked)
There are now many foreign securities companies in joint ventures with local partners. These joint
ventures, limited to a 49% stake, have been allowed since 2007 under Vietnam’s WTO commitments. We
will consider in more detail the foreign securities companies and the opportunities and threats which they
present, in the next Section.
There are a number of licensed businesses for which securities companies can apply, including
underwriting of new issues of securities, which requires a larger capital base, total capital requirement for
all business area is VND 300 billion. The number of trading accounts opened by investors has risen
strongly from nearly 3,000 to close to 1 million between 2000 and 2010, but still a low percentage
compared to the 87 million population, offering good future growth prospects.
Figure 2: Number of investor accounts as of 31 December (annually)
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
7 8 9 12 13 14
55
78
102 105
1 26
1825
43 46SC
FMC
12
Year
2005 2006 2007 2008 2009 30/9/2010
Total accounts
at securities
firms
31.241 86.184 305.298 531.428 822.914 1.003.297
Source: SSC November 2010
In terms of current business mix the core business of the domestic securities companies is brokerage
business, some have a relatively high weighting to proprietary trading and some are also developing their
investment banking services, such as private placement, IPO advisory and M&A; in the latter case, the
strategic rationale towards advisory work is to bring in new customers, diversify revenues towards the
“full service” model and raise brand awareness, even if it is a relatively low contributor (i.e. typically in
low single digits %) to revenues at the moment.
As for financial innovation, market practitioners are pushing for a faster launch of new products and
market innovation, pushing for, inter alia, margin lending, same day buying and selling, multiple trading
accounts for investors. SSC has been coordinating discussion and approval, however the process takes
longer than the market would like due to the nature of the approval process itself.
There is also a call for new products such as derivatives. Introduction of derivative products is likely
some years away in terms of the required process of building expertise, investing in the necessary
technology and infrastructure and expertise training of practitioners, as well as drafting and approving the
laws and regulations.
The number of listed companies has witnessed rapid growth. HOSE and HNX listed approximately 548
companies at July 2010, 245 on HOSE and 303 on HNX.
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Figure 3: Number of listed companies
511 20 22 26
41
193
250
338
457
649
511 20 22 26
32
106138
170194
281
0 0 0 0 0 9
87 112168
263
368
0
100
200
300
400
500
600
700
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total
HOSE
HNX
Source: SSC July 2010
There are two stock exchanges, HOSE and HNX. It is unusual to have two exchanges, in view of the
relatively small size of the total Vietnam securities market. This has had some disadvantages to date,
such as competition between the two exchanges for some new listing clients, also higher costs for
securities firms of dealing with two separate SE entities. However, it appears that the two exchanges will
remain for the time being and the SSC plan is for HOSE to reinforce its role as the market for larger size
stocks (above VND 80 billion) and HNX to be the market for small and medium size companies (below
VND 80 billion), for UPCOM and for Government bonds. This is not strictly demarcated at the moment
with HOSE and HNX competing for the listing business of some companies.
UPCOM is the new market, started in 2009, for smaller companies. This is a good development, the
rationale for the market is to encourage OTC stocks to list on UPCOM, where the shares will be
registered and cleared by VSD, where they can be regulated and provide a safer and more transparent
investor market, reducing the risks for investors and for market reputation from the unregulated OTC
market where there are no investor protections. The OTC market in Vietnam has traditionally been very
large and active, so encouraging the best companies to enter the regulated securities markets should foster
increasing an orderly market and trading in UPCOM or listed shares is less risky for investors.
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The market capitalization of the HOSE, after a slow start in the 2000 to 2005 period, has taken off
strongly from 2006. The HNX, itself starting in 2005 accounted for some 20% of the combined market
capitalization in July 2010 of VND 650 trillion. (US$ 33 billion), as can be seen in Figure 4 below:
Figure 4: Market capitalization
Source: SSC July 2010
This now accounts for some 38% percent of the 2009 GDP, as per Figure 5 below.
Figure 5: Market capitalization per GDP
0.24%0.33%0.47%0.39%0.55%1.11%
22.70%43.26%
15.19%37.60%
0.00% 10.00% 20.00% 30.00% 40.00% 50.00%
2000200120022003200420052006200720082009
MC/GDP
Billion VND
HOSE HNX2000 441,646 1,046 1,0462001 481,295 1,605 1,6052002 535,762 2,540 2,5402003 613,443 2,408 2,4082004 715,307 3,913 3,9132005 839,211 7,472 1,884 9,3562006 974,266 147,967 73,189 221,1562007 1,143,275 364,425 130,122 494,5472008 1,477,717 169,346 55,174 224,5202009 1,645,481 495,094 123,547 618,641
Year GDPMarket Cap
Total Market Cap
15
Source: SSC July 2010
Trading volumes have grown considerably over the same period from 2006, though with a dip in 2008 due to the global financial crisis.
Figure 6: Trading volumes for HOSE and HNX
Source: SSC July 2010
Trading volumes have averaged around US$ 120 million daily average in 2010, however daily volumes
have sometimes fallen much lower in the last few recent months, amid macroeconomic concerns and
pressure on the dong. The VN index stood around the 450 level at mid November. The market PE at mid
November 2010 is currently below 10x and is considered by many market observers to be attractively
priced, in view of the forecast double digit growth in profit of many Vietnamese corporates for 2011, as
well as compared to the higher PE valuations of other ASEAN markets such as Thailand, Indonesia and
Philippines.
Before turning to consider the challenges for the SSC and for the domestic securities companies, we will
review Vietnam’s WTO commitments and consider financial liberalization in general, as this is a key
issue for the development plans of the SSC and for the domestic securities companies.
0200,000,000400,000,000600,000,000800,000,000
1,000,000,0001,200,000,0001,400,000,0001,600,000,0001,800,000,000
2005 2006 2007 2008 2009
HOSE
HNX
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4 LIBERALIZING THE SECURITIES SECTOR
4.1 Liberalizing the Securities Sector in Vietnam
4.1.1 Introduction
Until very recently most of the academic discussions on the benefits of financial services liberalization
were focused only on the implications of the entry of foreign banks and, with a much more limited space,
on the effects of the opening of insurance services. In this context the role of securities firms in the
process of opening of the financial services market was not subject to a comprehensive academic
investigation and was usually researched in the framework of the much wider financial services sector.
Similarly, there were relatively few studies that focus on the wider benefit of a well functioning capital
market compared to what happens with the banking sector. Indeed, while studies on the effects of the
opening of the banking sector have been conducted since the early fifties, it is only until very recently that
the relationship between economic growth and securities markets development has been studied and with
this the effects that the opening of the domestic market to foreign investors bring to the economy.
In order to understand what the liberalization of the domestic securities market entails, it is of the outmost
importance to set a framework that will guide the reader in understanding the economic and regulatory
context in which the liberalization will take place. In this respect, it is worth a reminder that liberalization
is a threefold process in which, although the economic issues plays a substantive role in determining the
final outcome of the process, the legal and political economy framework determine the boundaries that
will enclose the domestic reform and that will substantially determine its trajectory.
This section is divided into various paragraphs. In the first part will be analyzed Vietnam’s WTO
commitments regarding the securities sector and the regulatory framework set out in the GATS. In the
second part, it will be briefly analyzed the relevant literature on the benefits of a well functioning
securities market. In the third part it will be analyzed the economic implications deriving from the
liberalization of the securities in the light of the WTO framework and in the context of the much broader
discussion regarding the pros and cons of liberalization of financial services.
4.1.2 Securities as a sub-sector of the broader “financial services sector” – Vietnam’s WTO Commitments
The first issue is to identify precisely the kind of services that are covered under the umbrella of
“securities” in the schedule of commitments of Vietnam signed on 12 January 2007. In the Services
Sectoral Classification List provided by the WTO Secretariat, in the broader macro sector of Financial
Services there is no independent subsector for Securities. Rather, all the services that are usually
17
associated to the securities sector are grouped into the banking and other financial services, reflecting the
modern business model of modern financial conglomerates that do not limit themselves only to pure
banking activities but providing also asset management, trading and advisory services.
In this context the GATS schedule of commitments of Vietnam emerges for its peculiarity, Vietnam being
one of the few countries that explicitly divided its commitments in FS between insurance, banking and
securities. While some of the services scheduled do not overlap, in few instances some subsectors of
banking and securities are scheduled both under banking as well under securities.
Figure 7: Vietnam’s GATS Commitments on Securities
Mode of delivery
(1) cross-border supply (2) consumption abroad (3) commercial present (4) present of natural person
Sectors & Sub-sector Limitations on market access
Limitations on national treatment
Additional commitments
C. Securities
(f) Trading for own account or for account of customers, whether on an exchange, in an over-the-counter market or otherwise, the following:
- Derivative products incl. futures and options;
- Transferable securities;
- Other negotiable instruments and financial assets, excluding bullion.
(g) Participation in issues of all kinds of securities incl. under-writing and placement as an agent (publicly or privately), provision of services related to such issues.
(i) Asset management, such as portfolio management, all forms of
(1)Unbound, except services C(k) and C(l).
(2) None.
(3) Upon accession, foreign securities service suppliers shall be permitted to establish representative offices and joint ventures with Vietnamese partners in which foreign capital contribution not exceeding 49%.
After 5 years from the date of accession, securities service suppliers with 100% foreign-invested capital shall be permitted.
(1)Unbound.
(2)None.
(3)None.
(4) Unbound, except as indicated in the horizontal section.
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collective investment management, pension fund management, custodial depository and trust services.
(j) Settlement and clearing services for securities, derivative products, and other securities-related instruments.
(k) Provision and transfer of financial information, and related software by suppliers of securities services.
(l) Advisory, intermediation and other auxiliary securities-related excluding (f), including investment and portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy (for other services under (l), refer to (l) under banking sector).
For services from C(i) to C(l), after 5 years from the date of accession, branches of foreign securities services suppliers shall be permitted.
(4)Unbound, except as indicated in the horizontal section.
4.1.3 Liberalization of Financial Services in the GATS – The Regulatory Framework
The process of opening of domestic markets to foreign competition is called liberalization. While this
economic choice is completely independent from any legal commitment at the international level, when a
country chooses to embark into the process of progressive liberalization in the ambit of its WTO
membership, this course is subject to a number of rules and conditions that must be respected. First of all,
it must be said that the law of the WTO applied to the services sector is enshrined in the provisions of the
General Agreements on Trade in Services (GATS). Under this set of rules, Vietnam unilaterally
committed to open its domestic market under certain conditions and according to various deadlines.
Furthermore, Vietnam, by the sole fact of being Member of the WTO, it is obliged to comply with the
horizontal and specific obligations arising from the GATS. This peculiar set of rules is briefly explained
here below:
In the GATS the supply of a service can be performed through four modes (the four modes of supply),
which are subject independently one from each other to the Market Access and National Treatment
19
commitments. This means that while the provision of a service under mode-1 could be prohibited, this
could not be the same under mode-3.
The four modes of supply distinguish the service by the way it is provided to the customer. The four
modes are described in Article I.2 of the GATS and are the following:
Mode-1 (Cross Border): In this case the service is supplied by a service provider located in
country A to a consumer located in country B; in the case of securities this mode could take the
form of a Security company located in Hanoi that offers asset management services to a
consumer located in Malaysia.
Mode-2 (Consumption Abroad): This is the case of a consumer from Country B that travel to
Country A to buy a service provided by a service supplier of country A; this could be the case of
a Malaysian consumer that, while travelling in Vietnam, buys from a Vietnamese securities
company a financial service.
Mode-3 (Commercial Presence) The most common of all the modes of supply. A service provide
from Country A establish a commercial presence in Country B. In this mode, a securities
company from Malaysia decides to enter the Vietnamese market and establish here a subsidiary
or a branch.
Mode-4 (Movement of Natural Person): A service provider from Country B travels to Country A
to supply the service; a consultant from one bank in London travels to Hanoi to offer a service to
a local consumer.
The Most Favoured Nation Clause
Unlike the MFN clause on trade in goods, which does not apply to subsidies1, Article II of the GATS
imposes on the Members the obligation to “accord immediately and unconditionally to services and
service suppliers of any other Member treatment no less favourable than that it accords to like services
and service suppliers of any other country”2, provided that they did not inscribe an exemption in their
schedule of commitments. The potential of the MFN obligation is limited by Paragraph 3 of the GATS
Annex on Financial Services that allows a departure from the MFN obligation regarding mutual
1 Subsidies are internal measures outside the coverage of the MFN clause, which covers only measures at the border in connection with importation or exportations. See GATT, Article I.
2 GATS, Article II
20
recognition agreements on financial services. Those agreements can comprise Memorandum of
Understanding on capital adequacy, on cross-border banking supervision and also on safety-net systems
and insolvency procedures3.
Transparency and Domestic Regulations
Article XVI of the GATS deals with Market Access. This provision, similarly to National Treatment,
applies only to the sectors scheduled in the commitments and to the limitations inscribed. In this regard,
unless the member has inscribed the limitation in its schedule, the Market Access provision prohibits six
kinds of measures:
(a) Limitations on the number of service suppliers whether in the form of numerical quotas, monopolies,
exclusive service suppliers or the requirements of an economic needs test;
(b) Limitations on the total value of service transactions or assets in the form of numerical quotas or the
requirement of an economic needs test;
(c) Limitations on the total number of service operations or on the total quantity of service output
expressed in terms of designated numerical units in the form of quotas or the requirement of an economic
needs test;
(d) Limitations on the total number of natural persons that may be employed in a particular service sector
or that a service supplier may employ and who are necessary for, and directly related to, the supply of a
specific service in the form of numerical quotas or the requirement of an economic needs test;
(e) Measures which restrict or require specific types of legal entity or joint venture through which a
service supplier may supply a service; and
(f) Limitations on the participation of foreign capital in terms of maximum percentage limit on foreign
shareholding or the total value of individual or aggregate foreign investment.
National Treatment
The national treatment clause applies only to the specific sector and modes of supply listed in the
schedules of commitments of each Member, and obliges member to “accord to services and service
suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no
3 S. J. Key, “Doha Round and The Financial Services Negotiation”, The AEI Press, Washington D.C, 2003, p. 51
21
less favourable than that it accords to its own like services and service suppliers”.4 At paragraph three it
clarifies: “Formally identical or formally different treatment shall be considered to be less favourable if it
modifies the conditions of competition in favour of services or service suppliers of the Member compared
to like services or service suppliers of any other Member”. Under this provision, a Member would be
obliged to apply the same procedures that apply to its domestic securities firms also to foreign firms. In
this respect the explanatory note at GATS Art. XXVIII clarifies that the national treatment obligation
cannot be extended to any other parts of the supplier located outside the territory where the service is
supplied5. This limits the territorial application of the national treatment only to the territory of the
Member. Therefore, this provision would affect only foreign firms present in the host state territory
(mode 3 liberalization).
The Prudential Carve-Out
The Annex on Financial Services is a specific agreement to the GATS that clarifies existing GATS rules
as they apply to the specificities of the financial services sector. Indeed, an unregulated liberalization of
the financial services sector would have in some cases a negative effect on macroeconomic stability
because it would not allow to Member that degree of regulatory freedom necessary to maintain the
soundness of the financial system necessary to cope with market failures. Thus, the regulatory constraints
entailed in the trade of financial services products, as regulated under the GATS, obliged negotiators to
inscribe in the Annex a provision that would prevent that a strict obedience to the rules of the GATS
would undermine the stability of the financial system. For this reason it was inserted in the Annex a
provision that would guarantee the freedom of the Members to adopt any measure apt at maintaining the
soundness of the financial system despite its possible incompatibility with the provisions of the GATS.
This provision is commonly known as the “prudential-carve out” and it provides as follows:
“Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking
measures for prudential reasons, including for the protection of investors, depositors, policy holders or
persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and
stability of the financial system. Where such measures do not conform with the provisions of the
Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations
under the Agreement”6.
4 GATS, Article XVII.(1)
5 Note ad Art. XXVIII.
6 Annex on Financial Services, Paragraph 2(a)
22
In this respect, any domestic measure that might be inconsistent with Article XVI or Article VI of the
GATS can be none the less justified on prudential grounds once it is proven that it has been adopted to
accomplish prudential objectives. In brief, this clause operates as an escape clause that derogate to the
general obligation of the GATS, based on the prevalence of macroeconomic stability against the positive
effects of trade liberalization.
Hence, when assessing the legitimacy of a measure to banks or securities firms, the carve-out operates as
an overarching principle that imposes a preliminary evaluation of the economic objectives behind the
measure. In spite of the simplicity of the approach adopted in this provision, there are a number of
implications that render particularly complicated such analysis. In fact, as some authors suggested7, the
prudential carve-out suffers from an intrinsic ambiguity, especially in the definition of the benchmark on
which evaluate what consists a prudential measure. In this regards, it seems unclear whether the states
retain a full control over the definition of prudential measures or they should be linked to other authorities
beyond WTO, such as the Basel Committee on Banking Supervision or the IOSCO. Another major
ambiguity consist in the fact that in paragraph II there is no necessity test to assess the degree of
prudential protection beyond which the subsidy would be considered a protectionist measure.
4.1.4 The Benefits of Securities Market in the Economy8
The role of capital markets in the economy is still a matter of debate. Most of the literature demonstrates
that a coordinated and safe development of the stock market contributes positively to economic growth by
increasing and improving the allocation of savings and investment. In this respect, it has been showed that
capital markets and all the various financial instruments associated with the development of capital
markets can raise domestic and personal savings levels and contribute to a more efficient allocation of
those savings, even in less developed economies (Engberg, 1975). Another important benefit of capital
markets is that it constitutes a liquid trading and price determining mechanism for a diverse range of
financial instruments. This allows risk spreading by capital raisers and investors and matching of the
maturity preferences of capital raisers (generally long-term) and investors (often short-term), that in turn
stimulates investment and lowers the cost of capital, contributing in the long-term to economic growth.
7 Joel Trachtman, “Addressing Regulatory Divergence Through International Standards: Financial Services”, in P.
Sauvé & A. Mattoo (eds), Domestic Regulation and Services Trade Liberalization, The World Bank, Washington DC, 2003, p 30.
8 This paragraph largely draws on: J. Irwing, Regional Integration of Stock Exchanges in Eastern and Southern Africa: Progress and Prospects, IMF Working Paper, 2005
23
There are other benefits as well. For example, development of other parts of the financial system can
benefit from the existence of an active securities market because a well functioning and competitive
securities market will stimulate competition in other commercial banks in the provision of debt financing,
thus forcing the banks to improve their efficiency and service levels, as well as providing the banks with a
means to securitize their debt and better manage the maturity watch and risk profile of their balance
sheets. And beyond the financial sector, the success of privatization programs depends to a degree on the
availability of secondary markets to allow investors to liquidate their holdings at a time of their choosing,
thus making their initial investment more attractive9. Furthermore, a well functioning capital market, by
providing a means of trading the ownership of firms (shares) without disrupting the operating and
productive processes within those firms and by providing a way for investors to diversify their portfolios
can have beneficial spillovers to other sectors of the economy and therefore have a positive effect on the
overall economic growth (Levine, 1990).
Other researches, in contrast, argued that Securities market development can producing economic
instability and adversely affecting savings allocation and the reallocation of existing real wealth and
disrupt economic growth in least developed countries. For instance, Hamid and Singh (1992) found in
their empirical studies of developing economies that, while large corporations “clearly” benefited from
stock market activity, the host economy as a whole “gained little” because, in many cases, investment in
portfolio shares replaced bank savings, with no increase in the economy’s aggregate savings or
investment.
Another important question is whether the development of the securities market has the same benefits that
the development of the banking sector and whether the two are complementary to each other. There also
has been considerable lack of consensus within the literature on the appropriate priority that should be
given to stock market development within overall financial and economic development. Levine and
Zervos (1995, 1996) suggested that banks and stock markets have a complementary relationship in
contributing positively to economic growth. Arestis, Demetriades, and Luintel (2001) conclude that both
banks and stock markets could potentially promote economic growth, albeit with banks having stronger
effects.
It is widely accepted that much of the outcome of capital market development lies in the regulatory,
macroeconomic and governance framework set out by the regulators. In this regard, a sound and stable
macroeconomic environment is a critical prerequisite to the proper functioning of a stock market and the
9 R. Pardy, Institutional Reforms in Emerging Securities Markets, World Bank working paper, 1992.
24
government pays a central role in facilitating a healthy growth of the market in developing countries,
beginning with laying solid legal and institutional foundations, followed by supervising the market to
ensure its efficient, fair, and stable operation. Many analysts have also stressed that building institutional
capacity is a key element in successful securities market development (Calamanti, 1983; Chuppe and
Atkin, 1992; Pardy, 1992; Bekaert, 1993). Indeed, securities markets are highly susceptible to
manipulation and other practices which distort pricing and allocation decisions, and have a negative
impact on investor confidence so that the supply of funds to the market is reduced. Securities markets also
rapidly transmit external shocks and which may have little or no relation to the domestic economy but
simply reflect the mood of the international securities market. Another important issue has to do with the
information asymmetries that can jeopardize the development of securities markets. In this respect,
regulations such as disclosure requirements for public companies, complemented by good accounting
standards, along with credible contract enforcement and restrictions on the intermediaries licensed to
participate in trading are extremely important. For this reasons, it is of outmost importance that regulators
lay down a prudential regulatory framework capable to absorb any negative externalities of securities
market development (Pardy, 1992). Bekaert (1993) included high and variable inflation rates and
exchange controls among the major economic impediments to equity market development and integration
globally.
Also foreign institutional investors have a role for in facilitating securities market development since the
activities of these investors—which tend to be less affected by informational asymmetry than individual
investors—can improve information flows about company prospects.
Furthermore also traditional factors such as low stock exchange turnover rates, the small number of local
investors, the small number of listed securities, and a limited number of potential issuers can also pose
significant impediments to the development of securities markets in less developed economies. Calamanti
(1983) found that the larger companies that could qualify for a listing tended to be mostly financed by
foreign capital, further impeding activity on the exchange. Even those local companies that would qualify
for a listing were reluctant to do so for fear of losing control of ownership/management. Among the
measures she recommended to address these traditional impediments was the promotion of institutional
investors, along with improved regulatory, disclosure, and institutional arrangements.
4.1.5 Liberalization of Capital Markets: the Issues at Stake
Liberalization is the decision of the government to relax regulatory and other kind of measures that
protect a certain sector of the economy from foreign competition in its domestic market. The reasons that
led to that decision usually rely on the general benefits associated with a free market. As it was briefly
25
mentioned at the beginning of this chapter, the process of opening the domestic market to foreign
competitors is threefold, as the political economy of free competition requires the adoption of various
economic, legal and political reforms.
In the case of financial services, such process is rendered even more complicated by the intrinsic complex
nature of financial services and by their pivotal and crucial role as the “engines” of modern economies. In
order to understand the complications deriving by the entry of foreign financial institutions in the host
economy is to bear in my that F.I. while providing useful capital to the economy could in some cases be
subject to market failures that would be likely to impact severely the economy. Indeed, the liberalization
of financial services stands in the middle of a triangle made by trade in financial products, capital
liberalization and the need of prudential regulations. In this respect the decision of a government to ease
protectionist measure to liberalize its FS sector must take into account the two other variables (capital
liberalization and need of prudential regulations). In many cases what could be considered as a barrier to
free trade could be nonetheless justified under prudential grounds.
Figure 8: The Links Between Financial Services Trade, Capital Flows and Financial Sector
Stability10
10 M. Kono and L. Schuknecht, Financial Services Trade, Capital Flows and Financial Stability, World Trade Organization, Geneva, 1998, p. 11.
26
Financial services trade
Financial sector stability
Capacity - Transparency and information - Regulation & supervision - Infrastructure & market development, risk management
Efficiency - Competition - Technology transfer - Skill transfer & development
Capital flows ‐ Quantity - Structure (term, instrument) - Volatility
The liberalization of the securities sector (the process of removing regulatory barriers to allow foreign
investors to enter into the market) carries many benefits to the domestic economy. First of all, the current
27
literature argues that that a deeper financial sector will stimulate economic growth as the increased
liquidity brought by new investors will provide a new fuel in the economy. Second, bigger and better
structured foreign securities companies, once entered into the market will be more likely to bring their
clients base and thus attracting more easily foreign capital into the host market. This in turn will have
beneficial effect to the economy as it will divert capital to local industries especially those in need to and
asset market. Furthermore, once they are allowed access, foreign investors will exploit the benefits of
diversification and will consequently drive up domestic equity market values; In this respect it has been
argued (BH and Henry 2000) that the cost of capital falls subsequent to major regulatory reforms that
permit foreign investors access to domestic equity markets.
As for all the other financial services, the entry of foreign firms will raise the competition among firms,
and therefore raise the efficiency and the standards of compliance with international regulations.
Arguably, foreign firms will adopt more advanced technology and management techniques that will
promote greater innovation among firms and more efficient operations and processes. Finally, as foreign
investors may demand improved corporate governance and transparency in these countries, liberalization
may reduce the wedge between costs of external and internal financing at the firm level, stimulating
corporate investment (see Love, 2000).
Why Countries Liberalize?
There are a number of reasons that push towards greater liberalization in financial services.
New entrants will enhance the competition between firms. The increased competition will have a
number of collateral effects in the market. First, the increased number of firms can allow
economies of scale and will allow greater specialization based on comparative advantage.
Specialized institutions will then offer better tailor made financial services to the consumers.
Second, the increased number of firms will reduce the price and the costs of financial products
and services offered. Third, the vast spectrum of products available could in some case allow big
financial firms to benefit of economies of scope and therefore offer a wide range of services that
would not be available otherwise.
Increased competition from more experience and better-managed foreign financial services
companies will allow in the long-term transfer of skills to Vietnamese personnel. Furthermore,
financial institutions will be forced to care more about consumer’s needs such as better
investment advice, thus leading in the long term to improved quality of the final service.
Foreign players will bring in the long-term transfer of technology and knowledge that will benefit
the domestic sector.
28
Increased number of available services and the emergence of new available financial instruments
will allow companies to better structure their investment portfolio and find a good combination of
bonds, loans, equity and other products to finance their projects.
Need to increase foreign investment and the need to have large amount of capital to boost the
development.
There is a growing body of literature that suggests that liberalization of financial services will
promote better macroeconomic policies. Indeed, given the critical nature of financial services
trade and the need to balance precautionary measures with the access to new capital, the role of
macroeconomic policies is crucial to ensure that the benefit of liberalization are not offset by
market failures.
Drivers of Liberalization
Technological and managerial innovation and management and technology transfer.
General globalization and interdependence of economies.
Need of foreign firms to seek new markets and subsequent political pressure to liberalize coming
from WTO, IMF and in FTAs
National development priorities and the use of liberalization as a tool to enhance the
competitiveness of the domestic securities sector.
Need of liberalizing countries to increase foreign investment and the need to have large amount
of capital to boost the development
Problems Usually Associated with Liberalization
In some cases, a number of developing countries experienced banking sector problems following the
adoption of liberalization policies or following the adoption of “light” regulatory policies. Most of these
crises were associated with banking or monetary crises and given the devastating effects that such crises
have on the economic system, many have argued that financial sector liberalization will lead to financial
instability.
Indeed, while it is true that financial crises can have a highly negative impact on the economy, it is
questionable the direct and unequivocal link between financial liberalization and systemic crises.
The relation between financial stability and financial services liberalization is usually depended on some
variables that would determine whether the decision to open the domestic sector would bring additional
benefits or would worsen pre-existing problems. Most of the commentators agree that financial sector
problems have usually their causes in unsound macroeconomic policies, inadequate government
29
regulation and supervision, and inappropriate intervention in financial markets (Galbis, 1994; Harris and
Piggot, 1997; Jacquet, 1997; various BIS publications).
For instance, easy monetary policies can encourage excessive foreign exchange exposure of banks or
imprudent lending. Furthermore, as financial services liberalization requires the opening of the market to
foreign competition and foreign capital, poor performance of domestic financial sector provider will push
them out of the market. In addition to that, given that liberalization of the capital account would attract
capital inflow, in case of crisis or loss of confidence the abrupt outflow of foreign capital could pose
substantial monetary and financial instability.
In order to offset the risks associated with opening of the financial services sector, principles have been
developed to minimize the likelihood of financial and monetary instability. Such principles require:
Macroeconomic stability;
Stability-oriented monetary policies;
Adoption of structural reforms;
Increased prudential supervision of financial institutions;
Adoption of liberal market entry and market exit rules in case of bankruptcies;
Adoption of adequate prudential safety nets in case of systemic crisis;
Improved management techniques and development of more advanced technology.
International Monetary Fund: Principles of Financial Sector Liberalization
• “Liberalization is best undertaken in the context of sound and sustainable macroeconomic policies.
• Capital market development-cum-financial stability hinges on establishing the institutional infrastructure for controlling both macroeconomic and financial risks. Financial system reforms that support and reinforce macroeconomic stabilization and effective conduct of monetary and exchange rate policies should be accorded priority. This principle entails living priority to central banking reforms to develop monetary policy instruments and money and foreign exchange markets.
• Financial liberalization and market development policies should be sequenced to reflect the hierarchy and complementarities of markets and related institutional structures. Market development policies should be comprehensive. Technically and operationally linked measures should be implemented together, and linkages among markets should be
30
considered.
• Capital market development requires a careful sequencing of measures to mitigate risks in parallel with reforms to develop markets. Policies to develop markets should be accompanied by prudential and supervisory measures, as well as by macro prudential surveillance, to contain risks introduced by new markets and instruments.
• The pace of reforms should consider the initial financial condition and soundness of financial and nonfinancial firms, as well as the time needed to restructure them.
• Institutional development is a critical component of building capital markets and financial risk management capacity. Establishing good governance structures in financial institutions, including internal controls and risk management systems, is among the most critical of markets reforms.
• Similarly, the operational and institutional arrangement for policy transparency and data disclosure need to be adopted to complement the evolving sophistication of financial markets.
• Pacing, timing, and sequencing also need to take account of political and regional considerations that could strengthen ownership of reforms.
• Reforms that require long lead times for technical preparations and capacity building should start early.
The following are additional principles for external financial liberalization:
• The liberalization of capital flows by instruments and sectors should be sequenced in a manner that reinforces domestic financial liberalization and that allows for institutional capacity building to manage the additional risks.
• Reforms need to consider the effectiveness of controls on capital flows in place or the implicit restrictions on capital flows from the ineffectiveness or absence of markets.
• Transparency and data disclosure practices should be adopted to support capital account opening”.11
11 International Monetary Fund (IMF), Financial Sector Assessment: A Handbook, International Monetary Fund, Washington D.C., 2002, p. 323
31
4.2 Financial liberalization in ASEAN securities markets
Financial liberalization has already taken place in the other ASEAN countries and 100 % foreign owned
securities companies are operating there. We can therefore review the impact of liberalization on the
competitive landscape in those countries and the strategies of domestic and foreign securities companies,
to see if there are any lessons which can be learned for Vietnam’s market opening process.
4.2.1 Malaysia securities exchange and investor overview
Securities Market background information
Bursa Malaysia established in 1976. Holding company for 3 exchanges, securities and derivatives exchanges, and Labuan Offshore Financial
centre. No formal OTC market Foreign investor limits apply (30% of any listed or unlisted company with certain exceptions) Short selling and same day turnaround permitted Opening hours: 9-12.30 a.m. and 2.30 to 5 p.m. Market cap. at 12 November 2010 US$ 322 bn.
20.9%
37.0%26.5%
15.6%
Malaysia Investor Value Traded
Local Retail
Local Insitutional
Foreign institutionalOther
Source: Bursa Malaysia (Year to October 2010)
Investor Value Traded
Large portion of domestic institutional at 37% Foreign institutional at 26% Retail at some 21% is lower than the combined institutional of 63.5%
32
4.2.1.1 Malaysia liberalization impact
In 2005 Malaysia allowed market entry to 5 special scheme 100% foreign owned securities companies.
Now by 2010 there are 6 foreign securities companies and plans to issue 3 new licences to foreign firms
(part of which is to expand Islamic finance) under the ongoing liberalization initiatives to increase the
liquidity and size of Malaysia’s securities market. Citigroup won a licence in 2010.
Many of the domestic securities companies have developed a full service model, some are part of
commercial bank groups and therefore have more funding available than stand alone securities firms. In
the case of both CIMB and Aminvest both offer investment banking services such as mergers and
acquisitions, underwriting and other advisory.
Domestic firms have pursued various strategies as far as foreign securities companies are concerned.
CIMB has not tied up with a foreign partner. CIMB instead, in addition to broadening its service offering,
chose to expand overseas as part of a pan ASEAN strategy, seeking new revenues in new markets. For
example, it acquired an independent securities company in Singapore, GK Goh in 2005. This broadening
of their geographic coverage was also a defensive measure in view of the increased competition deriving
from financial liberalization and the arrival of foreign securities companies in their home market of
Malaysia.
Other domestic controlled Malaysian securities companies, such as Aminvest, have brought in foreign
strategic partners. In Aminvest’s case, it is ANZ with 19.1%. This minority shareholding structure allows
Aminvest to retain control but at the same time it can benefit from the opportunities of ANZ’s foreign
know how in technology, research and investment banking services.
It is not possible to say categorically which strategy is the best, since this will depend on the individual
circumstances of each firm, their strengths and weaknesses, as well as the strategic priorities of
shareholders and management.
As for the competitive effect, the local firms have been subject to competition since 2005. In the case of
both CIMB and Aminvest they maintain positions in the Top 10 by brokerage share. Local firms have
remained stronger in retail brokerage business and indeed most foreign firms in Malaysia target only
foreign and domestic institutional business so far, the Malaysian authorities are encouraging them to
target retail business also in order to make the sector more competitive and to raise the standards.
33
In terms of the impact of the foreign firms’ market entry on the brokerage market share table, only one of
the Top 10 is 100% foreign owned, that is CSFB at No.8 with 5.4%. Other foreign names such as CLSA
and JP Morgan are in the 10 - 20 segment. A key reason for this is that the strategy of large global
investment banks is often not to aggressively pursue market share but to focus on building a business
platform to service their foreign clients and to target selectively higher margin and or higher profile IPO
and M&A work, often cross border work such as cross listings.
4.2.2 Thailand securities exchange and investor overview
Securities Market background information
SET established in 1974. Also has an Alternative Investment Market for SMEs. No official OTC market Derivatives – index futures started in 2006 and index options in 2007 Foreign investor limit 49% but plan to introduce non-voting depository receipts (NVDRs) Short selling and same day turnaround Open hours 10-12.30 and 2.30 to 4.30 Market cap. at November 2010 US$190 bn.
Source: SET (Year to October 2010)
Investor Value Traded
Retail accounts for over half of traded value (58%)
Institutional investor is mainly foreign at some 22%, domestic institution is 7.2%
58.0%
7.2%
21.8%
13.0%
Thailand Investor Value Traded
Local Retail
Local Insitutional
Foreign institutional
Other
34
4.2.2.1 Thailand liberalization impact
Thailand allows 100% foreign securities companies to establish. In terms of the strategy of domestic Thai
securities companies, some have chosen not to tie up with a foreign partner, but they have succeeded in
maintaining their largely retail client base and a profitable business model with good market share. In
many cases such as KTZ and Phatra they are subsidiaries of domestic commercial banking groups.
Asia Plus Securities does not have a foreign partner. Asia Plus Securities has a top 2 market position and
has a client base still predominantly retail (80%) with some domestic and foreign institutions. They
acquired the local operation of a foreign broker, ABN in 2004. Asia Plus Securities has done well since
then and part of their strategy was to be more prudent with margin lending than some of their competitors,
so that they did not have significant credit losses. Also, they instituted good internal controls and systems
to manage the business, with the result that they kept tight control of costs and their breakeven point for
trading volumes was the lowest among the Thai brokers.
One of the Top 10 domestic brokers, Bualuang Securities, has adopted a different strategy, bringing in a
US investment bank, Morgan Stanley, as its exclusive partner. BLS first signed a research support
agreement with Morgan Stanley Dean Witter Asia Limited in 2006 and then in 2007 this was followed by
them entering into an Exclusive Partner Agreement with Morgan Stanley. This provides them with access
to Morgan Stanley expertise and client base. It is a cooperation agreement not an equity holding.
Although it does not provide an equity cash injection, as in the case of ANZ with Aminvest in Malaysia,
or in the case of Daiwa Securities and ANZ with SSI in Vietnam for example, it may be viewed by both
parties as a prudent first step before entering a deeper equity based relationship. The lower commitment
level has this advantage and also that it is generally easier to unravel the cooperation if either partner
wishes to terminate it later, but also the disadvantage in that with a lower commitment level and financial
risk by the foreign partner, technical cooperation may be slower. On a more positive note a cooperation
agreement between a local securities firm and a foreign securities firm, if the initial relationship and
commitments of each party develop well, then a capital injection can be a second step towards fulfilling a
closer win-win relationship.
The Thai Capital Market Development Plan is focused on boosting the growth of their stock market in
response to domestic concerns that their market is falling behind compared with regional peers. This
foresees, inter alia, that some local securities firms will have to “adjust by forming alliances with strategic
partners to increase efficiency by offering new products and services”. The regulator sees that the
strategic partners offer opportunity as catalyst for product development of local firms.
35
As for investor composition in the Thai securities market, it is more similar to Vietnam than is Malaysia,
in the sense that retail investors still account for the majority of investors by traded value, while in
Malaysia and most developed markets the majority tends to be institutional investors, Top 10 brokerage
ranking includes three foreign majority owned firms, Kim Eng (11%), Phillip Securities from Singapore
(5%) and CSFB (3%). Other foreign names such as UBS and Macquarie are in the 10 - 20 segments, for
similar reasons to that mentioned in the Malaysia section, that brokerage share is not the highest priority.
4.2.3 Indonesia securities exchange and investor overview
Securities Market background information
Indonesia Stock exchange (IDX) established 2007 from merger of Jakarta and Surabaya exchanges. Trades in equity, fixed income and index futures.
Jakarta Futures Exchange for index and commodity futures
No foreign ownership restrictions for listed companies except for broadcasting companies
Short selling and same day turnaround permitted
Open hours 9.30-12.00 a.m. and 1.30 to 4.00 p.m.
Market cap. US$ 190 bn.
Investor Value Traded
Local investors 75% and foreign 25% (IDX Factbook 2009)
For Q1 2010 the foreign proportion had risen to 33%
4.2.3.1 Indonesia liberalization impact
Indonesia allows 100% foreign securities companies. Indonesia’s investor structure is not similar to that
of Malaysia or Thailand, in that foreign investor penetration is significantly higher in Indonesia than in
those ASEAN countries (at over 50% of market cap. held by foreign investors). Indonesia also has a very
small retail investor base, thus the natural local retail client base which is a typical advantage for local
securities companies is not currently so developed as in the other markets or indeed in Vietnam.
36
Six of the Top 10 are foreign majority owned, the highest CLSA with 4.64%. Other foreign names such
as Merrill Lynch, JP Morgan, UBS and Macquarie are in the 10 - 20 segment. Though foreigner securities
company penetration is higher in Indonesia for the reason of the investor structure its profile may be less
instructive for Vietnam than Malaysia or Thailand.
In terms of brokerage penetration, the Top10 have 37% of market by brokerage trading value, a relatively
low concentration compared with Malaysia and Thailand with 29 firms having 1% or more share. (IDX
Factbook 2010).
4.2.4 Conclusion on Foreign securities companies in ASEAN markets
In these ASEAN markets we have seen the securities market opening and the arrival of foreign securities
companies to establish partnerships and 100% foreign owned local companies.
However many leading domestic securities companies have so far maintained good franchises and market
shares. The global foreign brokerages tend to have different strategic priorities and client focus to the
local firms and so they do not tend to compete strongly for retail accounts for example. Some domestic
firms have maintained independence from foreign firms, while others have formed partnerships of an
equity and non-equity variety with foreign firms, to benefit from skills transfer and in the case of equity
partnership, from capital also. Financial liberalization brings both challenges and opportunities to the
securities market and the domestic securities companies.
4.3 Challenges for the regulator from market development and market opening
4.3.1 Introduction - Adapting to market liberalization
The SSC, supported by the MOF, has the responsibility to regulate the market. For this the SSC needs the
regulatory powers and capacity to fulfill its multiple responsibilities, which include to maintain an orderly
and efficient securities market with transparent information on the listed companies, with professionally
run securities companies which operate in the best interests of its investor clients, and to develop the
securities market into a modern, competitive market with a wider product range and good risk control and
systems. The regulator also faces the challenge arising from market opening to manage the foreign
securities companies and to cooperate more extensively with foreign regulators.
We will first review and assess the current powers and effectiveness of the SSC, this both in terms of the
adequacy of its capacity building and its needs to deal effectively with the pressures of market opening,
as well its capacity and resources in the specific area of surveillance, investigation and enforcement.. We
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will then in Section 5 make some policy recommendations for the SSC to strengthen it to meet these
challenges.
We have used as a reference framework for our analysis the IOSCO (“International principles, from the
Assessment on Objectives and Principles of Securities Regulation (IOSCO Principles), which provides
for the best international practice principles for securities regulations for the regulator, securities
companies and stock exchanges . We refer to those principles most relevant to our topics of adapting to
market opening and to the regulator’s supervision and enforcement role.
4.3.2 Review of regulatory powers and effectiveness
4.3.2.1 The responsibilities of the regulator should be clearly and objectively stated (IOSCO Principle 1)
The SSC’s functions, powers and responsibilities are provided in Decision No. 112/2009.
In addition to Decision No. 112/2009, there is another Decree No. 85/2010-ND-CP, dated 2 August 2010
on Administrative penalties in the securities market, which provides new, improved regulatory powers for
the SSC in enforcement in the stock market.
4.3.2.2 The regulator should be operationally independent and accountable in the exercise of its powers and functions (Principle 2)
Independence
The SSC is an agency of the MOF. The SSC has its Chairperson and no more than 3 vice chairpersons
and appointment and dismissal of these is by the MOF. The Minister of Finance appoints all Commission
members. SSC senior level management does not currently have any independent representatives from the
private sector and there is no specific requirement to have a legal expert, a financial expert, an accounting
expert at SSC senior management level.
Major regulatory and policy decisions are formulated and drafted by the SSC, the approval is required at
MOF level or higher and not made by the SSC itself. The SSC has the authority to issue guidance and
interpretation but not to set policy and enact rules. In conclusion the regulatory function is not completely
independent in its operation.
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Under IOSCO best practice the securities regulator should be independent to provide assurance to the
market that the regulator is able to operate on an arm’s length basis without undue political involvement
and with sufficient industry experts.
One practical disadvantage of the current model in Vietnam for the securities market is that the approval
process in Vietnam for legal amendments or new policies, requiring MOF approval or approval at
Government/ the Prime Minister Office level for Decisions for example, can be lengthy and can impede
market progress. The demands on the regulator from the securities market participants for new securities
market products and policies is increasing and there is frustration with the slow approval times. With
market opening and the likely additional lobbying of foreign securities firms and foreign investors, this
reform pressure on the SSC is likely to further increase. This is one reason why some domestic securities
companies are “experimenting” with new products before they are formally legalized, such as margin
trading and options; this practice of experimenting increases risk and should not be permitted.
The authorities should consider if a more streamlined consultation and approval process for new policies
and legal amendments can be introduced to reduce time to market. The best policy should be to fix an
efficient and achievable deadline for consultation and approval with the backing of MOF and the relevant
decision making bodies, involve the industry in consultation on new policies and clearly communicate the
process to the market. This market reform process should balance efficiency with prudence and careful
consideration of the risks; for example, the market is not yet ready for derivatives. Balanced evaluation
will be assisted by market expertise and independence, and it is important that SSC and the authorities
have available and use the necessary technical and market expertise in reaching their decisions. The more
the market sees transparency and a commitment to timely but prudent market development, the more the
market will gain in confidence and stability.
We understand that no changes are currently contemplated to the current operational model and that the
SSC is due to remain under the management of the MOF. The IOSCO best practice model is for the
securities regulator to be fully independent. In view of Vietnam being still at an early stage of
development this full independence process for SSC may take some time; however, this objective should
be incorporated in the medium term Capital Market Development Plan in order to signal pro market
policies and give confidence on the strategic direction which Vietnam is taking.
Accountability
The SSC, being a statutory body, is accountable to the Minister of Finance, Government and Prime
Minister and is required by law to submit its financial statements to the Minister of Finance. The
statements are audited by the State Auditor.
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The SSC releases its annual report to the public. However, content of the annual reports are focused on
policies, market operation, regulation and supervision. The SSC’s accounts statements are made public
annually and provide details of its use of resources over the financial year according to the regulation on
public disclosure of financial operation.
The SSC is mandated by law to protect investors. The SSC makes information available on its website
information.
All administrative actions taken by the SSC are documented in writing with reasons provided. The
Securities Law requires the SSC to give the person the opportunity to be heard before any action is taken.
The Inspectorate of the SSC will meet the person and the action is taken after a memorandum has been
signed by the violator(s) and the SSC to recognize that the person already violated the SL. Furthermore,
persons who wish to contest the SSC’s decisions can appeal to the Court.
4.3.2.3 The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers (Principle 3)
Since the SSC operates under the MOF, this places some limits on their powers: (i) limits the power to
issue prompt policies in response to market movements; (ii) limits the power to submit draft legal
documents to the National Assembly or Government for promulgating. The disadvantage of this is that
market practitioners become increasingly frustrated and experiment with new market mechanisms before
they are passed into law as mentioned above.
For investigation and enforcement powers we consider in Principle 8 and 9 respectively below.
Financial resources
There are two funding resources for the SSC:
(1) State Budget provides approximately 1/3 of income. This source covers normal operational expenses
for the SSC as a state budget funded organization. This includes: expenses for infrastructure,
procurement or renovation of fixed assets; annual fee for membership of international organizations
and consideration for international projects; funding for national projects; funding for special tasks
assigned by the Government; funding for streamlining of staff (if available); funding for training of
staff and science researches; and funding for other special tasks.
(2) Self -funding from fees and charges provides approximately 2/3 of income. This includes licensing
fee, market supervision fee, public company regulation fee and other fees specified in the relevant
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legal framework; revenue from providing training services on securities market; revenue from selling
the Securities Review and advertisement; revenue from providing IT services and other services;
funding from donors. These fundings are used to ensure: (i) a double salary for the SSC’s staff
compared to that of other state budget funded organizations; (ii) using of services and procurement;
(iii) study tours, training oversea and other international cooperation activities; (iv) supervisory and
regulatory activities; and other operational expenses.
The sufficiency of the SSC’s income is less of a concern (as the revenue from fees and charges has good
potential), than the mechanism for using its income. As a state budget funded organization, expenditures
of the SSC are subject to the regulations applied for that type of organization and they cannot be over
certain limits. For example, even the SSC’s staff enjoy a double salary compared to other government
officers in other ministries, the salary is much less than salaries paid in the securities industry and not
large enough to keep good people at the SSC.
Human resources
At present, the SSC has 318 staff, allocated to 14 departments and subsidiaries. However, the number of
staff cannot meet the current workload, especially in departments such as Securities Issuance Department
(30), Securities Inspectorate (23) and Market Surveillance Department (24).
The salary level in the SSC is not large enough to compete with the securities industry for the best human
resources. However, recently the SSC has achieved some improvements in human resource development.
Last year, the SSC started a special recruitment examination for graduates with Master Degrees or higher
Degrees and English proficiency (TOEFL or IELTS). The people who passed the special examination can
enjoy a higher salary than the ones, who passed the normal examination and they will not have to
experience one year of internship with only 85% salary as is the case for those SSC staff who pass the
normal examination. This is a good initiative. The SSC currently has few fluent English speaking staff;
this should be remedied in preparation for 2012. Increasing the English speaking ability of the SSC staff
will become increasingly important in order to have effective communication with foreign regulators,
foreign securities companies and foreign investors.
The SSC is now drafting a system of performance based human resources evaluation and assessment,
which will help to enhance efficiency in the employment and use of human resources.
Consideration should be given to making the salary packages more attractive in order to attract and retain
the right people; sufficient industry and technical experience is required to understand and manage the
issues and challenges of market development.
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As for protection of SSC staff carrying out their allocated responsibilities there are no detailed regulations
under the Securities Law for any action or proceedings for damages made in respect of any act or
statement made or omitted under any securities law or in the performance of any function or the exercise
of any power under the securities law. This should be amended to give the SSC staff the necessary
protection, except in case of negligence.
Training
Every year, the SSC carries out training courses for the SSC’s staff. The courses include:
- Professional training courses: every staff of the SSC must obtain 3 basic certificates on
securities market provided by the Securities Science Research and Training Center
(Fundamental Securities Market, Legal Framework on securities and securities market and
Securities Analysis). In addition, annually the training courses on law, accounting and
auditing, financial statements, market supervision, inspection and enforcement, IT and other
field of securities market are organized with the involvement of domestic and international
speakers;
- Training course for Government officers: training courses are held to provide necessary
knowledge and understanding on public services and duties of a public servant. They are
compulsory courses for the SSC’s staff;
- Oversea study tours and Training Programs: with multilateral and bilateral relationship
with countries and international organizations, the SSC always sends its staff for the study
tours short term and long term training course overseas. The study tours are usually for
experience exchange and training courses may be professional or post- graduate courses
(JoinVienna –IMF courses, IOSCO’s Courses, SECO Program for International Investment
Analysis Certificate)
Technical resources
The IT resources of the SSC are lacking, they are without an automatic market surveillance system,
information disclosure system and reporting system. Most of the workload of licensing, regulating and
supervising is done manually with PCs rather than with advanced IT tools and systems. This makes it
very difficult for SSC to adequately police the market.
SSC understands the need for a new system, the main challenge is not financial but technical in terms of
designing a customized system with appropriate locally tailored rules and alert settings in terms for
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example of the SL definitions for the different categories of market violation. Therefore, in the near
future, the SSC needs to build up a whole new IT system for regulation and supervision activities.
At the exchanges themselves, which also have regulatory responsibilities under the authority of the SSC,
the IT Project for both HOSE and HNX is in progress to provide a new trading system, stock watch
system and clearing and settlement system for the exchanges. The Project was initiated around 2003-
2004, we understand that similarly to the proposed SSC IT system the main reason for the long time it is
taking is the technical difficulties of customizing a system to local requirements. This proposed new IT
system for the SSC was estimated to cost in the region of USD 15 million for development of IT systems.
4.3.2.4 The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality (Principle 5)
The SSC staffs are subject to the requirements of confidentiality applied to government officers and the
officers who work in the finance industry. There is a list of confidential data and information the SSC
staff should respect. The SSC does not have established internal disciplinary procedures and guidelines
for investigating and resolving alleged violations of their Terms and Conditions of Employment and
general government employee requirements or any conduct which is inconsistent with a staff’s faithful
discharge of his duties.
If not already done so the SSC should ensure that its own staff dealing rules are at least as strict as those
for securities companies. There should be regular monitoring of staff compliance with this. This derives
from the need for the securities regulator such as the SSC to maintain the highest standards in order to
protect its integrity.
There is no specific Code of Conduct for SSC staff relating to matter such as the avoidance of conflict of
interest, restrictions on investing in securities, by which SSC staff are required to abide. SSC should
consider introducing a formal written Code of Conduct for SSC staff. Such Code would provide for the
avoidance of conflict of interest, restrictions in investing in securities and observance of confidentiality
and would establish internal disciplinary procedures and guidelines for investigating and resolving alleged
violations of the Code of Conduct, Terms and Conditions of Employment and any conduct which is
inconsistent with a staff’s faithful discharge of his duties. This serves to maintain SSC’s good name and
reduce risk of reputational risk and is also in line with being a role model to the securities companies, the
listed companies and to all market participants to adopt, internalize and take ownership of their own Code
of Conduct.
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4.3.2.5 The regulatory regime should make appropriate use of self regulatory organisations (SROs) that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets (Principle 6)
HOSE or HNX both have powers and responsibilities to conduct the function of a front-line regulator of
the markets which they operate. HOSE or HNX are vested with regulatory powers under the law and has
a statutory responsibility to ensure a fair and orderly market and prudent risk management. These
responsibilities relate to the regulation and surveillance of securities markets.
4.3.2.6 SROs should be subjected to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities (Principle 7)
The SSC is in charge of registration of securities firms (license for establishment and operation) and
supervision of the compliance of securities firms with the rules and regulations for the securities market,
provided for under Regulation No. 27/2007/QD-BTC dated 24 April 2007 on the organization and
operation of securities firms and under Decision No.126/2008/QD-BTC dated 26 December 2008 on
amendments of and supplements to the Regulation No. 27/2007/QD-BTC.
The HOSE and HNX exchanges are responsible for monitoring the securities members’ compliance with
their Regulations on Securities Members.
As for market surveillance, HOSE and HNX are in charge of identifying abnormal transactions, using
their set of criteria for alerts (21 for HNX and for 20 for HOSE). HOSE and HNX report on abnormal
transactions to the SSC on a weekly basis. Then the SSC provide the second tier of market surveillance:
the SSC makes a deeper analysis, using trading data reported by the SEs. The SSC may require HOSE
and HNX to provide more information or to participate at on-site inspections undertaken by the SSC at
securities firms, listed companies or collaborating with investors who are under investigation. Sometimes
the SSC authorize the HOSE and HNX to carry out on-site examinations on trading at securities firms.
HOSE or HNX is required to prepare an annual regulatory report within 20 working days- Circular No.
151/2009/TT-BTC dated 23 July 2009 to provide guidelines on supervision by the SSC over securities
operation of the SEs and Depository Center). The SSC carry out an annual on-site examination of HOSE,
HNX and VSD. This examination is not an audit and there is no regulatory report. The examination is
carried out to ensure compliance of the institutions with laws and regulations and that they are operating
in a fair and transparent manner. All aspects of their operation are inspected The Minister of Finance may
also require a special report from HOSE or HNX on its compliance with securities laws at any time.
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Based on my discussions with SSC and the stock exchanges all parties informed me that in their view the
cooperation between SSC and HOSE and HNX is working well. There was some frustration expressed
however that the approval process takes too long for market launch of new products such as margin
lending and of new trading structures such as same day buying and selling.
4.3.2.7 The regulator should have authority to share both public and non-public information with domestic and foreign counterparts (Principle 11)
Certain aspects of regulation may require the involvement of other domestic regulators, such as the
banking regulator. To facilitate greater co-operation and communication among the authorities, there was
a proposal for signing a memorandum between the MOF and SBV on cooperation in stock market
supervision. However, agreement has not been obtained and the MOU is still a draft until now.
A formal MOU for MOF/SSC with the State Bank of Vietnam should be agreed, providing for a full
exchange of information on all regulatory actions to be taken or contemplated by the signatories. The
MOU with SBV and other domestic institutions should also provide for advance warnings of potential
firm failures to ensure effective and timely response to possible systemic risks. Formalized cooperation
of MOF/SSC with the SBV should be supported by regular bilateral dialogues to foster effective
cooperation.
There is no formal coordination mechanism which would enable the SSC to be informed of policy
decisions while they are still under consideration that might materially affect the Vietnam securities
markets and which would allow the SSC to communicate its views on the likely impact of such decisions.
In terms of domestic sharing of public and non-public information SSC currently has significant obstacles
to completing its work as, in addition to not being able to access bank records due to lack of MoU with
SBV (the main problem is the Bank secrecy Laws), SSC is not permitted to access the phone or computer
records of persons under investigation.
In terms of other cooperation in force to assist the securities regulator, there is an Inter-ministerial
Circular No.46/2009/TT-BTC-BCA dated 11 March 2009 on cooperation between Ministry of Finance
and Ministry of Police in enforcement of violations in securities market.
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4.3.2.8 Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts (Principle 12)
In addition to domestic information sharing issues discussed in the previous section, it is essential for the
SSC, as part of its institutional capacity building, to formalise and develop its co-operation and
information-sharing arrangements with foreign regulators.
The IOSCO Multilateral Memorandum of Understanding (IOSCO MMoU) governs information sharing
between its signatories, the securities market regulators. The IOSCO MMoU, adopted in 2002, is based
on the IOSCO Objectives and Principles of Securities Regulation adopted in 1998 and the experience
gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized
framework for sharing enforcement-related information and a gradually expanding network of
participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a
comprehensive screening process to establish that they have the legal capacity to fully comply with the
terms of the IOSCO MMoU. Being a signatory to the MMoU implies that the IOSCO screening
committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13
and that the country’s securities regulator has therefore the legal capacity to share supervisory information
with and provide assistance to its foreign counterparts.
We understand Vietnam’s discussion on joining the IOSCO MMoU are in progress. This should be
expedited to assist SSC to adapt to market opening by making more readily available the assistance and
experience of foreign regulators and so that SSC can seek information on behalf of foreign regulatory
bodies, consistent with international standards for cooperation.
Therefore any necessary legal changes should be approved in order to enable the SSC to sign the IOSCO
MMoU.
4.3.2.9 The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers (Principle 13)
This should be in place once SSC has become a signatory to the IOSCO MMoU.
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4.3.2.10 Regulation should provide for minimum entry standards for market intermediaries (Principle 21)
Securities companies Licensing
Securities companies must be licensed in order to carry on permitted activities under the Securities Law.
Decision No.27 Regulations on Organization and Operation of Securities Companies provides that no
securities company should carry on a business in any regulated activity or holds itself out as carrying on
such a business unless it has the relevant licence.
Licensing requirements, criteria and conditions are detailed in Decision No.27. Decision No.27 details the
licensing criteria for entry for both companies and individuals. Requirements for a license include
organisational requirements, fit and proper requirements for applicant’s directors, shareholding
composition requirement, and the adequacy of financial resources.
The SSC conducts an assessment of applicants and its principal officers.
A Securities company must hold the relevant licence to carry on either one or more of these four regulated
activities:
1. Securities brokerage;
2. Securities proprietary trading (self-trading);
3. Underwriting of securities;
4. Securities investment consultancy.
Securities depository services providers should be registered with the SSC, securities firms and custodian banks.
Financial consultancy such as M&A and restructuring are side business, which the securities firms are
allowed to provide.
Ongoing Requirements for Securities companies
Licensing requirements must be met on an ongoing basis. Licensees are required to periodically report to
the SSC any change of information required to be entered in the register of licence holders, or any change
in information submitted to the SSC.
In addition, licensees are required to lodge with the SSC the annual financial statements together with an
evaluation of the operation of its internal control system. The annual financial statement should be audited
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by independent auditors in the list approved by the SSC and sent to the SSC in at least 10 working days
since the deadline for auditing of annual financial statement (31 March).
Decision 27 provides for reporting requirements to SSC for periodical information and for extraordinary
events such as losses equal to more than 10% of the value of the assets. Circular No. 09/2010-TT-BTC
dated 15 January 2010 on Information Disclosure on securities market covers in Section V securities
companies and there are disclosure requirements (public disclosure e.g. on website) for periodical and
extraordinary events. In addition there are various requirements for disclosure of important information,
such as investigations into market abuse or criminal case, also regarding significant changes in business
composition (defined as >10%). The SSC publishes on its website a list of licence holders, the status and
category of the licences.
In addition securities firms should meet the requirements of the Circular on financial prudence, which is
expected to be issued in early 2011 and also listed securities firms should comply with requirements on
listed companies.
Securities practitioners
There is Decision No. 15/2008/QĐ-BTC dated 27/03/2008 of Finance Minister on Regulation on
Securities Practitioners
Educational levels and prior securities experience are detailed. In particular the general director must
have inter alia at least 3 years’ professional experience in the finance, banking and or securities sector and
at least 3 years operational and managerial experience.
Also he must have a securities practising certificate earned after passing the relevant basic exams and
exams for his area of responsibility, for example underwriting or financial consultancy. Securities
Science Research and Training Center provides training courses and exams for practitioners).
Applications are processed based on set requirements and fit and proper criteria background checks are
used (qualifications of university graduate or post graduate, certificates of practitioner, number of
working experience years in relevant field) and the process is considered effective.
Compliance with professional ethics during securities business activities is also required –the Securities
Business Association of Vietnam has issued a Code of Conduct. This is a good initiative, however the
association operates on a voluntary basis, hence the Code of Conduct is not mandatory However, with
the experience of other jurisdictions to go by, it is important that effective application of a code of
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conduct needs to be led from the top i.e. by management vision that this is a vital part of their long term
prosperous future.
SSC’s authority
The SSC can conduct routine and adhoc inspection and monitoring of securities companies. HOSE and
HNX can carry out examination to ensure the securities firms have adequate equipment for providing
services of trading or online trading through SEs system. HOSE and HNX does not have to power to
conduct inspection. Only the SSC has this power and inspections by the SSC cover all fields of the stock
market.
4.3.2.11 There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake (Principle 22)
Requirements
All licensed intermediaries are required to comply with initial and ongoing capital requirements.
All securities companies are required by the HOSE or HNX Securities Rules to maintain a prescribed
capital adequacy ratio at all times in which the liquid capital requirement ensures that the financial
resources of a securities company is in a readily realisable form, to meet its total risk requirement.
The capital adequacy requirements take into account the risks undertaken by an intermediary, including
operational risk, counterparty risk, position risk, large exposure risk, and underwriting risk. Capital
adequacy of market intermediaries is monitored by the the SSC semi-annually, based on audited financial
statements submitted by the securities firms.
4.3.2.12 Regulation should be designed to detect and deter manipulation and other unfair trading practices (Principle 28)
Article 9, Securities Law, and Decree No. 85/2010-ND-CP dated 02 August 2010 on Administrative
penalties in the securities market set out the forms of prohibited conduct and offences such as market
manipulation and insider trading, but these are in simple terms and not adequate. It is expected that
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another Circular on Trading (being submitted to the Minister of Finance) will provide more details on
these market abuses.
4.3.2.13 Regulation should aim to ensure the proper management of large exposures, default risk and market disruption (Principle 29)
Monitoring of Large Positions
HOSE or HNX have mechanisms and triggers in place to monitor and evaluate the risk of open positions
or credit exposures that are sufficiently large to expose a market or clearing risk? There are 20 triggers for
HOSE and 21 for HNX.
For the equity market HOSE or HNX monitor participants’ ability to meet the net amounts due for
securities clearing. Clearing and settlement is made through VSD with confirmation on transaction from
HOSE and HNX, T+3 is settlement day, clients are required to have 100% money and securities for
placing an order at securities firms.
Margin trading has not been allowed on the Vietnam stock market, though there is current provision for
margin trading in the draft amendments to SL. However, some securities firms have been illegally lending
money to their clients to buy stocks or giving advances to clients from the proceeds of share sales. This is
a risky situation and some securities firms are facing troubles now with illiquidity of their clients.
Authorised personnel from the SSC and HOSE or HNX have access to information on the size and
beneficial ownership of positions held by direct customers of market intermediaries.
Under HOSE and HNX’s rules, HOSE or HNX is empowered to take action against participants who do
not make requested market information available. Rules are also in place to compel market participants in
carrying/controlling large positions to reduce their exposures. HOSE and HNX have rules on trading of
big lots and put-through transactions.
4.3.2.14 The regulator should have comprehensive inspection, investigation and surveillance powers (Principle 8)
Supervision and inspection powers
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SSC has a number of surveillance rights and procedures both directly and also via the surveillance
processes of the HOSE and HNX stock exchanges over the exchange activities and the securities
companies themselves.
At present, the surveillance collaboration between the SSC, HOSE and HNX is quite good. The problems
encountered are mainly of a technical nature to due to the lack of advance IT tools and systems.
SSC does not have any specific supervision process for clearing and settlement. The VSD has the
responsibility to ensure an adequate clearing and settlement process. The SSC supervise it indirectly by
approval of regulations drafted and issued by the VSD, periodically reporting by the VSD on its
operation, including clearing and settlement and annual on-site examination. In necessary cases, the SSC
has the power to carry out adhoc examination. From discussions with market participants and with VSD
itself it appears that most market participants are satisfied with the clearing and settlement process.
Investigation powers
SSC has a Securities Inspectorate department, however their power is limited with regulated entities such
as securities firms, investment funds, fund management companies and public companies. In the case of
suspicious individuals, the Securities Inspectorate can only invite the individual(s) concerned for
interview and require them to submit necessary books and documents, but it does not have the power to
search any premises where the suspicious individual keeps his/her books and document. Also, as
mentioned already, the SSC does not have the right to have direct access to clients’ bank accounts details,
internet and telephone statements. This causes inevitable difficulties for supervision, inspection and
enforcement. SCC’s powers should be increased to permit direct access to the investigated person’s data
and premises.
4.3.2.15 The regulator should have comprehensive enforcement powers (Principle 9)
The Securities Law provides for the enforcement powers of the SSC. In terms of the three categories
sanction normally available to a securities regulator, administrative, civil and criminal, SSC has been
largely confined to administrative sanctions.
For civil actions the SSC only has the power to recommend the civil action to the Supreme People’s
Procuracy of Viet Nam. The SSC needs the involvement of the Investigation Bureau of Police in order to
seek orders from the High Court to ensure compliance with its regulatory requirements.
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Under the recent amendments to the Criminal Law three violations of the Securities Law, namely
intentional fraud in reporting, insider trading, and securities price manipulation have become criminal
offenses from January 2010. However for enforcement of criminal actions the SSC does not conduct
criminal prosecution for breaches of securities laws under the SL, it must instead collaborate with the
Investigation Bureau of Police.
In enforcing compliance with securities laws, SSC has the power to appoint investigating officers or other
specially trained staff to carry out investigations for any securities offence. However their powers are
limited as already described above.
Enforcement power shortcomings
The enforcement problem of the SSC is the SSC only has power to use administrative penalties, which
are not tough enough (currently under Decree No. 85/2010/ND-CP of August 2, 2010, at a maximum of
VND 300 million for market manipulation or insider trading, they were previously at the low level of
VND 50 million).
There have been very few enforcement actions issued in Vietnam. Of the cases there have been, the
administrative penalties issued in the period since December 2009 have been in the range US$ 5,000 TO
US$10,000, which is too low to provide a credible deterrent in terms of the potential profits many
multiples higher which could be made by the violators.
In this way there has been a lack of a sufficient deterrent to wrongdoers, who are more likely to take the
risk of committing an offence if they know that the potential reward can be much larger than the related
penalty if they are caught. There has been no legal provision for having to repay the profit made by the
illegal activity. The SSC cannot apply a higher sanction as the maximum sanction is limited by the
Ordinance on Administrative Penalties of the Government.
The SSC has drafted Guidelines on Confiscation of ill-gotten gains. This is drafted to provide for
reimbursement of ill gotten gains and avoided losses and will be an important progress. It is scheduled to
be approved towards the end of 2010.
Ultimately the experience of developed markets shows that deterrent effect starts to make most impact
when it is a multiple of ill gotten gains that wrongdoers stand to lose i.e. they know that they may lose
more than they may gain. The U.S., viewed as having built one of the more successful enforcement
systems, has a civil sanction that may require up to three times the illegal incomes to be given up.
However, this does not preclude the possibility of monetary penalties, criminal fines and imprisonment,
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and being barred from employment with licensed market participants or service as an officer or director of
a public company.
In terms of enforcement powers, the SSC does not have the right to prosecute. In the area of criminal
enforcement action it is good that insider trading and market manipulation are now criminalized but the
SSC needs the collaboration of the Investigation Bureau of the Police if criminal procedures are taken, so
this inevitably makes it less efficient for the SSC to move a case successfully forward as its direct powers
are limited.
In many developed securities markets, such as UK and Australia, for example, the securities regulator has
the right to prosecute. The SSC development model should include a move towards wider powers of
investigation and taking increasing responsibility for enforcement and prosecution. This right to prosecute
could be given to the regulator in progressive stages, starting with smaller cases, in step with SSC
building its capacity and experience in these matters.
Insider trading definitions
From discussions with legal practitioners it appears that the definition of insider trading should be made
clearer in order to guide investors, securities companies, all market practitioners as well as to assist non
industry expert judges. There is some disparity for example between the definition of insider trading in
the SL and in the Criminal Code, though neither is believed to be wholly satisfactory. Some legal
practitioners believe it would be useful to define more clearly terms such as for example what is the
definition of major, where it states in the SL that insider information has a “major impact on the price of
securities prices”
4.3.2.16 The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance programme (Principle 10)
Market surveillance
The function of the surveillance system is to identify irregular trading activities, such as manipulative
trades and insider trading. The problem with the effective implementation of surveillance is that the SSC
does not have adequate IT or human resources to adequately police market abuse.
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The exchanges do not yet have a fully automated market surveillance system, nor does the SSC. Both
SSC and the exchanges are currently developing these systems. Full technical and financial support is
needed to complete these projects and have effective systems up and running.
Inspections
The SSC conducts routine periodic inspections of securities companies. The inspection process is
currently based on an equal basis and the SSC is now preparing to move towards a more risk based
regulation. To date the SSC has used a compliance framework, which is based on the merit regulation
approach. However, the SSC is now developing a risk based supervision approach, especially with
securities firms, which may be ready in early 2011. This move is in line with best practice and should
help SSC to adopt a more effective and targeted approach to risk supervision.
Compliance programme
Compliance by securities companies with securities regulations and with their own internal regulations,
internal controls and code of conduct is a key to long term success. Past experience has shown a positive
correlation between high compliance standards of a firm and its high popularity with investors and
positive effect on shareholder value. Briefly put, high compliance standards build trust and value.
However, compliance, like risk management, is often neglected by management. Therefore the SSC needs
to act as the catalyst to give the compliance issue the attention which it deserves. This should involve
establishing formal procedures for approving the designated compliance officer of a securities company.
The rules of the exchange provide for each participating organisation to conduct regular and periodic
reviews over its supervisory, compliance and internal control systems and for the maintenance of a
written record of such reviews. The compliance officer of the regulated entity is required to submit a
compliance report on a monthly basis to the exchange.
Currently the securities companies with whom I spoke confirmed that they have the compliance function
in place and that there have been no material issues with SSC. However, anecdotal evidence suggests that
in some securities companies, less attention and importance is paid to compliance issues than should be
the case; for example, the authorization process for staff trading, which is designed to prove a disciplined
process for staff trading and to reinforce the concept of acting in the best interests of the customer, is not
strictly enforced.
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Internal policing should be reinforced by more significant penalties for non compliance and by more
thorough external review by SSC and increased requirement on the external auditor to identify and
disclose non compliance to the SSC.
Enforcement
As discussed above the enforcement powers of the SSC are weak, therefore their use is not so effective.
The majority of complaints settled in the recent past has related to public companies regarding public
offering and regarding reporting and information disclosure. Disclosure of such non compliance tends to
be easier to identify than more sophisticated market abuse by securities companies or investors. As for
market abuses, there has been a rise in more sophisticated violations, such as concert party transactions
and this makes more pressing the need for the regulator to have a stronger tools of IT equipment and
more, suitably trained staff.
It is useful to look briefly at the case of a respected securities regulator, the FSA in the UK. The FSA has
stated its strategy to use credible deterrence as a tool to “change behaviour in the industry”. It uses its
sanctions to deliver strong, visible, enforcement outcomes. “To achieve credible deterrence, wrongdoers
must not only realize that they face a real and tangible risk of being held to account, but must also expect
to face a significant penalty”.
FSA has at its disposal the threat of a custodial sentence, which it considers to be a significant deterrent to
market misconduct. It is committed to bringing appropriate criminal prosecutions against those who abuse
the markets. In 2009/10 there were several successful prosecutions of individuals for insider dealing
resulting in custodial sentences of between 12 and 24 months.
In FSA experience they consider that action against individuals has a greater deterrent effect than action
against firms and they are committed to holding senior managers to account for inadequate competency
and integrity. In 2009/10 they published prohibitions of 56 individuals. In order to improve the
enforcement process FSA seeks formal feedback from those involved in the enforcement process and
supervisors provided feedback about the behaviour of firms after FSA published enforcement outcomes.
FSA has noted that publishing enforcement action, along with appropriate supervisory follow up, has
often led other uninvolved securities companies and other firms to consider whether the enforcement
action has implications for their business, systems and controls. There is evidence of firms being
contacted by their peers to discuss disciplinary action taken against them.
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4.4 Challenges for the domestic securities companies from market development and market opening
4.4.1 Domestic Market Conditions
The leading Vietnam securities companies have focused on building their client bases and market shares
by targeting a variety of different strategies, including offering clients good quality research and
investment ideas, offering an efficient sales and trading platform and good customer service, and offering
competitive financing terms for share trading. Many of the leading are diversifying their business models
and maintain profitability during the current difficult market conditions.
Overall however, the sector has too many securities companies, 105 as at November 2010. As can be seen
from the chart below, the number of securities companies is considerably higher than most regional peers,
both in absolute terms and in particular when compared with the relatively low market capitalization of
the Vietnam securities market.
No. securities firms
Mkt. cap USD bn.
2010China 107 3589Indonesia 119 249Vietnam 105 33Philippines 55 92Thailand 41 190Malaysia 35 322Singapore 24 492
Source: SSC and market data
During the bull market phase up to 2007 the growth in new securities companies was strong, now in a
slower market it is difficult for some of them to survive.
Many of the smaller Vietnamese securities companies have negligible market share and little business
franchise, however some of them do appear to be offering aggressive brokerage commission rates, even
zero commission in some cases, which disrupts a more rational fee structure. For example, during 2010
where trading volumes have been frequently low, many securities companies have been reporting losses;
in Quarter 3 2010 only 51 out of 105 securities companies reported profits to SSC. SSC has indicated that
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as of mid November all securities companies meet the current capital requirements, though future capital
pressures may force some to seek an exit.
Clearly rationalisation needs to take place. Some has taken place with foreign companies forming joint
ventures with domestic companies, however this has not reduced the overall number of securities
companies. Domestic mergers have been difficult to achieve: mergers among securities companies can be
difficult to execute, due to inter alia, differences in pricing expectation and agreeing who will get the top
jobs in the new merged company, in addition coping with the risk that the best staff and clients can move
after a merger, so the “value” paid for the merger can quickly evaporate. It may not be appropriate for
SSC to force companies to close down or merge, however raising the capital requirements threshold is a
more acceptable option to encourage rationalisation.
SSC has put a cap on the overall number of securities companies by not permitting new licence
applications, so that new entrants must seek existing licences. However, this policy will be amended by
January 2012 when under the WTO commitment schedule 100% foreign securities companies are allowed
to establish in Vietnam.
4.4.2 External Sector developments: WTO Financial liberalization
Vietnam’s securities industry commitments under the WTO and the resulting market opening can be
expected to increase competition, based on the experience of other countries.
The WTO commitment provided for a two step process for securities market liberalization. First step,
completed in 2007, was permitting a foreign securities company to form a joint venture with a local
partner (with a maximum 49% shareholding in the joint venture). The second step, from January 2012, is
to permit a 100% foreign owned securities companies to establish operations in Vietnam.
We will first review what impact these foreign joint ventures have already had on the local securities
market and in particular on competition with the domestic securities companies. We will then consider,
in respect of the second step for 100% foreign owned securities companies in Vietnam, what new
challenges and opportunities and this is likely to bring for the domestic securities companies.
4.4.3 Joint ventures with foreign securities companies
Since 2007, over 20 foreign players (for the large part foreign securities companies, with a few financial
investors) have formed joint ventures with domestic securities companies. A complete list of Local joint
ventures with foreign securities companies (“Foreign JVs”) is in Appendix 1.
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These foreign investors are predominantly Asian regional players who have invested in Vietnam as part
of a regional development strategy to diversify from their own competitive domestic brokerage markets
e.g. Japan and to provide access for their clients to invest in Vietnam. Six JV investors are from ASEAN
countries, namely Malaysia, Singapore and Thailand. Nine are from East Asia, Korea, Taiwan, Japan.
There are also some financial investors such as Dragon Capital in Ho Chi Minh Securities Company.
It is premature to evaluate the performance of these joint ventures on a profitability or market share basis
since the strategic priority of the foreign partners tends in many cases to focus on building a sustainable
business and client base for the medium term, rather than short term market share targets; in addition the
operating environment has been very difficult in the last couple of years due to the effects of the global
financial crisis, with low trading volumes by foreign investors who are the natural client base and revenue
bringers of such foreign JVs; in addition, it appears that some foreign and local partners have found it
difficult to agree between themselves a common development and funding plan. Thus in terms of the
brokerage market share benchmark, only one foreign JV, Kim Eng Securities, has reached the Top 10.
In conclusion these foreign JVs have not yet seriously threatened the significant market share held by the
stronger local players.
4.4.4 Potential new entrants to Vietnam securities market
Absent in Vietnam so far in terms of local on the ground securities operations via joint venture or
minority investment are some of the larger global US and European players who are already present in
markets such as Malaysia or Thailand. Also some of the large regional brokers who already expanded
from their home markets into neighbouring ASEAN markets are also not yet established.
One reason for the absence of some large names is that the market size at around US$33 bn is still
relatively small in terms of critical mass for a core brokerage business, as in view of the investment of
funds and resources the market will need to be larger to provide a more attractive payback possibility.
For this reason some players may not want to set up their own operations in Vietnam for the next few
years. However some may look for a local partner in order to provide a good access platform for their
foreign clients to invest in the Vietnam market. Thus, to take one example, Macquarie and Vina Securities
have agreed to cooperate in areas such as co branded research and some investment banking services.
While foreign securities companies can be a threat, in many cases they offer an opportunity also. They
can be a valuable source of finance, foreign institutional investors and expertise in new, innovative
products (e.g. derivatives), technology and investment banking services. I understand various domestic
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firms are in discussions with potential foreign partners and these are some of the benefits which they
could gain from such a tie up.
In terms of good preparation for such discussions, the key strategic issues for local partner investment
criteria for most foreign securities companies includes: management and human resources, service
quality ( research, sales and trading), risk management (avoid credit or other losses, reputation risk),
corporate governance and innovation culture.
4.4.5 Domestic Securities Companies: Enhancing Compliance with Regulations
4.4.5.1 Market intermediaries should be required to comply with standards for internal organisation and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters (Principle 23)
Compliance by securities firms
The purpose of compliance is to ensure observance of the regulations. This is important in order to
achieve an orderly market and a fair and level playing field for all investors and market participants.
Compliance by securities companies with securities regulations and with their own internal regulations
and internal controls is a key to long term success. Past studies show a positive correlation between the
quality of compliance standards of a firm and its popularity rating with investors and effect on
shareholder value. Briefly put, high compliance standards build trust and value.
However, compliance is often neglected by management. As the management and staff of a securities
company are responsible for making money, without the necessary internal and external disciplines
compliance issues risk being overlooked. A company with proven high compliance standards will be
more easily able to attract clients if they believe that this company will be transparent, respect the
regulations and put customer interests first.
Senior Management Responsibility
In a securities company or in any company wishing to follow best practice, individual senior managers
need to ensure that the business area which they run is properly organised and is capable of being
controlled. It is important to have clear internal rules and allocation of responsibilities to specified
individuals in order to be perfectly clear who is accountable for what in the organisation and to avoid
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“grey areas” around accountability. This is essential, in particular when problems arise, since it is only at
that time that weaknesses in a governance framework are identified. Therefore all securities companies
should look at whether their overall framework is absolutely clear about who is responsible for what, and
the senior management should discuss the current approach to compliance and any improvements they
feel they should make.
Allocation of Responsibilities and Internal supervision
In this respect senior management should be clear which of them has what responsibility in the area of
internal controls, and take reasonable care to ensure that the systems and controls that support those
operations are in place, and that they are appropriate to the nature and complexity of the business, bearing
in mind that different firms have different needs.
Compliance in Vietnam
In Vietnam the licensing regulations stipulated by Decision 27 April 2007 requires that the business of a
securities have an organisational structure which provides a physical separation between the working
areas and staff to avoid conflict of interest between company and clients and between clients. The
licensing criteria also require at least one director with the requisite relevant experience to be licensed to
ensure proper board involvement in the business. Market intermediaries are required to have put in place
adequate supervisory and internal controls, procedures and systems and avoid any situation which may
create a conflict of interest.
Overview of compliance function
Each securities company is required to have a formal compliance officer in all, who is the contact point
for SSC. Such compliance officer would be responsible for the overall supervision of the intermediary’s
compliance with securities law, regulations and guidelines, and with internal policies and procedures.
Regulation No. 27 /2007/QD-BTC dated 24 April 2007 on Organization and Operation of Securities
Firms, Article 21 has specific requirements on the qualification of this compliance officer. However, the
compliance officer is not required to pass any relevant examinations and there is currently no compliance
training provided by the SSC.
In Vietnam a securities company must have an internal control system which is subject to administration
and management by the general director of the company. A company must have internal control staff,
whose qualifications include that they are undergraduate or postgraduate in economics or law. Internal
controls must ensure compliance with the Securities Law, and with business processes, and with client
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money separation. In addition each company must assess their internal control system once a year and
send the report to SSC together with the annual financial statements.
Currently the securities companies with whom I spoke confirmed that they have the compliance function
in place and that there have been no material issues to report to the SSC. However, anecdotal evidence
suggests that in some securities companies, less attention and importance is paid to compliance issues
than should be the case; for example, the authorization process for staff trading, which is designed to
prove a disciplined process for staff trading and to reinforce the concept of acting in the best interests of
the customer, is not strictly enforced.
Self assessment needs to be reinforced by rigorous external review by the SSC. It could possibly also be
supplemented by an increased requirement on the securities company’s external auditor to disclose any
identified cases of non compliance to the SSC. In addition, the senior management person responsible for
compliance needs to be accountable for significant compliance violations.
Compliance training
Leading firms in financial services typically have leading training programmes for their staff; in their
experience, training is a key priority. Their motivation is clear: they regard the staff of their company as
the custodians of the company’s personal reputation and business success; it is the staffs who protect their
company’s brand and drive customer satisfaction. Therefore, spending the time and effort to put in place a
system to produce appropriately trained staff who operate within the regulatory and internal control
framework is absolutely vital to everything they do as managers of the business,
In Vietnam currently there are no specific requirements for compliance training for staff. In general there
seems to be a lack of awareness and attention paid to compliance. From past market experience, as the
main business of a commercial company is to make money the disciplines and checks and balances of
effective compliance tend to need to be imposed by external bodies tough regulations for non compliance.
In the UK and various other developed markets training videos for all staff on compliance issues are
mandatory and this should be a good practice to introduce in Vietnam.
Market intermediaries are required to have in place policies and procedures on conflict management.
There are explicit requirements to act honestly and in the interest of the clients. ( Regulation No. 27
/2007/QD-BTC dated 24 April 2007 on Organization and Operation of Securities Firms, and Decision
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No.126/2008/QD-BTC dated 26 December 2008 on amendments of and supplements to the Regulation
No. 27/2007/QD-BTC)
Market intermediaries are required to maintain books and records, including accounting records and other
records that explain the transactions and financial position of the entity. The records must be retained for
15 years (Regulation No. 27 /2007/QD-BTC dated 24 April 2007 on Organization and Operation of
Securities Firms). The SSC will ascertain compliance with record keeping requirements when it conducts
examination on the market intermediaries.
Customer protection
There are detailed requirements on the segregation and safekeeping of client’s assets. Market
intermediaries are expected to obtain and maintain information sufficient to “know your client” and
market intermediaries are required to provide a client with a Client Agreement setting out the rights and
responsibilities of the clients and the securities company. Market intermediaries are required to provide
clients with a full and fair statement of account, and a monthly statement explaining the movement of
clients’ assets. In addition, market intermediaries should put in place an adequate mechanism to handle
complaints received. Market intermediaries are required to make an assessment of the clients knowledge
level, risk awareness and tolerance and investment targets under the “know your client” principle-
(Regulation No. 27 /2007/QD-BTC dated 24 April 2007 on Organization and Operation of Securities
Firms).
Corporate Governance
In addition to the corporate governance requirements for Listed Companies under the SL and for non
listed companies under the Enterprise Law, we understand that the SSC/MOF is working with the IFC on
The Corporate Governance Scorecard for Vietnam. This provides recommendations to shareholders,
corporations and government for implementing and monitoring good governance standards. Its
methodology is to rate a company based on a range of corporate governance criteria such that it obtains a
score for different areas and a total score. The criteria include compliance with laws and regulations,
including local governance regulations and globally recognized governance practices.
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It is starting with a review of the CG practices of the 100 largest companies listed on HOSE and HNX. In
this way individual companies are rated on a systematic basis and this encourages a strengthening of
corporate governance standards. Over time this can be rolled out to cover more companies.
One benefit of adopting more transparent, timely and standardized practices is to enable Vietnamese
companies to integrate into an increasingly competitive and selective global market.
4.4.6 Opportunities for domestic companies
As we have seen from the previous commentary the arrival of foreign securities companies in ASEAN
markets such as Malaysia and Thailand has brought opportunities for cooperation as well as increasing
competitive challenge.
While the government and regulator of these countries, as also in Vietnam’s case, agreed to liberalize the
financial markets with the goal of boosting the capital markets, foreign investment and economic growth
and generally they regarded the resulting increased competition from the arrival of foreign securities
companies as a desired catalyst for faster, more effective change in terms of expertise, product rollout,
corporate governance and general best practice, at the same time they wished to preserve an effective
local securities companies sector.
In Vietnam, the domestic securities companies can also benefit from opportunities which market opening
can bring.
International securities companies bring:
• Latest technology;
• Technical and product know how;
• Improvements in the market by acting as a catalyst;
• More liquidity and foreign investors in the market;
• Research from a different perspective, comparing companies to international standards.
However, the domestic securities companies should be prepared for increasing challenge and competition
from the potential threat of increased competition from existing foreign JVs and possible new 100%
foreign owned companies from 2012 onwards. We consider below some action points which domestic
securities companies can take.
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4.4.7 Action points for Vietnam securities companies
Action points
While there is not a single strategy which will be appropriate for all domestic securities companies, we
list below a number of suggested action points which these companies may can take, if they did not do so
already. These are all typical best practice business planning measures, which will be familiar to a number
of domestic practitioners already. Nevertheless it is a useful discipline to set out the action steps, in
particular for those who may not yet have fully thought through these issues. Key action points include:
1. Set your strategy
Top management should discuss and set a medium term business strategy, with the necessary
level of consultation and approval by shareholders and other stakeholders.
This should take account of a realistic SWOT assessment of the company and establish the
optimal business model to achieve the company’s goals. For example, should the company only
focus on retail customers, or should they try to also win foreign institutional investors, perhaps
with the aid of a foreign securities company partner?
Set the strategy: which services?
Some leading domestic companies have already been diversifying their services to reduce reliance on
pure brokerage business and enter the potentially more lucrative investment banking products. The
previous review of markets such as Malaysia showed some domestic securities companies using this
strategy, as it has been used extensively by many Western firms. There are various attractions of this full
service model, namely diversified revenue sources, potentially higher margin services, enhanced prestige
and brand value of high profile services such as IPOs and M&A, and ability to identify attractive
companies earlier pre IPO and have more time to cement client relationships. Other advisory services
include private placement and valuation. However this full service model has its risks; the expertise and
service levels can be demanding so investment is required in personnel (the cost base will grow as
successful persons with investment bank track record tend to command high salaries) and capital for
underwriting. It also depends on senior management understanding the investment banking business and
related risks. The investment banking model will not realistically be the right solution for all the
domestic securities companies.
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We note that margin lending has been popular among a number of domestic firms in 2010 as an attractive
revenue earner to supplement falling revenues, however there is a credit risk must be carefully assessed so
as not to suffer losses.
Another possible strategy for some domestic companies may be to specialize in SME companies, the
future high growth champions. This is an area which some retail investors and some more growth
oriented foreign investors like to invest in, and which it is difficult for 100% foreign securities companies
to cover without local assistance. It may be an area where some domestic securities companies can
specialize in some cases in partnership with foreign securities company to provide advisory services to
SME on best practice skills in terms of analysis of business and risk management, as well as offering the
domestic company a pool of new foreign investor clients via their foreign partner.
Target if possible a balanced customer base as some are more volatile than others. If the business is retail
based currently the feasibility should be examined of developing an institutional client base to provide
better stability.
Set the strategy: other key issues
Some of the key areas where successful securities companies typically outperform their peers are:
a. Strong infrastructure
i. Management and Human resources ii. Risk management, avoid credit or other losses, reputation risk
iii. Corporate governance b. Service quality, strong research and sales to attract and retain customers
c. Innovation culture
Strong Infrastructure: for a business to be sustainable it is critical to have a solid infrastructure; this
requires well trained and professional human resources, operating within a corporate environment
based on strong risk management, internal controls and corporate governance, and founded on good
business ethics and quality standards. Such companies earn the clients’ confidence and respect and
can enjoy the dividend of high reputation, growing client base and sustainable, profitable business.
It is often the case that management, in their focus of running the business and achieving growth and
profits, pay too little attention to housekeeping issues such as risk management and corporate
governance. However, just as the example of the global financial crisis highlighted glaring
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deficiencies in risk management and corporate governance of many large institutions, it is sound
advice to companies in developing as well as developed markets to implement and maintain strong
control systems to reduce all forms of risk.
Awareness and implementation of risk management, internal controls and compliance systems is
generally not so developed in Vietnam companies. The level of awareness and training should be
increased to enhance employee awareness. For securities companies wishing to have robust systems
to enjoy a more sustainable future and reduce all forms of risk, both credit risk for example and
reputation risk from scandals, it is better to proactively address this area now rather than to wait
reactively for the arrival of better controlled foreign firms later.
Service quality: Most foreign investors and wealthier retail investors choose a securities company
which can consistently offer high service levels in all aspects of their business, from research, sales
and trading through back office. Research and sales are key areas, as such investors like to receive
well researched, reliable analysis which provides good ideas.
Innovation culture: The securities markets globally are evolving very fast. As securities markets
develop they look to offer a wider product range to investors. New industry drivers such as high
frequency trading and dark pools significantly impacted Western markets such as the US and Europe.
Though Asian securities markets were so far less affected by some of these changes, due to more
fragmented structure and more protective regulatory environment, some changes are now developing
in ASEAN countries.
Now that the Vietnam market is opening, the domestic securities companies who wish to succeed
need to be innovative, to follow market trends and be responsive to client needs.
2. Business Plan
Based on the above approved strategy management should write a business plan which details
the key ideas and development plan to take the business forward; this should be an integrated
plan, addressing all areas of the company’s business, including, target customer base, services
and products, marketing, sales & trading, research, human resources, technology and other
investment, costs and marketing.
It is often useful to frame this by setting a company mission statement and establishing a code
of business conduct, as many leading companies in other countries have done.
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3. Financial forecasts
The Business Plan needs to be integrated and fully linked to a supporting set of financial
forecasts covering the same 3 to 5 year business plan period. The forecasts should include an
integrated set of income statement, balance sheet and cash flow statement. This discipline
will help to ensure not only that that the forecasts are technically correct, but will also
highlight the costs, capital and cash flow necessary to support the business plan execution and
thus aid management to focus on new capital requirements and discuss with the shareholders
in order to plan ahead and assess the need to find new shareholders. In this way, if existing
shareholders are not able or not willing to support new capital raisings, then a timely search
can be made for a new financial or strategic shareholder.
For the financial forecasts the key operating and economic assumptions should be clearly
thought out and stated for a base case, including assumed macroeconomic and business/stock
market conditions, such that the model can be used for sensitivity analysis for a worst case
and best case scenario. The financial model should include assumptions for the
macroeconomic variables, such as GDP growth, interest and exchange rates, and from
operating side, assumptions on fee rates, brokerage volumes and client growth rates; the
model should be well constructed to be capable of running scenario analysis to evaluate the
financial impact of different strategic options and different core assumption on macro and
operating outlook e.g. so called base case and worst case scenarios.
For example, the financial model can be used to assess the break even and profit/capital
impact of a worst case scenario for trading volumes.
If necessary the company’s auditor or other adviser may be able to assist on this exercise.
4. Marketing document for potential partners
To ensure optimal presentation the securities company should prepare a good quality
marketing document presenting the company and showing the strengths. This can be in the
form of a powerpoint presentation and ideally also brochure for clients. It is important for
showing the firm in the best light to potential partners, financiers and to raise the corporate
self identity among staff. The presentation should include section on Strategy, Products and
Services, Client Base, Financial Information (profit and loss account, balance sheet, capital
position and funding needs), Management credentials and experience, Staff information,
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Market position and Competition, Market Outlook. All companies have to a greater or lesser
degree weaknesses and these should not be hidden or denied. A good potential investor will
find them anyway so it is better to be open and show that you are aware of weaker areas and
already have a proactive strategy to address them.
5. Industry consolidation and partnerships
In some cases this exercise may lead management and or the owners of some of the weaker companies to
conclude that the best course of action is to seek a buyer for the business. This will depend in part on the
realistic profit prospects and the financial resources and commitment of the shareholders, a situation
where securities subsidiaries of commercial banks may find it easier than some smaller securities
companies who are not members of well resourced financial or other groups.
All securities companies should consider their strategic options in terms of whether it makes sense to go it
alone or seek partnerships business wide or in specific areas. For the domestic securities companies the
main options in terms of corporate control are:
1. No major change to existing ownership structure - preserve the status quo;
2. Merge with domestic peer(s) to create a stronger, larger local group;
3. Sell 100% to a domestic or foreign buyer;
4. Cooperate with a foreign partner. This could be via:
a. Joint venture (49%)
b. Minority stake (smaller stake, size depending on the objectives typically between 10%
and 30%)
c. Non equity cooperation agreement
Strategic partner or no partner?
We consider below some advantages and disadvantages of each option, in order to stimulate consideration
of these options.
Strategic option
Pros Cons
No major change to existing ownership
o Avoid time consuming talks with foreign or other equity partners.
o May be harder to compete in some areas where foreign expertise is a benefit e.g. new products such as derivatives, though expertise can be imported by hiring an
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structure experienced team.
Acquire/merge with other domestic securities companies
o May be opportunities to acquire new client portfolios and a business with complementary skills
o An enlarged entity can attain more critical mass and be more stable if it has a larger and more diversified revenue and client base. Also cost savings should be possible.
o Some securities companies’ intrinsic value in terms of brand name and client base may be relatively low and price agreement between buyer and seller may be difficult to reach.
o Acquisition of people businesses can be risky; if disagreements arise people assets can walk away, reducing the value of your purchase
o With a domestic merger there will be more overlap in terms of staff and infrastructure so more redundancies are likely
Sell 100% o If current shareholders do not wish/cannot support the next stage of growth it may be the right time to exit now while there is interest from foreign buyers attracted by Vietnam’s long term growth prospects
o If various domestic securities companies are considering an exit and if there is more supply than demand from buyers in the market, this will put downward pressure on the sale price of securities companies.
Equity tie up with a foreign partner (joint venture or smaller minority stake)
o Equity investment by a foreign partner provides fresh capital and is a sign of commitment which should be a good market signal and positive for your brand and domestic and foreign client recognition
o A significant minority stake is a popular investment model for a foreign securities company, such as SBI with FPT Securities. Normally it shows the wish to be a strategic investor, not just a passive financial investor
o The significant minority stake typically between 15% to 30% often indicates a good level of commitment but at same time the local partner remains in control
o Joint venture at 49% may be less workable in medium term, we may see some foreign partners seek to buy out their local partners to convert to a 100% foreign owned company
o A foreign investor strategic investor committing significant capital to the business will want some rights such as Board Seat(s), voting rights so it is important to assess carefully before signing that this partner is a good cultural and business fit and define clearly both parties rights and obligations (as well as exit terms to protect the downside in case the relationship does not go well and needs to be terminated).
Cooperation agreement
o May be a good first step, provides a getting to know each other period which if positive can lead to an equity relationship later. It is a good idea to sound out the potential partner’s longer term commitment at the initial talks i.e. when agreeing cooperation agreement, develop a clear understanding if the foreign partner aspires also to a second equity investment stage so that goals and expectations are aligned.
o Less commitment than equity relationship, can normally be more easily broken
o Does not bring capital
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o Example is Macquarie and Vina Securities, as per the public announcement this is a non equity strategic partnership.
5 RECOMMENDATIONS
5.1 Recommendations for SSC to address market opening
SSC capacity building and securities market infrastructure 1. The SSC currently is not able to properly fulfill its surveillance responsibilities due to its inadequate
IT system. The SSC needs an automatic market surveillance system, information disclosure system
and reporting system. Full priority in terms of human resource and technical expertise, as well as
continuing funding support should be given to this project. With a modern IT system this would
enable SSC to identify more easily and on a more timely basis potential violations. It is a fundamental
initial step in developing a more effective surveillance and enforcement system For the securities
market in order to raise standards.
2. The SSC workload is too high especially in departments such as Securities Issuance Department,
Securities Inspectorate and Market Surveillance Department. This also prevents the SSC from
properly fulfilling its mandate. Priority should be given to assessing and approving a reasonable
increase in the number of suitably qualified staff in order to tackle the workload successfully.
3. The proposed new integrated IT system for the two exchanges, HOSE and HNX, to provide a new
trading system, stock watch system and clearing and settlement system should also be given priority
by the authorities. This will also help HOSE and HNX identify more easily suspected market abuse,
as well as increase efficiencies between the exchanges and the VSD.
4. SSC should consider amending the law in order to acquire legal protection for its Board members and
staff personal liability in the lawful performance of their duties. This is in line with international best
practice, as it is important for the SSC staff to be able to carry out their duties in often sensitive areas
without unfairly incurring personal liability.
5. The SSC should ensure that its own staff dealing rules are at least as strict as those for securities
companies. There should be regular monitoring of staff compliance with this. This derives from the
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need for a securities regulator such as the SSC to maintain the highest standards in order to protect its
integrity and set a good example to the securities companies and other firms which it regulates.
6. SSC does not have a formal Code of Conduct. In its capacity as the regulator and upholder of good
standards it should introduce a formal written Code of Conduct for SSC staff in line with IOSCO best
practice. This is in line with the need for the SSC to serve as a role model to the securities companies,
the listed companies and to all market participants to adopt, internalize and take ownership of their
own Code of Conduct . By internalizing such a code this could also make it easier for SSC staff to
better transfer the understanding to the securities companies management. In light of firm scandals
and heavy losses and global financial crises caused by inter alia, lack of ethics and transparency, it is
clear that good ethics has an important role to play in business. This should also help to maintain
SSC’s good name and reduce the risk of reputational loss.
Regulatory independence
1. The consultation and approval process for new market policies and products and related legal
amendments is lengthy and not transparent. The Vietnam Capital market development plan should
provide for the SSC to acquire increasing independence at the same time as ensuring it has sufficient
capacity and powers as a regulator in terms of inter alia, having sufficient senior and experienced
people, with expertise in the securities market, finance, law and other areas. Regulator independence
is in line with IOSCO best practice, because from experience capital markets develop more
successfully if they are regulated at arms length from political decisions and influence. By
incorporating the goal of independence for the regulator as a development objective, this would give
the right signal to the market that the authorities are committed to build a modern and competitive
securities market. In view of Vietnam being still at an early stage of development this full
independence process for SSC may take some time; however, in the meantime the authorities should
implement a more efficient consultation and approval process for new policies and legal amendments
in order to avoid undue delays in market reform. In this way, after careful but timely consultation on
the risks and benefits of each new product or measure, the time to market for approved policy
changes can be speeded up. This should have the benefit of a more efficient implementation of
positive market reforms. In the meantime the SSC should strongly discourage experimentation by
securities companies in new products which have not been approved.
Cooperation with domestic institutions 1. Currently there are occasions when SSC is not informed of policy decisions while they are still under
consideration that might materially affect the Vietnam securities markets. This means that SSC is not
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able to make optimal preparations to ensure a stable market. A formal MoU for MOF/SSC with the
State Bank of Vietnam should be agreed, providing for a full exchange of information on all
regulatory actions to be taken or contemplated by the signatories. This MoU should allow the SSC to
communicate its views on the likely impact of such policy decisions. It should also provide for
advance warnings of potential firm failures to ensure effective and timely response to possible
systemic risks. Formalized cooperation between MOF/SSC and SBV should be supported by regular
bilateral dialogues to encourage effective cooperation. Closer cooperation and early warning
communication would allow for better handling of negative events for the securities market pressures
and help the SSC to manage the more effectively the associated risks.
2. SSC’s investigation powers are too restricted, as it is not permitted direct access to bank records. The
MoU with SBV should address this issue and relevant policy change should be approved, so that the
SSC can access bank records on a timely basis. This will then allow the SSC to be more effective and
efficient in their investigation and enforcement role.
Cooperation with foreign regulators and regulating foreign securities companies
1. SSC is not yet a member of the IOSCO MMoU. This means that the SSC cannot enjoy the full and
more standardized enforcement cooperation which other regulators across the world enjoy (more than
65 signatories). This will help the SSC receive the cooperation and information sharing of foreign
regulators when foreign investors or foreign securities companies commit financial crimes in
Vietnam. With further market opening in 2012, the SSC should be given full support to expedite its
fulfilling the joining requirements for the IOSCO MMoU. One of these requirements is to enact any
necessary legal changes to enable the SSC to seek information on behalf of foreign regulatory bodies,
consistent with international standards for cooperation. As a signatory to IOSCO MMoU the SSC
would be better prepared and equipped to handle cross border enforcement.
2. The SSC has few fluent English speaking staff. This makes communication and understanding with
foreign, securities companies, investors, regulators and others more challenging and puts a burden on
the SSC staff who do have English proficiency. It will become increasingly important for SSC to have
sufficient, effective English communication with foreign securities companies and with foreign
regulators. The SSC has already taken some new measures to attract staff with English proficiency;
this and other necessary initiatives should be taken to properly equip the SSC.
Overpopulated domestic sector
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1. As identified in the above section “Challenges for the domestic securities companies”, the SSC is
faced with the challenge of an overpopulated sector of 105 securities companies, with the prospect of
applications for additional licences for new foreign securities companies in 2012. Many of the
existing securities companies have no long term strategy and low risk management skills, thus when
the markets are difficult as in Quarter 3 2010 many have reported losses. A more healthy market
structure would be for a lesser number of larger, better capitalized securities companies which have
more business and financial critical mass to provide stability and sustainability. However, market
forces have produced little rationalisation to date in terms of mergers. SSC should encourage mergers
as a solution for some weaker firms but not force them on securities companies who are otherwise
compliant with regulations.
2. The SSC should monitor capital adequacy levels rigorously and be disciplined in follow up with firms
whose capital falls below the legal threshold. For those companies with capital difficulties and
shareholders who do not wish to inject new capital SSC should encourage them to explore the option
of sale or merger as an alternative to closing down.
3. SSC may also wish to consider raising the capital level further to encourage consolidation.
Surveillance
1. In addition to a new IT system mentioned in capacity building above, the SSC needs more suitably
qualified staff, in particular in departments such as Securities Issuance Department , Securities
Business Department, Department of Investment Funds and FMCs, Securities Market Development
Department, Securities Inspectorate and Market Surveillance Department. Staff increase depends on
the allocation by the MOF and the Ministry of Internal Affairs. Total staff increase in 2011 for the
SSC may be 40-50 persons. In order to strengthen its capacity building it would be an advantage if the
SSC can offer more attractive salary and employment packages in order to attract and retain good
caliber personnel.
Inspection
1. The SSC selection system for securities companies inspections is based on an equal system, not a risk
based one. Best practice among leading regulators is to implement a risk based approach, since the
risk level of securities is not uniform. Some carry higher risk, be it from more aggressive business
activity, lower risk management skills, moving into new business areas/and it is these firms which
more regulatory focus should be concentrated, as insufficient monitoring can lead to greater volatility
or failures. The SSC is already in the course of designing a risk based approach and this should be
encouraged and facilitated.
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2. External compliance audits by SSC should be rigorous and penalties for non compliance need to
provide an effective deterrent for the company and for the director responsible for compliance; also,
the SSC should consider making public the inspection results for individual securities companies and
the grades in order to provide some positive peer pressure.
3. External compliance should also be strengthened as part of the upgrading of external auditors
professional standards. In the case of important non - compliance matters identified by auditors, it
should be mandatory for the auditors to disclose this to the SSC.
Investigation
1. The law does not currently permit the SSC to visit the premises of a suspected person nor to have the
right to have direct access to clients’ bank accounts details (see Cooperation with Domestic
Institutions above), internet and telephone statements. Access to this information is a normal right for
regulators under best practice and absence of the right deprives the SSC of basic and vital information
to enforce effectively. The law should be revised to allow designated SSC investigation personnel to
carry out these inspection activities.
Enforcement
1. Penalties have traditionally been too low to provide an effective deterrent. SSC has taken active steps
and in 2010 penalty amounts were increased to VND 300 million from VND 50 million to provide a
larger deterrent. This move will now be supplemented with the new legal changes to permit the
disgorgement of ill gotten gains or losses avoided. The SSC needs to apply these measures, in
conjunction with other surveillance and enforcement improvements, to see if there is an improved
reduction in market abuse and higher compliance by market participants or if further penalty
increases or other changes are required.
2. The SSC is not able to directly initiate civil enforcement actions. Policies should be developed with
the objective that SSC should obtain legal authority to be able to directly initiate such actions on its
own behalf. This should speed up the process and make successful and efficient civil enforcement
more achievable.
3. The SSC criminal enforcement process is currently via the MOF and the Inspectorate of Police. The
process is not effective or efficient. SSC/MOF need the full and efficient cooperation from the
criminal authorities to close successful enforcement cases.
4. Existing definitions of insider trading lack clarity in some areas, such as the definitions of “major
impact on securities prices” in the SL, and “big illicit profits” in the Criminal Code. This makes it
more difficult for judges to make informed assessments of market abuse cases, in particular with a
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civil law code and with judges lacking the financial markets expertise to provide more informed
confidently assess cases and pass judgement. Drafting of the SL and Criminal Code in respect of
insider trading should be clarified, drawing on the experience of other regulators.
5.2 Recommendations for domestic securities companies to address market opening
1. Strategy: Many domestic securities companies operate on a short term profit basis and management
do not have a clear long term strategy or vision. In bull markets they can make profit like other firms
but in bear markets, without clear strategy they tend to be passive and their losses are often increased
by proprietary trading positions which they cannot close out. Therefore the management of domestic
firms need to set a long term strategy in consultation with shareholders and produce a detailed and
well thought out business plan (see for more detail the previous section on action points)
2. Business plan and forecasts: Domestic firms need to develop a good business plan and financial
model. A number of firms do not have this and their firm risk is increased, since they will inevitably
be more reactive than proactive, without a clear idea of where they are going and how they will get
there. The business plan will assist by providing the practical steps and timings for each area of the
business, and it should be integrated with financial forecasts of matching duration to capture forecast
revenues, all anticipated costs and investment requirements, as well as cash flow and financing
sources and needs. The financial spreadsheet model should be well constructed, so that it is capable of
running scenario analysis to evaluate the financial impact of different strategic options the company’s
management may wish to consider. It should also be built on core assumptions for the
macroeconomic and operating outlook. Scenario analysis can then be modeled for base case, worst
case and best case scenarios in terms of macro and operating variables. (see for more detail the
previous section on Action Points).
3. Management and Corporate culture: many domestic firms need to move from a short term
approach to foster a proactive, innovation culture, where management is open to change and
anticipating trends and inspires its staff to focus on skills development, client service, and high
professional and ethical standards: financial services in emerging markets is ever changing, as
barriers come down, the change rate increases. This needs to be management led and management
and shareholders should assess the need for further strengthening of management teams in order to
strengthen this process.
4. Marketing document: domestic firms should all have a marketing document, which can be in the
form of a powerpoint presentation and ideally also brochure for clients. This is important for showing
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the firm in the best light to potential partners, financiers, clients and to raise the corporate self identity
among staff.
5. Partnership/cooperation: Many foreign firms will be interested to discuss cooperation with
domestic firms. As part of the strategic planning process the company should decide if it wishes to
explore opportunities with new equity investors, domestic or foreign, so that they do not miss out on
opportunities.
6. Funding: Some domestic firms do not plan well and in advance for their funding needs, which can
leave them in a position of unnecessary pressure to find capital in a short space of time. Firms should
fix their funding strategy to ensure sufficient capital is available for normal operations, growth plans
and some margin for unexpected losses. They should establish if funding will come from existing or
new shareholders and verify their resources and commitment.
7. Risk management and controls: There is not yet a widespread risk management culture in Vietnam.
In order to manage risk effectively it is necessary to understand the importance of the risk
management technique and the time and resources it takes to design a risk management system for the
company. While some domestic and foreign securities companies do already understand the
importance of risk management and are seeking to implement appropriate risk management systems,
most firms do not yet understand its importance and are not making the required progress. As a result,
in adverse market conditions, these firms are more likely to incur losses. Domestic firms should
implement a formal process to address and correct risk management limitations. Important is not only
the investment in IT systems but the technical understanding and general appreciation of the
importance and benefits of good risk management for long term success.
8. Corporate governance: This is still a weak area for Vietnamese securities companies and for
Vietnamese enterprises in general, due in particular to the fact that Vietnam has recently transformed
from a command economy to a market economy. The concept of corporate governance is still
relatively new in Vietnam. Domestic firms are now gradually appreciating its importance and the
need to comply with regulations in corporate governance. However, this process is starting and
requires more time for firms to comply with corporate governance standards effectively and
efficiently. Many firms are still weak and their management practices and governance are not
transparent, which can results in abuse of client assets and disputes and litigation. This is an area
where foreign securities companies will typically have higher corporate governance standards and
domestic firm management should make it a priority to upgrade its corporate governance now.
Shareholders should reinforce this where necessary to ensure management is properly focused on this
issue to make the firm more stable and sustainable. Management of securities companies should be
aware of best practice and should give proper attention to initiatives such as the MOF development of
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the Corporate Governance scorecard. This applies in particular to listed securities and other listed
companies but non - listed firms should also apply such standards as much as feasible now and be
aware of the model to work towards.
9. Code of Conduct: incorporate a code of conduct into your internal regulations and terms of
employment and ensure that this is understood and adhered to. This contributes to a raising of the
firm’s business conduct standards and customer service and should be viewed as an integral part of
developing higher corporate governance and compliance standards. This in turn raises the reputation
of the forms and attracts customers and investors.
Secondary
5.3 Recommendations to enhance compliance of Securities Companies
1. Management should understand the importance of compliance to build a long term sustainable and
profitable business, to be a brand leader in which the investor community has confidence. Sound
compliance is necessary to achieve stable and sustainable securities companies and sound overall
market development.
2. Management should put the systems in place to ensure securities company staff understand the
concept of compliance, its importance and their own personal compliance duties in their business
area. Therefore the SSC should implement an industry wide mandatory compliance training
programme so that the basic concepts and rules are clearly understood. Individual firms should then
be responsible for making sure all staff attend training sessions and have a clear understanding of the
compliance concept and the firm specific compliance processes and their individual compliance
responsibilities. Ongoing validity of the practicing certificate should be linked to attendance at such
compliance training sessions.
3. An examination should be set for the designated compliance officer and his team in the securities
companies and he should be approved by the SSC before appointment.
4. In conjunction surveillance of compliance must be upgraded and enforcement more effective for non
compliance and related negligence or willful non-disclosure. An effective deterrent is needed for inter
alia, the Board Director responsible for compliance (should be clearly accountable), the compliance
officer, internal audit.
5. SSC inspection report results including compliance effectiveness rating should be published on the
SSC website together with the securities company evaluation grade. Such transparency encourages
improved performance.
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6. If the securities company external auditor becomes aware of any matter that can have a material effect
on the standing of the company or of any non compliance matter, the auditor should report this to the
SSC. Legal amendments to enable such reporting should be made.
5.4 Other recommendations
1. The previous MUTRAP Report, “Assistance to the Ministry of Justice and other relevant Ministries
and Agencies to scrutinise national legislation against GATS obligations and commitments”, June
2008, contains a recommendation by local experts for the promulgation of an implementation
document on the establishment and operation of 100% foreign invested securities companies, fund
management companies and branches of foreign securities firms and fund management companies,
with time of execution of 11th January 2012, in order to ensure the transparency as well as
prudential management in the securities sector. This is because current legislation covers in detail
only the organization and operation of domestic securities firms and fund management companies.
This recommendation is sensible and should be acted upon by the SSC and other necessary
institutions in order to achieve promulgation of the implementation document before January 2012.
2. While the disclosure regime and audit and accounting standards have not been examined under the
scope of this report, our discussions with market participants indicate that auditor standards need
improving. The SSC already has a list of accredited auditors. However, in general transparency and
reliability of financial information is still rated as low by most observers. From a technical aspect,
information accuracy can be further improved; I understand, for example, that in several cases in the
recent past, the audited financial statements of listed companies contained balance sheets which did
not balance.
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