Knowledge

Derivatives are financial instruments whose values are based on an agreed-upon underlying assets. Common derivatives include:

• Forwards: an agreement between two parties to buy an underlying asset at a pre-determined price and on a pre-specified future date.
• Futures: a standardized forwards contract written by a clearing house that operates an exchange where the contract can be bought or sold.
• Swaps: a contract to exchange cashflows on or before a prespecified future date based on the underlying value of currencies exchange rates, bonds/interest rates, commodities exchange, stocks or other assets.
• Options: a contract that gives the owner the right, but not the obligation to buy (a call option) or to sell (a put option) an underlying asset at a pre-determined price (the strike price) and on a pre-specified future date.

In the experience of countries that have developed derivatives market, futures and options are the most popular products. However, options is a more complex and advanced product, which may be difficult for majority of investors in the early stage of the market. Meanwhile, futures trading has many similarities with stock trading, in line with the criteria of product design simplicity and its ease of use. Therefore, futures is chosen as the first derivatives product to be launched in Vietnam.

To step-by-step help investors familarize with new instruments, in the first phase of the market, two futures products which are index futures (on VN30 and HNX30) and bond futures will be introduced. Other derivatives products will be launched when market conditions are appropriate.

Derivatives provide for investors more instruments to hedge risk, speculate and arbitrage

• Investors can experience some features which have not been allowed in the stock market such as short selling, intraday trading and daily settlement
• In terms of capital usage, high leverage effect in derivatives market means that investors are able to trade a large notional amount with relatively small amount of capital
• Last but not least, exchange-traded derivatives products will help investors mitigate counterparty risks since clearing process is conducted via CCP (Central Clearing Party) which is a buyer of all sellers and a seller of all buyers

Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit.

In Vietnam stock market, investors can sell only if they own the stocks. However, in futures market, if the investors have expection of falling price in the future, the investors can short sell futures contracts without having to own underlying assets.

Intraday trading means investors can open and close positions within a day.

For example: Investor A buys futures contracts at 10 a.m on 17th February 2017. At 2 p.m on 17th February 2017, investor A wants to realize any losses/profits, thus investor A places a short order to close the existing position.

VSD manages collateral assets based on two criteria: (i) the ratio of Cash to stocks and (ii) Account ratio.

Collateral assets can be cash and/or securities which must be in the short list of SSC. Securities’ values will be discounted based on their liquidity. The proportion of cash collateral in total asset collateral must not be lower than 80%.

For example:

An investor deposits collaterals including 240 million VND of cash and 100 million VND of securities (after haircut).

Since the proportion of cash collateral in total asset collateral cannot be lower than 80%, the value of eligible collateral is equal to 240 million VND + min(100 million VND; 25%* 240 million VND) (300 million VND in which 240 milion VND cash và 60 million VND securities).

Furthermore, VSD sets three levels of warning for Account ratio. The higher the Account ratio, the lower the remaining collateral amount used for derivatives trading:

Account ratio ≤ 80%: trading account’s status is Safe

80% < Account ratio ≤ 90%: trading account’s status is Warning level 1. Text messages will be sent out to warn customers

90% < Account ratio ≤ 100%: trading account’s status is Warning level 2. Emails and text messages will be sent out to warn customers

Account ratio > 100%: trading accounts are blocked (customers cannot place orders except for closing positions)