Group 2

Vietnam s Money Market

Group 2
V Hong Y n Nguy n H ng Tn Hong Ngn H Nguy n Thu H ng Bi Vi t Quang
4/2/2011

Group 2 Vietnam s Money Market

Vietnam s Money Market

A. Money markets in Vietnam
1. Definition Money markets exits to transfer funds from individuals, corporations, and government units with short-term excess funds (suppliers of funds) to economic agents who have short-term needs for funds (users of funds) 2. Functions and its importance Satisfy the immediate cash needs of individuals, corporations, and government Enable large amounts of money to be transferred from suppliers of funds to users of funds for short periods of time both quickly and at low cost to the transacting parties Be an important tool that government use to regulate economy 3. Participants State bank of Vietnam Commercial banks Brokers and Dealers Corporations Individuals Other financial institutions

B. Money markets instruments in Vietnam

Short-term debt instruments (those with an original maturity of 1 year or less) are issued by economic units that require short -term funds and are purchased by economic units that have excess short-term funds Once issued, money market instrument trade in s econdary markets which are extremely important as they serve to reallocate the (relatively) fixed amounts of liquid funds available in the market at any particular time Basic characteristics Sold in large denominations; low transaction cost Low default risk Must have an original maturity of one year or less

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1. Treasury bills (T-bills)

Based on participants, the money market includes: - The short-term (ST) debt market - The ST credit market between commercial banks ( Interbank) - The foreign exchange market First of all, we learn about one of the ST debt market s instrument, the treasury bills. Related to treasury bills, we should know - What are treasury bills, - What are its characteristics, - How to calculate its price, - Its auctions and its payment process The term treasury bills is stated as the ST debt obligations issued by the ministry of finance with the aim of covering a temporary deficit of state budget. Additionally , the Government buys and sells T-bills to implement monetary policy. The T-bills have high liquidity, so they are owned mainly by commercial banks. They were released in the form of certificates or book entries. This tool are sold on a discount basis, without coupon rate.The duration of Treasury bills usually 3 months, 6 months, 1 year. It is the least risk instrument in the currency market because - It is the State to guarantee the payment - The duration is short so that the interest rate fluctuations on the currency markets was negligible. As mentioned in the Inter-ministerial Circular No. 01 NHNN - TC IN THE GUIDELINES FOR TREASURY BILLS, the selling price of treasury bills are calculated as followed: MG G = ---------------------Ls x T 1 + -----------365 x 100 G: The selling price of treasury bills MG: The par value of treasury bills Ls: The interest rate for treasury bills winning (calculated in percentage%). T: number of days in term bills 365: Number of days per year. Adjacently, we study the auctions market for treasury bills. As you can see from the slide, the auctions market for treasury bills is done from May 1995. The main trend is the increase in No. of sessions and volume annually. This is consistent with the trend of market development and international p ractice . The SBV organizes many sessions annually, but not all these sessions are done successfully. It is due

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to the fact that members joining auctions do not want to buy that T -bills. This fact leads to the situation that there are many sessions, but th e volume of T-bills which are purchased is small. In relation to members joining the market: After applying the Decision 935/2004/QD -NHNN , SBV recognize total member is 20 . In the primary market, Treasury bills are issued in various forms: auctions, issued directly through the treasury system, or issued through age nts. 1. Regarding to auctions (through SBV): On the basis of the tender form of the members, the SBV will determine the winning price and volume of Treasury bills to be mobilized . SBV can implement the method of bidding and bidding volume rates, depending on market condi tions. Method of issuance Treasury Bills by auctions at Central Bank has many advantages: State saves cost by taking advantage of the existing network of customers, reduces retail &printing cost, the State Treasury control over volume and rev enue generated on the budget. SBV agrees to direct the policy of interest rate, create currency markets and facilitate an open market. The combination of the ministry of Finance and Central Bank are regular, spontaneous and timely. 2. Issuance of Treasury bills directly through the state treasury: Retail Treasury bills to the subjects as individuals, organizations and credit institutions... Announced to the media about the issuance: volume, term, interest rate, face value, time, location, method of payment ... All Interest and principal are paid directly into accounts designated by the purchaser

3. 3.Released through an agent: State Treasury may issue Treasury bills through dealers and credit institutions. Agents must meet certain conditions specified. These agents are entitled to a fee prescribed by the Ministry of Finance. In the secondary market, most banks purchased Treasury bills tend to hold to maturity instead of trading because it increases the liquidity. Furthermore, the banks use Treasury bills to join the open market. Treasury bills can be traded at any time in the OTC (over-the-counter) market. These transactions are conducted by telephone, telex, through the trading station. The trading of Treasury bills is done by brokers act as intermediaries for their customers.

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The Treasury bills often exchange large volumes among professional investors. The payments of T-bills are regulated clearly in the Inter-ministerial Circular No.
th

01/NHNN - TC dated 10 Feb 1995 IN THE GUIDELINES FOR TREASURY BILLS

Limitations of T-bills market in Vietnam: - The number of members participating in the auction market for treasury bills is still limited, mostly members of the commercial banks. - Currently, the interest rates applicable to direct interest in bidding for treasury bills interest rates should not form the bid winner according to market principles. - System of technical infrastructure, there are certain restrictions.

2. Inter-bank market
This market is under the administration of the SBV in order to regulate capital in the system of commercial banks Banks with excess reserves lend fed funds, while banks with deficient reserves borrow fed funds Actually, the purpose of making loans in the interbank market is liquidate and payment, not making loans to individuals or organizations. The borrowers (usually big commercial banks) want to earn interest with excess funds and the lenders ( small banks) want to mobilize more funds. Classifications: 1. Domestic Interbank market:  Participants: SBV, credit institutions, mainly commercial banks  Purpose: - Ensure the required reserve - Management of required reserved by SBV - Ensure liquidity - Disbursement. - Business temporarily idle funds As u can see, the Interbank Interest Rate (VNIBOR) in 17 th March 2011 for these durations: - Interest rate: negotiated by 2 party s agreement (formed on the basis of supply demand relationship, partnership, ratings ...) - Term: Overnight, 1 week, 2 weeks, 1 month, 2 months, 3 months. Most are under 3 months. - OTC transactions are: The same term has many market price. - Trading methods: Telephone, fax the contract .... - Use Reuters Dealing System: Reuters has built a site the average exchange rate on the interbank market of Vietnam (VNIBOR) on a daily basis bid of some banks 2. Foreign Interbank market:

Group 2 Vietnam s Money Market

 Participants: SBV, CI  Function - SBV: To ensure foreign currency reserves, the payment service requirements of customers, ... Tools: Implementing monetary policy through measures aimed at stabilizing the exchange rate, affecting total money supply - CI: liquidity needs other currencies than USD, Buy and sell foreign currency spot, forward Loan transactions, send Eurodollar: overnight, term ....  Banks have foreign elements are present in different price
Limitations of Interbank market in Vietnam: The number of participants and size of transactions and limited mostly to address the demand for liquidity. The transfer of capital is often only one-sided between the group of banks lending : stated commercial banks and group of banks borrowing: joint stock commercial banks, joint venture banks and foreign bank branches . - Interest rates on the interbank market does not accurately reflect th e supplydemand relations and trends of the currency market. The role of banks in collecting information and participate in the interbank market regulation are weak, especially in case of a larger supply of capital to the market.

3. Repurchase agreements (repos or RP)

Besides Treasury bills and Inter -bank fund, repo is another popular instrument in the Vietnamese money market. By definition, repo is the sale of a security with an agreement to buy the security back at a set price in the future. Repo posses s many similarities to a short-term collaterized loan in which the borrower will use the security as a mortgage. In the present days, repo is very active in the Vietnamese stock market. So how does a repo contract process? Step 1: Initiating the repo contract Imagine you are an investor. You have realized a particular stock is experiencing its good time: its price keeps rising up gradually at a stable pace, the corporation issued the stock is also preparing to announce a new project an information which definitely will help to level up the stock price even more. You know if you have some money to buy this stock, you will get some capital gain in the very near future. It is a sure bargain and you know it! Unfortunately your account is drained because y ou have put all your money in other investment. Instead of money, you are now possessing some valuable stocks but because of their high value, you do not want to sell them. What to do? Simple answer: borrow money. Fund supplier? A bank loan will require on e too many procedures and documents to submit and probably by the time the process finishes, the stock price has already reached zenith and begun to slow down. An alternative choice now is provided by many stock company:

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repo. Take your stock to the stock company you have trust in. The company will evaluate your stock s profitability and if your stock s performance are good, your contract will be approved. Step 2: Implementing the contract Once your repo contract is signed, you will have to transfer the o wnership of the security to the stock company. In return, the company will give you an amount of money to purchase those stock this amount usually equals half of the stock s total value. Step 3: Clearance of the contract After making capital gains on your investment, you can take part of your interest to the stock company to buy back your own shares. The company, after receiving your money, will transfer back the shares to your account. The repurchase price is usually pre determined by the following f ormula and stated clearly in the initial contract. Repurchase price = 1st price x (1 + repo interest/365 x number of days) Differentiate between repo and a normal collaterized loan: Scale REPO - Only evaluate the legal status and profitability of stock. - Stock company is more concerned with the stock s performance on the market rather than what the investor is planning to do with the borrowed money - Simple, quick - Short term - Repurchase the stock - High - Stock company can trade the shares they are given Collaterized loan - Evaluate the legal status of stock and borrower s ability to pay back debt - Concerned with the debtor s purpose of using money - Complex, long - Short, middle, and long term - Pay back debt - Low - Collateral are just frozen. They are not allowed to be used for business purposes.

1.Evaluating process

2. Administrative process 3. Maturity 4. Borrower s responsibility 5. Cost 6. Collateral

Which securities can be accepted to repo?

Group 2 Vietnam s Money Market

The process to determine which securities should be accepted to repo can be complex because it can decide the risk of the contract itself and also define the price and interest of the repo. Usually the stock company will accept only those stocks of big corporations and are performing well on the u pper end of the stock market those which are least likely to plunge in the near future. Below are some examples of the stocks that Security company in Vietnam accept for repo.

ACBS (Asia Commercial Bank Security company) mainly accept to repo stocks of banks portfolio: consist of 9 OTC stocks Prioritize customers who have strong financial background and has no bad debt at credit instititutions SHS (Saigon Hanoi Security company) list of stocks accepted to repo: Military Bank (MB), Eximbank, Vietcomba nk, Habeco, Sabeco, Bao Viet Cooperation Longest maturity: 6 months SBS (Sacombank Security company) 15 top listed stocks, including: Eximbank, MB, Habubank, Hong Anh - Gia Lai, Vinaconex

Benefits of repo:

Increase the liquidity of unlisted shares: sha res of profitable but private companies are more valuable because they can be used to borrow money Increase the liquidity of capital Supply investors with more capital to enlarge portfolio: investors have access to strong capital fund to finance their inve sment Increase efficiency of investment: more investment can be done at the same time

Limitations of repo:

The market is exposed to more risks - domino effect: if the market unexpectedly experience a fall, investors decline to buy back their securities, the stock company also cannot sell those shares to restore their debts because of the decrease in stock price the whole market will become even more depressed. Illiquidity of the market hinder clearance of Repo contracts Risk of share price bubbles: when the investor keeps buying again and again one particular stock, it increases the demand for that stock and thus raises the price quickly. Stock price escalate without a truly perceived development in the corporation.

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Inexperienced evaluation: Stock companies in VN are not yet experienced in evaluating the stock s profitability or its future so it may increase th e risk of repo. Out-of-date portfolio accepted for repos: discourage investors from noticing repo service Poor customer service

Some suggested solutions to increase the effectiveness of repo and expand its market:

Manage risk and increase the effectiveness of repo: specify safety rates for security companies, submit periodic report to Committee of Security Enforce strict rules: punish manipulators, avoid asymmetric information Increase marketing activities: mail, phone, advisory service, seminar Develop administrative ability

4. Commercial paper (CP)

Despite being similarly used, the term commercial paper refer to two whole different instruments in the money market in Vietnam and America. While in US, Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper a t a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. (source: Wikipedia) In short, commercial paper in US can be considered a kind of short -term corporate bond. On the other hand, in Vietnam, commercial paper is a term used to call unsecured shortterm promissory notes which are issued to raise short-term cash to finance working capital requirements. On the commercial paper, it states a demand or a promise to pay an amount of money at a specified date in the future. There are two types of commercial paper: Promissory note, Bank draft About these two kinds of commercial paper:

 Promissory note - issued by issuer - promise to pay unconditionally a specified amount of money to the beneficiary when there is a request or the note matures  Bank draft - Issued by drawer - Demand the drawee to pay unconditionally a specified amount of money to the beneficiary when there is a request or the note matures

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Some requirements of commercial paper in Vietnam:

Regulated by Ordinance number 17/1999/PL -UBTVQH10, issued 24/12/1999, enforced since 01/07/2000 Must follow the official form specified by the government Written in Vietnamese Amount of money stated in VND Short-term maturity (< 1 year)

Benefits of commercial paper:

Promote business activities Foster trade exchange: foreign companies feel more secured when they receive promissory note when conducting the transaction Expand banking credit service Establish another method of payment

Commercial paper s present development in Vietnam:

Most banks provide the service of discounting commercial paper Not active in secondary market: no transactions between individuals: since commercial paper are only backed by the seller s reputation, individuals rarely trade among each other this kind of note because no one trust the oth er completely in business region. Usually used in international transactions: banks act as an intermediary to conduct the purchase and sale between the domestic companies and foreign firms, and the commercial paper is used as a promissory note to guarantee the contract

5. Negotiable certificates of deposit (CD)

Certificate of Deposit is a bank issued, fixed maturity, time interest bearing deposit. It has specific maturity date and interest rate and is negotiable. In US, CD is a bearer instrument which means that there is no records are kept of who owns the underlying property, or of the transactions involving transfer of ownership. Whoever physically holds the bearer bond papers owns the property. In contrast, in Vietnam, there are three types of Certificate of Deposit: registered, unregistered and book registered. Registered and book- registered CD are considered non-bearer instrument for individual and corporate, respectively whereas unregistered CD is bearer inst rument. Certificate of Deposit has many similar characteristics with the savings deposit which is used widely in Vietnam. There are three main differences between these two types of deposit. First, CD can be negotiable which means you can trade give or se ll it to other buyer in the secondary market whereas the savings book can not be negotiable. The second

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difference is that savings book often has more flexible maturity date than CD. In fact, CD has a fixed maturity date that when the bearers want to withd raw the money before its maturity; they will not receive any of the interest and will be have a fine of 10% of the original principal. On the other hand, the savings book has more flexible maturity date which you can withdraw the money before or after the maturity date but still receive the whole principle and interest. Even in the case of termed or fixed deposit which has fixed maturity date, the bearer still receive the lowest interest rate, often the interest rate of demand deposit when they want to with draw the money before the actual maturity date. Therefore, it can be seen that CD is less liquidity than savings book and the bearer of CD often face higher risk than the bearer of savings book. As a results, it bring about the third different that CD often have higher interest rate than savings book. Certificate of Deposit was published in Vietnam on 15/02 to 10/4/2006 by Techcombank in the four big cities of Vietnam: Hanoi, Haiphong, HCM city and Danang. The total amount issued was 300 billion VND. There are two denominations for the investors 5 million and 50 million VND. The maturity date is 11 months and the interest rate is 0.77%/ month. In Vietnam, the bearer can deposit in the banks with USD, VND or EURO denomination. Many banks have also make a commitment to buy back the foreign currency when the customers want to sell foreign currency for VND, such as Maritime bank, ANZ, etc. The denomination for CD deposit in USD/EUR range from $100 $100.000 for individual and from $3000 - $100.000 for corporation. In VND, it ranges from 1 million VND to 1 billion VND. The popular maturities are: 1, 2, 3, 6, 9, 12 months. Starting in 2006, Certificate of deposit is still a new product and not yet developed in Vietnam. In addition, while in most developed countr y like US, the second market is very active, it is still very weak in Vietnam. Some of the reasons underlying this might be lack of awareness, trust and activeness of Vietnamese people. However, many banks have released this new product with the belief tha t this will be a potentially efficient instrument in the money market.

6. Banker acceptances (BA)

Banker s Acceptance is basically a time draft payable to the seller of the good with payment guaranteed by the bank. In Vietnam, according to clause I2, article 20, Law on Credit Institutions, Banker s acceptance is a document made by the credit institution that commits to pay the seller of the goods a promised future payment for its customer (the buyer) when the buyer fail to fulfil the agreement with the seller as specified between two parties. The buyer will then be liable and have to pay back the credit institutions the money they owed. In banker s acceptance transaction, there are often three main subjects:

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- Credit Institution - Guarantee (often the buyer) - Guarantee receiver (often the seller) a. Credit Institutions
According to article 58, Law on Credit Institutions, e eligible credit institutions that have the right to guarantee for their customer include:

State-owned commercial bank Joint-stock commercial bank Branch Banking Joint venture bank Some investment and development banks and other credit institutions that are permitted by the SBV. Moreover, in some special case, SBV can also make the guarantee when the government appointed

In term of the legal subject, the credit institutions need to meet these conditions: They should have the legal status and legal representatives. In bankers acceptance business, only CEO, deputy CEO, director or deputy director can be the legal representatives. - They must be permitted by the SBV in the banker s acceptance business (it is often specified by the government in the establishment license of the credit institutions) b. The guarantee

According to the law, organizations and individuals need to meet these conditions to be eligible for banker s acceptance. The conditions include: Organization and individual that are legally establish and operate in Vietnam and have the legal capacity for civil action. - Organization and individual that have the legal document specified their responsibility when being guaranteed by the credit institutions. - Have the financial capacities for the liabilities based on the asset mortgage, and financial status at the time reported for guarantee. c. Guarantee receiver:

According to the law, guarantee receiver can be thought of the beneficiary, who can receive the future payment from the guarantee as specified between two parties in the contract.

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The process for the Banker s acceptance is quite simple. First, the organizations and individuals that want to be guaranteed by the credit institutions need to submit a file that contains:

A petition for banker s acceptance List of asset mortgage for the banker s acceptance Within 20 day, the credit institutions will tell if it is accepted or rejected.

Then, if accepted, the organization or individual will have to go through procedures for the mortgage and pledge for the guaranteed payment that the credit institution agree to pay for the organizations/ individuals in case they fail to fulfill their responsibility with their partner. After having the legal documents for the mortgage and pledge from the guarantee, the credit institution will then sent the banker s acceptance to the guarantee receiver. In case the organization/individual (the guarantee) fulfill all their responsibilities with its partner (the guarantee receiver), the credit institution will have to give back all the mortgage and pledge. However in case the organization/individual (the guarantee) can not fulfill all their responsibilities with its partner (the guarantee receiver), the credit institution make the payment for the guarantee to the guarantee receiver, then the guarantee will have the liability to pay for that payment plus interest rate as specified by the credit institution. In Vietnam, Banker s acceptance can be used in some fields, according to the clause 2; article 58 of Law on Credit Institutions, banker s acceptance can be used in the following field:

- Contract BA - Bid BA - Warranty BA - Payment BA - Delivery BA Banker s acceptance is especially important in the international trading. In Vietnam, when exporting goods to other country in the world, the most popular and preferable type of payment (especially for medium and small sellers) is L/C. L/C is a special type of banker s acceptance for international trading. Uniform customs and practices relating to L/C are provided by the UCP 600 rules of International Chamber of Commerce (ICC).
Vietnam choose to follow the economy market socialist oriented, therefore Banker s Acceptance is an important money market instrument. However, the laws concerning Banker s Acceptance are still very weak and not yet synchronized. Therefore, the government should make some change and improvement in order to provide uniform and synchronized laws and policies for Banke r s Acceptance.

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