Vietnam: What should non-resident foreign investors note in investing in VN30 Index Futures Contracts and Bond Futures Contracts?

A non-resident foreign investment company investing in Vietnamese derivatives securities through futures transactions contacted us on this matter. The company intended to open a derivative trading account with VNDirect for investing in the VN30 index futures and bond futures listed in the Hanoi Stock Exchange (“HNX”). 

To answer the subject question, BLawyers Vietnam pointed out 2 issues as follows:

invest

1. What are VN30 Index Futures Contracts (“VN30 Index Futures”) and Bond Futures Contracts (“Bond Futures”)?

a. Derivatives

Derivatives are financial instruments in the form of contracts, including options contracts, futures contracts, and forwards contracts that determine the rights and obligations of the parties to pay money and transfer a specific quantity of underlying assets at a specified strike price before or on a specified date in the future. Thus, derivatives include futures.

b. Futures

Futures are listed derivatives that certify the parties’ agreement to perform one of the following transactions:

  1. Buying or selling a quantity of underlying assets at a predetermined price on a specified date in the future;
  2. Paying the difference between the value of the underlying assets determined upon contract conclusion and the value determined on a specified date in the future.

There are two types of futures:

i.  Stock index futures contract (“Index Futures”) is futures based on the underlying asset which is a stock index.

Underlying assets of Index Futures are securities indexes designed by the Stock Exchange of Vietnam on the index formulation and management principles set out by the Stock Exchange of Vietnam after they are reported to and approved by the State Securities Commission (the “SSC”).

ii. Government bond futures contract (“Bond Futures”) is futures based on the underlying asset which is a Government bond or a hypothetical bond that has some basic characteristics of a Government bond .

Underlying assets of Bond Futures are :

(1) Government bonds currently traded on the market; or

(2) Bonds assumed to have some basic characteristics of Government bonds.

Upon their maturity, Bond Futures shall be executed in the form of cash payment or transfer of underlying assets under regulations of the Vietnam Securities Depository and Cleaning Corporation (VSDCC). Modes of payment must be stated before listing of Government bonds.

Thus, the VN30 Index Futures and the Bond Futures that such foreign investor intends to trade by the account opened at VNDirect are considered derivative securities, and both must meet certain conditions to participate in those transactions.

2. Which conditions such foreign investor should meet to participate in derivative transactions?

As the foreign investor is a company established and operated under foreign law and located in oversea, it is considered a foreign organization.

Derivative investment means the purchase, sale, and holding of derivatives by investors on the securities market.

Derivative trading means the performance of one or some or all of the following activities: derivative brokerage, derivative proprietary trading, and derivative investment consulting.

Foreign organizations can invest in the derivatives in Vietnam, except for cases where the foreign organizations are banned by competent authorities from performing securities activities related to securities and the securities market for a fixed period or permanently due to the commission of securities-related offenses and cases where must meet the conditions to invest in the derivatives.

In which, the cases that must meet the conditions to invest in the derivatives include:

  1. Securities companies shall invest in derivatives only after they have been issued the Certificate of eligibility to conduct derivative proprietary trading by the SSC to conduct derivative trading activities;
  2. Fund management companies shall only use trusted capital from their investment portfolio management to invest in derivatives for the purpose of preventing risks to the list of securities they are holding; and use capital sources of securities investment funds or securities investment companies to invest in derivatives for the purpose of risk prevention as prescribed by the law on securities investment funds. Fund management companies shall not use their own capital, borrowed funds, and other lawful funding sources to invest in derivatives;
  3. Credit institutions, foreign bank branches shall invest in derivatives only after obtaining written approval from the State Bank Vietnam;
  4. Insurance enterprises and branches of foreign insurance enterprises shall only invest in derivatives in accordance with regulations of law on the insurance business;
  5. State-owned economic groups, state-owned corporations, and state-owned enterprises shall invest in derivatives only after obtaining permission from competent authorities in accordance with regulations of law on the management and use of state capital in the business operations of enterprises.

Thus, a foreign investor can conduct derivatives investment activities if does not fall into the cases that must meet the above conditions.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at consult@blawyersvn.com. We would love to hear from you.

Date: 08 March 2023

Writers: Linh Nguyen, Tram Nguyen & Thuyet Tran

blawyersvn-cta-image

Request a consultation

To schedule a meeting with BLawyers Vietnam’s attorneys, please call us or complete the intake form below. We will respond within 24 hours.

This field is for validation purposes and should be left unchanged.