Securities market liberalisation in vietnam

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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


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


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

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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


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

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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

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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


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)


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


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.


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 postgraduate 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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References

Duong Thi Phuong, Deputy Director Market Supervision Department, State Securities Commission: “Recent Developments and Challenges in Viet Nam”, presentation made at Vientiane, 29 July 2010

EU Multilateral Trade Assistance Project Vietnam II (MUTRAP II) SERV-1 Report:“Implication Assessment of Vietnam’s GATS Obligations and Commitments”, July 2007

EU Multilateral Trade Assistance Project Vietnam II (MUTRAP II) SERV-2 Report:“Assistance to the Ministry of Justice and other relevant Ministries and Agencies to scrutinise national legislation against GATS obligations and commitments”, June 2008

EU Multilateral Trade Assistance Project EU – Viet Nam MUTRAP III SERV -2A “The comprehensive strategy for service sector development to the year 2020 (CSSSD) with a vision up to 2025”, December 2009

Hanoi Stock Exchange (HNX) 2009 Annual Report

Ho Chi Minh Stock Exchange (HOSE) 2009 Annual Report

International Monetary Fund (IMF): “Financial Sector Assessment: A Handbook”, International Monetary Fund, Washington D.C., 2002

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

J. Irwing: “Regional Integration of Stock Exchanges in Eastern and Southern Africa: Progress and Prospects”, IMF Working Paper, 2005

M. Kono and L. Schuknecht: “Financial Services Trade, Capital Flows and Financial Stability”, World Trade Organization, Geneva, 1998

R. Pardy: “Institutional Reforms in Emerging Securities Markets”, World Bank working paper,

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S. J. Key: “Doha Round and The Financial Services Negotiation”, The AEI Press, Washington

D.C, 2003

IOSCO: “Objectives and Principles of Securities Regulation”, May 2003

Financial Services Authority (UK): “Enforcement Annual Performance Account”, 2009/10

Bursa Malaysia website

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Indonesia Stock Exchange (IDX) Factbook 2009

Stock Exchange of Thailand website

Securities market liberalisation in vietnam

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