What is required for a stock market upgrade?

According to Mr. Hoàng Quang Kiet, FIDT Research and Analysis Department, the FTSE Russell standards are substantially simpler than the MSCI requirements. MSCI includes more difficult criteria, such as issues connected to foreign exchange markets and restrictions on foreign ownership, which offer substantial challenges.

The Vietnamese stock market presently lacks criteria for clearing and settlement operations (and the related payment-versus-payment transfer) based on a Central Counterparty (CCP) model, according to both rating bodies. This improvement necessitates significant efforts from many market parties, including the government. Specific legislative adjustments and policy measures, such as the functioning of the KRX system and the execution of clearing and settlement operations, are required.

Circular 120 from the Ministry of Finance now requires international investors to make buy/sell orders only after depositing 100% of the funds/securities in their trading accounts. This regulation creates considerable barriers to capital use for foreign investors and typically limit s market liquidity.

In most markets, maintaining a sufficient amount of funds/securities at a certain time prior to performing T2 transactions and/or using other risk management strategies is adequate. Many nations use Central Counterparty (CCP) clearance, a payment-versus-payment paradigm that comprises the following mechanisms:

In the underlying market, the CCP model acts as a guarantor for the parties' settlement obligations, employing multiple layers of risk prevention tools such as (1) strict participant requirements, (2) the establishment of guarantee funds contributed by CCP members, (3) the setting aside of profits and CCP capital, and (4) the use of credit from banks for settlement in emergencies.

In terms of assistance in the event of a securities shortage, (1) Continuous Net Settlement (CNS) procedures are used when transactions do not have enough securities for settlement despite using other support measures such as SBL. Transactions are postponed to the next working days. (2) Mandatory Buy-ins compel members to purchase sufficient stocks if shortages persist after employing SBL to ensure settlement.

"We believe that, given the market's features and related legal concerns, adopting the CCP clearing and settlement system in the Vietnamese market will take more time to conform to an appropriate model", said Mr. Hoàng Quang Kiet.

KRX Progress Update

Following a meeting on October 10th between the Ho Chi Minh City Stock Exchange (HOSE) and the market members' vendor (the business offering solutions/system development) to assess system readiness for the Information Technology (IT) tender project - KRX, these are the major points:

Based on testing up to the end-user acceptance testing (eUAT) phase, 59 securities firms successfully tested 100% of the functions, whereas 17 organizations have not yet successfully tested all functions.

The scenario compliance rate is rather high (69 out of 79 securities firms comply with more than 80% of the go-live functions). However, the system's readiness for go-live remains low (66 out of 76 securities firms are rated as unprepared).

According to the KRX Contractor's plan, Vietnam will execute final acceptance testing (FAT) in November 2023, and KRX is projected to complete system preparation for deployment by the end of December 2023.

The functioning of KRX is expected to improve the capabilities of the Vietnamese stock market by raising liquidity (to 4 billion USD each session) and lowering settlement time from T2.5 to T0 (increasing capital turnover rate). The KRX system, according to FIDT, is a fundamental prerequisite for addressing persisting challenges and elevating the Vietnamese market from frontier to emerging market status.

The KRX system provides the infrastructure required to deploy the central clearing partner model, Central Clearing Counterparty (CCP), and, as a result, remove one of the fundamental barriers of leveling up: prefunding.

The functioning of the CCP, according to KBSV, would only ease one of the bottlenecks, while problems relating to obstacles to international investors will necessitate greater steps by the executive agency.

"The Vietnam stock market upgrade will likely have to wait until at least 2025 to be approved," KBSV anticipated.