Derivative Securities Transform and Elevate Vietnam's Market Landscape

(SGI) - In the span of six years since its inception, the derivatives market has undergone a remarkable evolution, emerging as a pivotal force not only in attracting a growing pool of investors but also in reshaping the structure of the stock market.
Derivative Securities Transform and Elevate Vietnam's Market Landscape

This progress is a significant stride toward fulfilling one of the prerequisites for Vietnam's stock market to advance from its current status as a marginal market to the esteemed realm of an emerging market.

Explosive Growth in Derivative Securities Accounts

The curtains lifted on the stock market's grand stage on August 10, 2017, with the Hanoi Stock Exchange (HNX) as its host. The inaugural tradable product in this arena was the VN30 index futures contract. In the subsequent years, HNX introduced a 5-year government bond futures contract in 2019, followed by the unveiling of the 10-year futures contract in 2021. These strategic moves mirrored the developmental roadmap of the derivatives market.

The half-dozen years since inception have borne witness to robust and steady growth within the stock market. This flourishing environment, characterized by active transactions, has magnetized a burgeoning number of investors to the market's fold. HNX's most recent statistical insights, as of July 31, illuminate a staggering milestone – the tally of derivative securities trading accounts has surged past 1.34 million accounts. This astronomical leap marks a 546-fold increase from the market's nascent phase.

Concurrently, the derivative securities market's dimensions and liquidity have expanded substantially. Notably, the average trading volume of VN30 futures contracts surged from 10,954 contracts per session in 2017 to nearly 225,178 contracts per session during the first seven months of the present year. The open interest volume (OI) of VN30 futures contracts mirrored this growth trajectory, ascending from 8,077 contracts at the close of 2017 to 62,077 contracts by July's end. The zenith of trading volume saw a peak at 647,457 contracts during the October 25, 2022 session, while the pinnacle of open interest scaled to 71,190 contracts on March 30, 2023.

Over the interval spanning 2018 to 2022, VN30 futures contract transactions have experienced robust growth, boasting an average annual escalation of 38.65%. 2020 stands as the high watermark, with an impressive growth rate of 79.9% compared to 2019, while 2022 witnessed a growth of 43.8% in contrast to 2021. In the initial seven months of 2023, the average transaction volume reached 225,178 contracts per session, marking a 17.41% decrease in comparison to 2022. Yet, this figure remains the second-highest average trading volume, trailing only the zenith reached in 2022.

The Shield and the Opportunity

The derivatives market has gradually metamorphosed into an instrument for investors to hedge risks. Its significance is underscored when the underlying market experiences sharp downturns, as the derivatives market plays a pivotal role in mitigating selling pressure, stabilizing investor sentiment, and harmonizing market dynamics. This orchestration curtails the downturn of the underlying market index. This influence is tangibly manifested in the liquidity of the derivatives market, particularly exemplified by the trading volume of VN30 index futures contracts. This segment has exhibited substantial growth since the conclusion of the Covid-19 pandemic in 2022, demonstrating a robust 43.8% upswing in comparison to 2021. This pattern resonates with the overarching trend observed in global stock markets.

Upon a closer analysis of these trends, a securities expert has attributed the driving force to the broader trend observed in primary stock markets across the globe, including Vietnam. These markets have embarked on a downward trajectory, leading to a decline in trading of underlying securities. Simultaneously, the demand for hedging the portfolio of underlying securities has surged. Consequently, the channeling of cash flow into stock market trading emerges as an objective necessity.

Beyond its role in risk hedging, derivative securities serve as profitable investment avenues for traders. The ability to execute two-way trades, coupled with the capacity for continuous buying and selling throughout sessions, empowers investors to amass gains even during phases of market contraction. This is particularly relevant when the underlying market experiences a sharp downturn, rendering avenues for profitability scarce. During such periods, investors have the chance to pursue returns in the derivatives market, safeguarding the flow of funds within the stock market and preventing mass investor exodus during market downtrends.

The derivative trading membership network has undergone a rapid expansion. From its inception in 2017 with a mere seven members, the Stock Exchange has since seen its membership swell to encompass 24 member securities companies. All of these entities adhere to stipulated standards, boasting minimum charter capital and equity figures of VND 900 billion or higher.

Diversification Beckons for Derivative Products

Aligned with international norms, derivative securities products in Vietnam's stock market adhere to a progressive roadmap, advancing from simpler to more intricate offerings. This ensures that products meet the evolving demands of the investing populace as they enter the market. The VN30 index futures contract, emblematic of this approach, was the inaugural derivative securities product due to its straightforward nature. Following the successful establishment of stable trading for the VN30 futures contract, HNX embarked on the development of the 5-year government bond futures contract and the 10-year government bond futures contract. These derivative products were carefully calibrated to suit prevailing market conditions, adhering to the developmental roadmap of the derivatives market.

To further amplify the role of risk mitigation and foster effective investment avenues catering to diverse investor needs, the derivatives market necessitates an infusion of fresh derivative products. This could encompass the introduction of futures contracts associated with new indices, such as the VN100 index. A representative from HNX disclosed that the VN100 futures contract is currently undergoing expedited development and is poised for imminent introduction to the market. Moving forward, exploration into single stock futures and options products remains a viable strategy for broadening the market's spectrum of offerings.

A Focus on Safety in Derivative Trading

In its commitment to ensuring the safety of clearing and settlement activities for VN30 index futures contracts, the Vietnam Securities Depository and Clearing Corporation (VSDC) has enacted two adjustments to elevate the minimum initial margin ratio for these contracts. The initial margin ratio was initially elevated from 10% to 13% in 2018, followed by a subsequent increase from 13% to 17% in 2022.

In summation, the derivative securities market has emerged as a transformative force within Vietnam's financial landscape. With its role as a risk mitigation tool, avenue for profitability, and catalyst for market development, it has ushered in a new era of investment possibilities, providing investors with diverse strategies to navigate the intricate currents of the financial world. The derivatives market's potential continues to expand, as it prepares to unveil new products that align with both international best practices and the ever-evolving needs of investors.

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