Finance & Banking

Last updated: Wednesday, January 23, 2019


Stock Derivatives Market: More Options for Investors

Posted: Tuesday, May 09, 2017

The securities derivatives market will be officially launched on May 19, 2017 and opened to investors on June 2. Till now, many retail investors have not actually understood about this market. Many questions have been raised by investors, for instance, about conditions for derivatives transactions, opportunities and risks.

Game for small investors too
At first, Vietnam will launch two securities-based derivatives, namely government bond futures and stock index futures.

With this approach, derivatives are tradable by investors with a small amount of cash. Specifically, investors only need to deposit 10 per cent of futures contracts with a minimum value of VND70 million. Or, they only need VND7 million to perform transactions.

Thus, this is considered the starting value for derivatives transaction. And, to reduce inconveniences for investors in case of price drop after purchasing stock index futures, securities companies are likely to require investors to deposit more than the starting value of VND7 million (possibly VND8-9 million). Otherwise, investors will be asked to add margin requirements in case of price drop.

Easy to play, easy to lose
Government bond futures are more suitable for institutional investors who invest to hedge interest rate risks on the market, according to securities companies.

Index futures will attract retail investors because of strong leverage effects, usually 7-10 times more than the original value, according to experience from other countries like South Korea, Thailand and Hong Kong. Investors only need to have 10-15 per cent of the value to conclude the deal.

In case derivatives are allowed short sale, investors can short-sell futures contracts and then buy back to fill up positions and take a profit/loss, even take it on the day of trading. Investors can buy and sell the same futures in the day to lock in profits and avoid overnight fluctuations.

With futures contracts, investors can buy or sell without having to hold their respective underlying assets because the nature of the deal is based on investors’ price expectations. Therefore, there is always a trade-off between the number of forward contracts expected to gain the value (buyers) and the number of futures expected to lose the value (sellers).

Thus, if bids are not matched for a long period, investors will have their value evaporated much faster than the underlying market. For example, when the index rises by 1 per cent, investors will earn 10 times of profit; otherwise, if the index drops, they will then lose up to 10 times.

To ensure the liquidity on the derivatives market, the Hanoi Stock Exchange (HNX) issued the Regulations on members of derivatives market. Accordingly, it guides in detail how securities companies register for becoming market makers. However, this regulation is infeasible in a fledging market like Vietnam.

To enable market-making functions, securities companies must place buying orders when there is no buyer on the market to create liquidity. This is also a risk for securities companies as there is no certainty that their purchases are sold, resulting in huge losses in the event that incentive mechanism is not in the horizon.

According to experience from other countries in the region, in creating a derivatives market, the stock exchange will share a significant portion of transaction costs with securities companies, then the latter will be able to boost the development of the derivatives market.

To join the stock derivatives market, an investor needs to go through three steps.

Step 1: He/she needs to go to a securities to open an account. This account needs to be opened by the investor at least one business day before he/she can place a derivative transaction order. If he/she has not opened a base securities, he/she must open it before registering for a derivatives account.

Step 2: He/she place a requirement deposit into his/her derivatives account at securities companies before he/she can place an order. He/she must be assured that his/her money has been sent to the Vietnam Securities Depository (VSD) and his order does not break any rule. Margin requirement (in cash) is set by the VSD (cash to securities ratio is 80 to 20). Securities on margin must be decided by the VSD. A customer can withdraw his/her margin surplus at securities companies/VSD if the margin value is greater than the margin requirement.

Step 3: He/she performs a transaction and clearing payment. His/her transaction order must meet certain conditions: price range, order limit, cumulative order limit, position restriction and remaining room for new transactions.

If he/she wants to close a position, he/she must make a reverse transaction on the same type of futures. For example, he/she opens BUY position and closes SELL position. He/she opens SELL position and closes BUY position.

At the end of the day, all gains and losses of closed positions are recorded and paid to customers. This is different for the base market as customers are paid profit/loss on a daily basis.

Dinh Thanh


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