Proactively solving shortcomings to upgrade stock market

Mr. Vu Chi Dung, Director of the International Cooperation Department, State Securities Commission

FTSE Russell has just officially released the latest Country Classification Report, which includes assessments on issues related to the possibility of upgrading Vietnam's stock market. Could you please tell me more about these evaluations?

The latest Country Classification Report published by FTSE Russell on March 30, 2023, showed that Vietnam continued to be a frontier market (Frontier) and was on the Watch List for the possibility of upgrading to a new market (Secondary Emerging market). According to the assessment of FTSE Russell, Vietnam has not met the criterion of "Delivery versus Payment (DvP)" and is assessed as "Limited" due to the market practice of checking capital availability before the transaction. In addition, this organization considered that introducing an effective mechanism to facilitate transactions between foreign investors for stock exchanges that have or are about to reach restrictions on holding foreign investors is also considered important. Besides policy evaluation, rating agencies also evaluate the actual operation of the market and the implementation of policies. It means that these judgments are viewed from not only the perspective of the regulatory agency but also the perspective of the market participants, ensuring objectivity when evaluating.

With that view, besides being updated with new content in terms of market development and management policies, rating agencies also directly communicate with market members and foreign investors of Vietnam's stock market to assess the application of policies, the linkage between policies of the sector, such as the percentage of foreign investors' ownership in different industries.

In its report, FTSE Russell also noted several activities that Vietnam has carried out in recent years, such as organizing discussions to find solutions between relevant market management authorities and market member groups. Users are also testing the new trading system from February 2023 between Vietnam Securities Depository and Clearing Corporation (VSDC) and its members. Moreover, the plan to launch the Non-Voting Depository Certificate (NVDR) has also started, helping foreign investors feel safe about the restriction on holding.

Can you tell me more about the solutions to solve problems in the upgrade process, especially for the two contents that require margin trading requirements before transaction and restriction on holding of foreign investors, as mentioned above?

In the spirit of proactively and actively reviewing the content of the upgrade, besides organizing many working sessions with relevant parties to exchange and find solutions to solve problems, SSC also maintains constructive exchanges with rating agencies to provide timely clarification of relevant information.

As for the main criteria that still have problems following the assessment of FTSE Russell, SSC has also reported to the Ministry of Finance some solutions to solve two main problems in evaluating upgrade criteria soon. Accordingly, for the margin trading requirement before a transaction, Vietnam is currently regulated to ensure enough money and stocks before trading, following the provisions of Circular 120/2020/TT-BTC. Meanwhile, the requirement of rating agencies is "No margin trading is required before the transaction". Therefore, the solution is proposed by implementing a central clearing counterparty (CCP) for the underlying market and gradually reducing the margin trading before the transaction. Currently, VSDC and SSC have prepared two models of CCP for the underlying market. Furthermore, in the past, the SSC and VSDC have actively worked with relevant agencies to have detailed technical exchanges to solve problems related to margin regulations.

For the rate of holding of foreign investors, the proposed solution is to clearly define the method of determining the restriction on holding of foreign investors for each business line. In particular, it is necessary to specify a list of similar business lines corresponding to foreign investors' holding rates, which is specified in international treaties and specialized laws. The restriction on holding foreign investors is not only within the competence of the State Securities Commission but also needs to be researched and resolved with the cooperation of different ministries and sectors. In the past time, to solve this problem, SSC has held several meetings with rating agencies, market members, and management agencies in ministries and sectors to discuss and propose solutions

Regarding the problem of foreign room, what solutions have the management authorities and will have to overcome to attract more foreign capital flows into Vietnam's stock market, sir?

Upgrading the market is a relatively long process, requiring much effort to create changes in internal resources and legal policies. To overcome the problem of foreign room limitation, one of the immediate solutions is to issue a non-voting depositary receipt (NVDR). The regulation of NVDR is aimed at helping foreign investors who want to trade shares of public companies that have run out of foreign room or conditional business lines. The Law on Securities 2019, the Law on Enterprise 2020 and Decree 155/2020/ND-CP have set out framework regulations related to NVDR, creating a premise for building a legal framework for product deployment in the future. At the same time, to implement NVDR, it is necessary to prepare the trading system, operating mechanism, and specific guiding regulations… Through the Joint Capital Market Program (J-CAP), the World Bank is currently supporting the State Securities Commission in finding experts to develop an NVDR Research Project for the stock market.

Besides that, the solution of deploying a portal to disclose information about transactions outside the daily trading limit of foreign investors for stocks that have run out of foreign room is also studied. This solution provides information about transactions outside foreign investors' daily trading limit, including real-time price information. However, this requires upgrading the information technology systems of the Stock Exchanges and securities companies.

Thank you!