Covered Warrant - A good signal for Vietnamese stock market

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HCMC Stock Exchange. HCM. Picture: ST.

The product is being expected by many investors

The buying and selling order of CW is similar to the securities transaction. Existing investors are permitted to use their regular stock trading accounts to buy and sell CW. New investors must open trading accounts at HoSE’s sub- diaries and order the CW trading. Time, methods of transaction and orders applied to CW are similar to securities. After owning CW, the investors have the right to resell CW through the trading system of the Stock Exchange or hold to the maturity date.

MB Securities Company (MBS) said that CW is a very new product in Vietnam but will be welcomed by individual investors due to its superiority of profitability and risk control.

This is considered as a good signal for Vietnamese stock market when for a long time, the market had only three traditional products, which are securities, bonds and fund certificates.

MBS also said that this product has the same transaction method with securities and is not limited by foreign investors, so it is promising to meet the diverse needs of investors.

CW is structured as a derivative and has leverage, low transaction cost, short life cycle, which is quite suitable for individual investors, especially for Vietnamese stock market where individual investors always occupy a large proportion.

Mr. Nguyen Tuan Cuong, Director of product structure of VNDIRECT Securities Corporation said that the initial cost to buy CW is only a small amount (about 10% of the value of underlying stock), so investors can achieve the equivalent price fluctuation rate as the initial rate of those basic shares and the leverage will increase profitability for investors. Thus, during the validity period of CW, if the underlying stock price fluctuates as expected, the investors will earn a huge profit compared to the initial investment cost.

However, a product has high leverage, meaning that it will be more risky. In addition to raising profit, the leverage of CW can also raise the damage rate when price of underlying stock fluctuates in response to investors' expectations. The price of warrants will fluctuate rapidly with the good and bad news of the underlying stock, accordingly, the profitability and risk of CW is also higher.

According to Nguyen Duc Hung Linh, Director - Retail Research & Investment Advisory of Saigon Securities INC (SSI), CW's life cycle is always limited (minimum 3 months and maximum 2 years from date of issue). At the maturity date of CW, only CWs in a profitable status will be entitled to trading. Other CWs will be worthless and investors will lose all their money for buying the original CW.

In addition, the assessment of financial health, the performance of issuers is also an important factor that investors should pay attention to.

CW - a cost-effective risk management tool

CW products will soon be launched on the HCMC Stock Exchange in 2018 with 5 securities companies participating in the issuance and 23 securities.

In order to limit the risk to the issuers and protect the investors, HoSE said that the State management agencies have issued many regulations to ensure safe and effective operation.

Under current regulations, risk prevention is a mandatory obligation of CW issuers. During the validity period of CW, CW issuers must buy and sell underlying stock according to the risk prevention method described in the prospectus. The risk prevention is to ensure the solvency to investors upon the maturity. This activity is closely monitored by the Stock Exchange through the daily reporting regime.

At the same time, to limit the manipulation of the stock price on the last trading day, the underlying price to determine the CW trading is the average closing price of the underlying stock for the five trading days before maturity date (excluding maturity date).

In addition, HoSE always attaches great importance to closely monitoring the CW market and the underlying stock market in order to monitor and detect abnormal fluctuations in prices, trading volume and trends of price movement of warrants and underlying stock.

Nguyen Viet Duc, MBS's senior researcher said: "As one of the five securities companies involved in issuing CW, MBS coordinates closely with the State Securities Commission, HCMC Stock Exchange and Vietnam Securities Depository Centre to jointly resolve the limitations during the CW implementation in Vietnam. The IPO must be implemented prior to listing, which makes the process from IPO to trading time relatively long and creates risks for both securities companies and investors. Although following a prudent strategy when issuing a new product, MBS tries to be one of the first companies to launch the CW product"- said Duc.

It can be said that in addition to diversifying list of investment products, CW is also a cost-effective risk management tool. Therefore, the development of regulations is necessary to limit the risk in the operation of a new product in a legal, transparent, public and fair way for issuers, investors and related parties. .

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In the case where the issuers fail to insolvency, Circular 107/2016 / TT-BTC stipulates that the assets used to pay for the owners of CW include assets for risk prevention and other assets on the self-trading account; assets deposited on the escrow account at the custody bank or payment guarantee (a deposit equal to 50% of the total value of the issued warrants). In the case where the CW issuers have used up all of the above assets but still have not paid all for investors, the owners of CW will become a partially secured creditor for the issuers.