Securities market liberalisation in vietnam
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Securities market liberalisation in vietnam Securities market liberalisation in vietnam Document Transcript

  •   9th Floor, Minexport Building, 28 Ba Trieu, Ha Noi, Viet Nam Tel: 04 62702158 Fax: 04 62702138 Email: mutrap@mutrap.org.vn; Website: www.mutrap.org.vn REPORT SECURITIES MARKET LIBERALISATION IN VIETNAM - KEY ISSUES FOR THE SECURITIES REGULATOR AND THE DOMESTIC SECURITIES COMPANIES ACTIVITY CODE: SERV-2 Prepared by: Andrew Capon Federico Lupo Pasini Duong Thi Phuong Nguyen Thi Thuc Anh Nguyen Van Chi This document has been prepared with the assistance of the European Union. The views expressed herein are those of the author and therefore in no way reflect the official opinion of the European Union nor the Ministry of Industry and Trade 
  •   TABLE OF CONTENTS1 OBJECTIVE OF REPORT ......................................................................................................................................... 4 1.1 Methodology ............................................................................................................................................................... 4 1.2 Structure ...................................................................................................................................................................... 42 EXECUTIVE SUMMARY......................................................................................................................................... 53 BACKGROUND OF SECURITIES MARKET IN VIETNAM ................................................................................ 8 3.1 Supervisory Framework .............................................................................................................................................. 83.1.1 Securities Regulator ................................................................................................................................................ 83.1.2 Securities Law ......................................................................................................................................................... 94 LIBERALIZING THE SECURITIES SECTOR ...................................................................................................... 16 4.1 Liberalizing the Securities Sector in Vietnam .......................................................................................................... 164.1.1 Introduction ........................................................................................................................................................... 164.1.2 Securities as a sub-sector of the broader “financial services sector” – Vietnam’s WTO Commitments .............. 164.1.3 Liberalization of Financial Services in the GATS – The Regulatory Framework ................................................ 184.1.4 The Benefits of Securities Market in the Economy .............................................................................................. 224.1.5 Liberalization of Capital Markets: the Issues at Stake .......................................................................................... 24 4.2 Financial liberalization in ASEAN securities markets.............................................................................................. 314.2.1 Malaysia securities exchange and investor overview ........................................................................................... 314.2.2 Thailand securities exchange and investor overview ............................................................................................ 334.2.3 Indonesia securities exchange and investor overview........................................................................................... 354.2.4 Conclusion on Foreign securities companies in ASEAN markets ........................................................................ 36 4.3 Challenges for the regulator from market development and market opening ........................................................... 364.3.1 Introduction - Adapting to market liberalization................................................................................................... 364.3.2 Review of regulatory powers and effectiveness.................................................................................................... 37 2  
  •   4.4 Challenges for the domestic securities companies from market development and market opening ......................... 554.4.1 Domestic Market Conditions ................................................................................................................................ 554.4.2 External Sector developments: WTO Financial liberalization .............................................................................. 564.4.3 Joint ventures with foreign securities companies.................................................................................................. 564.4.4 Potential new entrants to Vietnam securities market ............................................................................................ 574.4.5 Domestic Securities Companies: Enhancing Compliance with Regulations ........................................................ 584.4.6 Opportunities for domestic companies.................................................................................................................. 624.4.7 Action points for Vietnam securities companies .................................................................................................. 635 RECOMMENDATIONS .......................................................................................................................................... 69 5.1 Recommendations for SSC to address market opening ............................................................................................ 69 5.2 Recommendations for domestic securities companies to address market opening ................................................... 74 5.3 Recommendations to enhance compliance of securities companies ......................................................................... 76 5.4 Other recommendations ............................................................................................................................................ 77References…………………………………………………………………………………………………………………. 72 3  
  •  1 OBJECTIVE OF REPORTIn line with the TOR requirements, and as discussed with counterparts at the State Securities Commission(“SSC”), the objective of this report is to assess, in the context of Vietnam’s post WTO related securitiesmarket liberalization, the challenges posed by this liberalization to both the SSC and to the domesticsecurities companies and to recommend policy changes and action points to enable the SSC and thesecurities companies to prepare for these challenges.For the SSC, we recommend policy changes to strengthen its ability to meet the challenges of marketopening in general and to strengthen its existing regulatory surveillance and enforcement powers inparticular.For the securities companies we recommend how domestic firms can best prepare for the challenge offoreign competition and how they should enhance their compliance with national legislation. 1.1 MethodologyThe report is based on discussions with the local PTF expert at the SSC, with securities companies,market practitioners and other market participants, as well as drawing on the experiences of ASEAN andother international securities markets and regulations and considering the international experience ofbodies such as IOSCO, World Bank, ADB. 1.2 StructureFollowing the Executive Summary below, we begin our study by providing background on the Securitiesmarket in Vietnam, on the institutional and legal context and the market structure.In Section 4 we analyze Vietnam’s WTO commitments regarding the securities sector and the regulatoryframework set out in the GATS; the relevant literature on the benefits of a well functioning securitiesmarket; and the economic implications deriving from the liberalization of the securities market in the lightof the WTO framework and in the context of the much broader discussion regarding the pros and cons ofliberalization of financial services.From this general analysis of liberalization, we then in Section 4 consider the opportunities and threatspresented to the SSC and to the domestic securities by market opening. To assist with this we first drawon the example of neighbouring ASEAN securities markets and the experience of their domesticsecurities companies in the face of similar market opening and increasing foreign competition. Finally, we 
  •  look at the impact of Vietnam market opening to date, what is the effect of competition from foreignsecurities companies already, from the over 20 already established foreign invested joint venturesecurities companies in Vietnam, and what is the likely effect from the potential new 100% foreigninvested securities companies, which will be permitted under the WTO commitments in January 2012.We also consider the challenge of compliance by securities firms with national legislation, assess thecurrent effectiveness and how they should improve their compliance with national legislation in order toprepare for market opening and the anticipated higher compliance standards of foreign securitiescompanies.In Section 5, following this analysis of the challenges and risks of market opening, we makerecommendations for the SSC on how to adapt to market opening and to improve the effectiveness of theprevailing surveillance and enforcement system; we also consider some important steps which domesticsecurities companies can take, if they did not do so already, to develop a strategy to prepare for greatercompetition from foreign securities companies and to improve their compliance with national legislation.The reader should note that in the time available for this report we have focused our study on the equitymarkets rather than the bond market. This is due to the fact that our two core topics, surveillance andenforcement, and the future of the domestic securities companies is more closely linked currently to theequity market (the bond market is currently largely confined to the Government bond market). Howeverfurther development of the bond markets, corporate bonds and convertible bonds is an integral part of theoverall development requirements of Vietnam’s securities markets to broaden the range of capital marketproducts.2 EXECUTIVE SUMMARYThe Vietnam securities market has made considerable progress since 2000, in particular since 2005. Theinstitutional and legal framework is in place and the securities market has grown to over 600 listedcompanies and over US$ 30 billion in market capitalization. These notable achievements have benefitedfrom the strong support of the authorities to develop Vietnam’s capital markets activities.The medium to longer term macroeconomic outlook for Vietnam also looks promising: according toWorld Bank, GDP growth is expected to be in the range of 6.5% to 7.5 % for the period to 2015. Vietnamhas a large population of some 87 million, with a young workforce, and a growing pool of corporate talentand listed companies; the local population, in particular the urban young, has growing prosperity. 5  
  •  International investors already demonstrated significant interest in Vietnam, with an estimatedapproximately US$ 7 billion of foreign indirect investment; this has slowed during the global financialcrisis and is still tempered currently by macroeconomic concerns, however many foreign investors alsobelieve that Vietnam has attractive long term prospects. This foreign capital has already benefitted manyVietnamese companies and foreign investors have helped in some cases to raise standards by introducingbest practice to build the value of their investee companies.Foreign involvement in the securities market is also increasing due to market opening and the arrival offoreign securities companies. In line with Vietnam’s 2007 WTO commitments, foreign securitiescompanies have been permitted to form local joint ventures since 2007 and as a second step in marketopening, from January 2012, 100% foreign invested securities companies will be permitted to establish inVietnam.The SSC faces a number of significant challenges. Market opening will bring the additional challenges ofregulating foreign securities companies, cooperating with foreign regulators and developing a healthymarket with strong local players able to hold their own against foreign competition. The SSC thereforeneeds to address a number of areas including the following areas: strengthen its capacity with modern,empowering IT systems, as well as with more, well qualified staff; more formal and improvedcooperation with domestic and foreign regulators; achieve faster implementation times for consultationand approval of new laws and policies for the securities market; encourage consolidation of theoverpopulated domestic securities companies.For SSC there are considerable challenges in surveillance and enforcement also. SSC has inadequatepowers of investigation and enforcement, resulting in an inability to adequately fulfill its surveillance andenforcement responsibilities. In addition the compliance obligations of securities companies are not wellunderstood or enforced internally, training for securities company staff is required and also closerinspection by external bodies and more accountability for senior management. Administrative penaltieshave been too low, so the deterrent has not been effective; with recent changes to increase penaltyamounts and plan to introduce “ill gotten gains” recovery, this may start to improve, SSC will need tomonitor and if not effective consider further reinforcements.. A full set of recommendations for SSC formarket opening and for surveillance and enforcement is in Section 5.For domestic securities companies this market opening will bring both opportunities and threats.Opportunities include know how transfer of products, technology and service quality, improving the skillsand experience of Vietnamese staff; also possible partnership agreements between foreign firms anddomestic firms. Foreign securities companies will bring new foreign investors and they can also act as a 6  
  •  catalyst for faster domestic market changes, such as introduction of new products, with their experienceof more complex products such as derivatives, which can assist market development. Looking at theexample of other countries the entry of more foreign securities companies has resulted in greatercompetition which in turn has had the benefit of raising the standards and efficiency of the whole market.The counter side of this is that greater competition is a threat for the domestic securities companies. Theyare now faced with a number of strategic choices which they need to evaluate in order to fix anappropriate strategy. This includes questions such as if they should seek a foreign partner, maintain thestatus quo or if the shareholders wish to sell and find a new buyer. The experience of ASEAN and othercountries shows that as the securities market opens up to foreign competition, in some cases the domesticcompanies form equity partnerships with foreign securities companies, in other cases they prefer topursue their own strategy under the control of domestic shareholders. The past experience indicates thatthere is room in the market for both good domestic and foreign securities companies, however a proactivestrategy is better than a reactive one.Domestic firms therefore need to decide now how best to operate in this more competitive and openmarket. They should develop their strategy and business plans, inter alia assessing and securing theirmedium term funding needs, deciding if they wish to explore the possibility of cooperating with a foreignsecurities company and if so which type of cooperation they would prefer, for example equity or nonequity..At the same time they should strengthen their infrastructure by improving corporate governance andcompliance, risk management and controls, and code of conduct, in order to build a more stablefoundation to their business, less susceptible to the risk of unexpected losses, loss of customer goodwill orother reputational problems; this includes improving the compliance with national laws and internalregulations to achieve a better corporate reputation and brand name. On the compliance front, seniormanagement need to lead these initiatives, ensure proper training of staff is done so that their staffunderstand what compliance is, have a general understanding of the firm’s compliance obligations, aswell as a deeper understanding of their own department and personal responsibilities are. Ourrecommendations for the domestic securities companies for the market opening challenge of foreignsecurities companies and for enhancing their compliance is in Section 5. 7  
  •  3 BACKGROUND OF SECURITIES MARKET IN VIETNAM 3.1 Supervisory Framework 3.1.1 Securities RegulatorThe State Securities Commission (SSC) is the primary regulatory authority over the capital markets andtheir participants.Established in November 1996 SSC is responsible for the organization, development and supervision ofthe country’s securities market. The history of the SSC is not within the scope of this study, it is coveredalready in the previous MUTRAP report titled “The comprehensive strategy for service sectordevelopment to the year 2020 (CSSSD) with a vision up to 2025”.The Securities Law (see below) has stipulated the SSC being a part of the Ministry of Finance (MOF), notan independent body. Under this model of operation, the main functions of the SSC are as follows(according to the Decision 63/2007/QD-TTg dated 10th May 2007 by the Prime Minister):The main functions of the SSC are as follows (according to the Decision 63/2007/QD-TTg dated 10thMay 2007 by the Prime Minister): - Formulating and implementing strategies, plans, policies and projects to develop the securities market in Viet Nam; - Drafting and enforcing regulations and guidelines related to securities and securities markets; - Working out regulations on organization and operations of organized securities trading market in Viet Nam; - Licensing and enforcing regulations over the operations of securities companies, securities advisers, securities investment funds, and securities depositaries & custodians; and their practitioners; - Exercising surveillance, inspection and enforcement and examining the compliance of securities regulations by securities issuers, listed organizations, securities business, services providers and investors in the market. - Training and licensing authorised practitioners for the securities industry.In its supervision role, SSC is supported by Ho Chi Minh Stock Exchange (HOSE) and Hanoi StockExchange (HNX), which act as frontline regulators of the exchanges and the market intermediaries. 8  
  •  Functions and responsibilities of the SSC can be seen in the Securities Law and other under legaldocuments.Some specific functions and responsibilities of the SSC include: - Decision No.112 September 2009 which defines the functions, tasks, powers and organizational structure of SSC - Decision No.127 December 2008 regarding supervision of the securities market - Decision No.27 April 2007 regarding the organization and operation of securities companies, as amended and supplemented by Decision No. 126 2008/QD-BTC of December 26, 2008 3.1.2 Securities LawVietnam has experienced increasing interest in its securities market by domestic and foreign investorsduring the last decade, in particular from 2005 onwards, and the sharp increase in securities marketlistings and trading has been accompanied by a number of related regulatory challenges in order todevelop the market in an orderly and professional manner. In this context, the Vietnam Government, withthe objective of strengthening securities regulation and in anticipation of WTO requirements, introducedThe Securities Law (SL) in 2006, made effective in 2007.The legal framework on the securities market in Vietnam includes the SL (Securities Law) and other legaldocuments (in total 37 up to 2010). SL is the main legal basis for the regulation of the Vietnam securitiesmarket. It comprises 37 legal documents. This is generally considered by the legal and marketpractitioners with whom I spoke to have marked a significant improvement from the previous regulationand to provide a more solid legal framework for the securities sector. The Securities Law takes account ofthe International Organization of Securities Commission (IOSCO) principles, placing emphasis on marketsurveillance and supervision, transparency and disclosure, and investor protection.In an attempt to keep pace with market developments, a number of improvements to the SL have beenformulated by SSC, with market consultation, such as private placement and tender offer, and submittedfor the approval process through the MOF up to the Government. The amendment of and supplements tothe Securities Law were adopted by the National Assembly meeting session in 24 November 2010.Legal framework preparation for WTOWe also understand from previous reports by experts and our discussions with the SSC that SL fulfilsVietnams commitments under its 2007 World Trade Organization (WTO) accession. 9  
  •  In terms of legal framework preparation the Securities Law was being prepared in anticipation of WTOrequirements and so it took into account the WTO requirements. A previous MUTRAP report,“Assistance to the Ministry of Justice and other relevant Ministries and Agencies to scrutinise nationallegislation against GATS obligations and commitments”, dated June 2008, has stated that domestic legaldocuments on securities services promulgated in 2006/07, in principle, are appropriate with the WTOcommitments of Vietnam and there are no more amendments that need to be made in these regulations.At present, Decision No. 27 and Decision 35 on Regulation on organization and operation of securitiesfirms, fund management companies provide guidelines for implementation of the articles of Decree No.14. However, the scope of these documents is limited to the organization and operation of domesticsecurities firms and fund management companies. Therefore, to ensure the transparency as well asprudential management in this sector, this report contains a recommendation by local experts for thenecessary promulgation of an implementation document on the establishment and operation of 100%foreign invested securities companies, fund management companies and branches of foreign securitiesfirms and fund management companies with time of execution of 11th January 2012, as the currentframework is not sufficiently detailed; for example, there are some aspects, which would need moreclarification, such as translation, authentication or certification of Embassy or Consular applicationdocuments. This document would help the mode 3 market access commitment implementation.MARKET STRUCTUREThe equity market is built around the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange(HNX). It is supported by the Vietnam Securities Depository (VSD) for clearance and settlement oftrades.Key market intermediaries include: 105 securities companies (of which there are 103 securities brokersand 2 firms provide investment advisory services only) and 46 fund management companies. The numberof securities companies is high relative to other markets and to the overall market capitalization size.Many new domestic entrants were attracted by the strong bull market phase to apply for a securitiescompany licence, the sharp rise in the number of new securities companies occurred mainly in 2006 (with biggest number of new registered securities firms in that year). This was in retrospect an unfortunatetiming in view of the sharp fall in the VN INDEX in early 2007 and the ensuing global financial crisis.Figure 1: Number of securities companies and fund management companies 10  
  •   120 102 105 100 78 80 60 55 SC 43 46 FMC 40 25 18 20 12 13 14 7 8 9 6 1 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: SSC July 2010Note: (*) 1 Securities firm was de-licensed (licence revoked)There are now many foreign securities companies in joint ventures with local partners. These jointventures, limited to a 49% stake, have been allowed since 2007 under Vietnam’s WTO commitments. Wewill consider in more detail the foreign securities companies and the opportunities and threats which theypresent, in the next Section.There are a number of licensed businesses for which securities companies can apply, includingunderwriting of new issues of securities, which requires a larger capital base, total capital requirement forall business area is VND 300 billion. The number of trading accounts opened by investors has risenstrongly from nearly 3,000 to close to 1 million between 2000 and 2010, but still a low percentagecompared to the 87 million population, offering good future growth prospects.Figure 2: Number of investor accounts as of 31 December (annually) 11  
  •   Year 2005 2006 2007 2008 2009 30/9/2010Total accounts 31.241 86.184 305.298 531.428 822.914 1.003.297at securitiesfirmsSource: SSC November 2010In terms of current business mix the core business of the domestic securities companies is brokeragebusiness, some have a relatively high weighting to proprietary trading and some are also developing theirinvestment banking services, such as private placement, IPO advisory and M&A; in the latter case, thestrategic rationale towards advisory work is to bring in new customers, diversify revenues towards the“full service” model and raise brand awareness, even if it is a relatively low contributor (i.e. typically inlow single digits %) to revenues at the moment.As for financial innovation, market practitioners are pushing for a faster launch of new products andmarket innovation, pushing for, inter alia, margin lending, same day buying and selling, multiple tradingaccounts for investors. SSC has been coordinating discussion and approval, however the process takeslonger than the market would like due to the nature of the approval process itself.There is also a call for new products such as derivatives. Introduction of derivative products is likelysome years away in terms of the required process of building expertise, investing in the necessarytechnology and infrastructure and expertise training of practitioners, as well as drafting and approving thelaws and regulations.The number of listed companies has witnessed rapid growth. HOSE and HNX listed approximately 548companies at July 2010, 245 on HOSE and 303 on HNX. 12  
  •  Figure 3: Number of listed companies 700 649 600 500 457 400 Total 338 368 300 250 281 HOSE 263 193 170 HNX 200 194 138 168 106 112 100 11 20 22 26 41 87 5 20 0 22 26 0 11 0 0 0 32 9 0 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: SSC July 2010There are two stock exchanges, HOSE and HNX. It is unusual to have two exchanges, in view of therelatively small size of the total Vietnam securities market. This has had some disadvantages to date,such as competition between the two exchanges for some new listing clients, also higher costs forsecurities firms of dealing with two separate SE entities. However, it appears that the two exchanges willremain for the time being and the SSC plan is for HOSE to reinforce its role as the market for larger sizestocks (above VND 80 billion) and HNX to be the market for small and medium size companies (belowVND 80 billion), for UPCOM and for Government bonds. This is not strictly demarcated at the momentwith HOSE and HNX competing for the listing business of some companies.UPCOM is the new market, started in 2009, for smaller companies. This is a good development, therationale for the market is to encourage OTC stocks to list on UPCOM, where the shares will beregistered and cleared by VSD, where they can be regulated and provide a safer and more transparentinvestor market, reducing the risks for investors and for market reputation from the unregulated OTCmarket where there are no investor protections. The OTC market in Vietnam has traditionally been verylarge and active, so encouraging the best companies to enter the regulated securities markets should fosterincreasing an orderly market and trading in UPCOM or listed shares is less risky for investors. 13  
  •  The market capitalization of the HOSE, after a slow start in the 2000 to 2005 period, has taken offstrongly from 2006. The HNX, itself starting in 2005 accounted for some 20% of the combined marketcapitalization in July 2010 of VND 650 trillion. (US$ 33 billion), as can be seen in Figure 4 below:Figure 4: Market capitalization Billion VND Market Cap Year GDP Total Market Cap HOSE HNX 2000 441,646 1,046 1,046 2001 481,295 1,605 1,605 2002 535,762 2,540 2,540 2003 613,443 2,408 2,408 2004 715,307 3,913 3,913 2005 839,211 7,472 1,884 9,356 2006 974,266 147,967 73,189 221,156 2007 1,143,275 364,425 130,122 494,547 2008 1,477,717 169,346 55,174 224,520 2009 1,645,481 495,094 123,547 618,641Source: SSC July 2010This now accounts for some 38% percent of the 2009 GDP, as per Figure 5 below.Figure 5: Market capitalization per GDP MC/GDP 2009 37.60% 2008 15.19% 2007 43.26% 2006 22.70% 2005 1.11% 2004 0.55% 2003 0.39% 2002 0.47% 2001 0.33% 2000 0.24% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 14  
  •  Source: SSC July 2010Trading volumes have grown considerably over the same period from 2006, though with a dip in 2008due to the global financial crisis.Figure 6: Trading volumes for HOSE and HNX 1,800,000,000 1,600,000,000 1,400,000,000 1,200,000,000 1,000,000,000 HOSE 800,000,000 HNX 600,000,000 400,000,000 200,000,000 0 2005 2006 2007 2008 2009Source: SSC July 2010Trading volumes have averaged around US$ 120 million daily average in 2010, however daily volumeshave sometimes fallen much lower in the last few recent months, amid macroeconomic concerns andpressure on the dong. The VN index stood around the 450 level at mid November. The market PE at midNovember 2010 is currently below 10x and is considered by many market observers to be attractivelypriced, in view of the forecast double digit growth in profit of many Vietnamese corporates for 2011, aswell as compared to the higher PE valuations of other ASEAN markets such as Thailand, Indonesia andPhilippines.Before turning to consider the challenges for the SSC and for the domestic securities companies, we willreview Vietnam’s WTO commitments and consider financial liberalization in general, as this is a keyissue for the development plans of the SSC and for the domestic securities companies. 15  
  •  4 LIBERALIZING THE SECURITIES SECTOR 4.1 Liberalizing the Securities Sector in Vietnam 4.1.1 IntroductionUntil very recently most of the academic discussions on the benefits of financial services liberalizationwere focused only on the implications of the entry of foreign banks and, with a much more limited space,on the effects of the opening of insurance services. In this context the role of securities firms in theprocess of opening of the financial services market was not subject to a comprehensive academicinvestigation and was usually researched in the framework of the much wider financial services sector.Similarly, there were relatively few studies that focus on the wider benefit of a well functioning capitalmarket compared to what happens with the banking sector. Indeed, while studies on the effects of theopening of the banking sector have been conducted since the early fifties, it is only until very recently thatthe relationship between economic growth and securities markets development has been studied and withthis the effects that the opening of the domestic market to foreign investors bring to the economy.In order to understand what the liberalization of the domestic securities market entails, it is of the outmostimportance to set a framework that will guide the reader in understanding the economic and regulatorycontext in which the liberalization will take place. In this respect, it is worth a reminder that liberalizationis a threefold process in which, although the economic issues plays a substantive role in determining thefinal outcome of the process, the legal and political economy framework determine the boundaries thatwill enclose the domestic reform and that will substantially determine its trajectory.This section is divided into various paragraphs. In the first part will be analyzed Vietnam’s WTOcommitments regarding the securities sector and the regulatory framework set out in the GATS. In thesecond part, it will be briefly analyzed the relevant literature on the benefits of a well functioningsecurities market. In the third part it will be analyzed the economic implications deriving from theliberalization of the securities in the light of the WTO framework and in the context of the much broaderdiscussion regarding the pros and cons of liberalization of financial services. 4.1.2 Securities as a sub-sector of the broader “financial services sector” – Vietnam’s WTO CommitmentsThe first issue is to identify precisely the kind of services that are covered under the umbrella of“securities” in the schedule of commitments of Vietnam signed on 12 January 2007. In the ServicesSectoral Classification List provided by the WTO Secretariat, in the broader macro sector of FinancialServices there is no independent subsector for Securities. Rather, all the services that are usually 16  
  •  associated to the securities sector are grouped into the banking and other financial services, reflecting themodern business model of modern financial conglomerates that do not limit themselves only to purebanking activities but providing also asset management, trading and advisory services.In this context the GATS schedule of commitments of Vietnam emerges for its peculiarity, Vietnam beingone of the few countries that explicitly divided its commitments in FS between insurance, banking andsecurities. While some of the services scheduled do not overlap, in few instances some subsectors ofbanking and securities are scheduled both under banking as well under securities.Figure 7: Vietnam’s GATS Commitments on Securities Mode of delivery (1) cross-border supply (2) consumption abroad (3) commercial present (4) present of natural person Sectors & Sub-sector Limitations on market Limitations on Additional commitments access national treatment C. Securities (1)Unbound, except (1)Unbound. services C(k) and C(l). (2) None. (f) Trading for own account or for (2)None. account of customers, whether on an (3) Upon accession, (3)None. exchange, in an over-the-counter foreign securities market or otherwise, the following: service suppliers shall be permitted to - Derivative products incl. futures and establish representative options; offices and joint - Transferable securities; ventures with Vietnamese partners in - Other negotiable instruments and which foreign capital financial assets, excluding bullion. contribution not exceeding 49%. (g) Participation in issues of all kinds of securities incl. under-writing and After 5 years from the placement as an agent (publicly or date of accession, privately), provision of services securities service related to such issues. (4) Unbound, suppliers with 100% except as indicated foreign-invested capital in the horizontal shall be permitted. (i) Asset management, such as section. portfolio management, all forms of 17  
  •   collective investment management, pension fund management, custodial For services from C(i) depository and trust services. to C(l), after 5 years from the date of accession, branches of (j) Settlement and clearing services foreign securities for securities, derivative products, and services suppliers shall other securities-related instruments. be permitted. (k) Provision and transfer of financial (4)Unbound, except as information, and related software by indicated in the suppliers of securities services. horizontal section. (l) Advisory, intermediation and other auxiliary securities-related excluding (f), including investment and portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy (for other services under (l), refer to (l) under banking sector). 4.1.3 Liberalization of Financial Services in the GATS – The Regulatory FrameworkThe process of opening of domestic markets to foreign competition is called liberalization. While thiseconomic choice is completely independent from any legal commitment at the international level, when acountry chooses to embark into the process of progressive liberalization in the ambit of its WTOmembership, this course is subject to a number of rules and conditions that must be respected. First of all,it must be said that the law of the WTO applied to the services sector is enshrined in the provisions of theGeneral Agreements on Trade in Services (GATS). Under this set of rules, Vietnam unilaterallycommitted to open its domestic market under certain conditions and according to various deadlines.Furthermore, Vietnam, by the sole fact of being Member of the WTO, it is obliged to comply with thehorizontal and specific obligations arising from the GATS. This peculiar set of rules is briefly explainedhere below:In the GATS the supply of a service can be performed through four modes (the four modes of supply),which are subject independently one from each other to the Market Access and National Treatment 18  
  •  commitments. This means that while the provision of a service under mode-1 could be prohibited, thiscould not be the same under mode-3.The four modes of supply distinguish the service by the way it is provided to the customer. The fourmodes are described in Article I.2 of the GATS and are the following:  Mode-1 (Cross Border): In this case the service is supplied by a service provider located in country A to a consumer located in country B; in the case of securities this mode could take the form of a Security company located in Hanoi that offers asset management services to a consumer located in Malaysia.  Mode-2 (Consumption Abroad): This is the case of a consumer from Country B that travel to Country A to buy a service provided by a service supplier of country A; this could be the case of a Malaysian consumer that, while travelling in Vietnam, buys from a Vietnamese securities company a financial service.  Mode-3 (Commercial Presence) The most common of all the modes of supply. A service provide from Country A establish a commercial presence in Country B. In this mode, a securities company from Malaysia decides to enter the Vietnamese market and establish here a subsidiary or a branch.  Mode-4 (Movement of Natural Person): A service provider from Country B travels to Country A to supply the service; a consultant from one bank in London travels to Hanoi to offer a service to a local consumer.The Most Favoured Nation ClauseUnlike the MFN clause on trade in goods, which does not apply to subsidies1, Article II of the GATSimposes on the Members the obligation to “accord immediately and unconditionally to services andservice suppliers of any other Member treatment no less favourable than that it accords to like servicesand service suppliers of any other country”2, provided that they did not inscribe an exemption in theirschedule of commitments. The potential of the MFN obligation is limited by Paragraph 3 of the GATSAnnex on Financial Services that allows a departure from the MFN obligation regarding mutual                                                            1 Subsidies are internal measures outside the coverage of the MFN clause, which covers only measures at the borderin connection with importation or exportations. See GATT, Article I.2 GATS, Article II 19  
  •  recognition agreements on financial services. Those agreements can comprise Memorandum ofUnderstanding on capital adequacy, on cross-border banking supervision and also on safety-net systemsand insolvency procedures3.Transparency and Domestic RegulationsArticle XVI of the GATS deals with Market Access. This provision, similarly to National Treatment,applies only to the sectors scheduled in the commitments and to the limitations inscribed. In this regard,unless the member has inscribed the limitation in its schedule, the Market Access provision prohibits sixkinds of measures:(a) Limitations on the number of service suppliers whether in the form of numerical quotas, monopolies,exclusive service suppliers or the requirements of an economic needs test;(b) Limitations on the total value of service transactions or assets in the form of numerical quotas or therequirement of an economic needs test;(c) Limitations on the total number of service operations or on the total quantity of service outputexpressed in terms of designated numerical units in the form of quotas or the requirement of an economicneeds test;(d) Limitations on the total number of natural persons that may be employed in a particular service sectoror that a service supplier may employ and who are necessary for, and directly related to, the supply of aspecific service in the form of numerical quotas or the requirement of an economic needs test;(e) Measures which restrict or require specific types of legal entity or joint venture through which aservice supplier may supply a service; and(f) Limitations on the participation of foreign capital in terms of maximum percentage limit on foreignshareholding or the total value of individual or aggregate foreign investment.National TreatmentThe national treatment clause applies only to the specific sector and modes of supply listed in theschedules of commitments of each Member, and obliges member to “accord to services and servicesuppliers of any other Member, in respect of all measures affecting the supply of services, treatment no                                                            3 S. J. Key, “Doha Round and The Financial Services Negotiation”, The AEI Press, Washington D.C, 2003, p. 51 20  
  •  less favourable than that it accords to its own like services and service suppliers”.4 At paragraph three itclarifies: “Formally identical or formally different treatment shall be considered to be less favourable if itmodifies the conditions of competition in favour of services or service suppliers of the Member comparedto like services or service suppliers of any other Member”. Under this provision, a Member would beobliged to apply the same procedures that apply to its domestic securities firms also to foreign firms. Inthis respect the explanatory note at GATS Art. XXVIII clarifies that the national treatment obligationcannot be extended to any other parts of the supplier located outside the territory where the service issupplied5. This limits the territorial application of the national treatment only to the territory of theMember. Therefore, this provision would affect only foreign firms present in the host state territory(mode 3 liberalization).The Prudential Carve-OutThe Annex on Financial Services is a specific agreement to the GATS that clarifies existing GATS rulesas they apply to the specificities of the financial services sector. Indeed, an unregulated liberalization ofthe financial services sector would have in some cases a negative effect on macroeconomic stabilitybecause it would not allow to Member that degree of regulatory freedom necessary to maintain thesoundness of the financial system necessary to cope with market failures. Thus, the regulatory constraintsentailed in the trade of financial services products, as regulated under the GATS, obliged negotiators toinscribe in the Annex a provision that would prevent that a strict obedience to the rules of the GATSwould undermine the stability of the financial system. For this reason it was inserted in the Annex aprovision that would guarantee the freedom of the Members to adopt any measure apt at maintaining thesoundness of the financial system despite its possible incompatibility with the provisions of the GATS.This provision is commonly known as the “prudential-carve out” and it provides as follows:“Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from takingmeasures for prudential reasons, including for the protection of investors, depositors, policy holders orpersons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity andstability of the financial system. Where such measures do not conform with the provisions of theAgreement, they shall not be used as a means of avoiding the Members commitments or obligationsunder the Agreement”6.                                                            4 GATS, Article XVII.(1)5 Note ad Art. XXVIII.6 Annex on Financial Services, Paragraph 2(a) 21  
  •  In this respect, any domestic measure that might be inconsistent with Article XVI or Article VI of theGATS can be none the less justified on prudential grounds once it is proven that it has been adopted toaccomplish prudential objectives. In brief, this clause operates as an escape clause that derogate to thegeneral obligation of the GATS, based on the prevalence of macroeconomic stability against the positiveeffects of trade liberalization.Hence, when assessing the legitimacy of a measure to banks or securities firms, the carve-out operates asan overarching principle that imposes a preliminary evaluation of the economic objectives behind themeasure. In spite of the simplicity of the approach adopted in this provision, there are a number ofimplications that render particularly complicated such analysis. In fact, as some authors suggested7, theprudential carve-out suffers from an intrinsic ambiguity, especially in the definition of the benchmark onwhich evaluate what consists a prudential measure. In this regards, it seems unclear whether the statesretain a full control over the definition of prudential measures or they should be linked to other authoritiesbeyond WTO, such as the Basel Committee on Banking Supervision or the IOSCO. Another majorambiguity consist in the fact that in paragraph II there is no necessity test to assess the degree ofprudential protection beyond which the subsidy would be considered a protectionist measure. 4.1.4 The Benefits of Securities Market in the Economy8The role of capital markets in the economy is still a matter of debate. Most of the literature demonstratesthat a coordinated and safe development of the stock market contributes positively to economic growth byincreasing and improving the allocation of savings and investment. In this respect, it has been showed thatcapital markets and all the various financial instruments associated with the development of capitalmarkets can raise domestic and personal savings levels and contribute to a more efficient allocation ofthose savings, even in less developed economies (Engberg, 1975). Another important benefit of capitalmarkets is that it constitutes a liquid trading and price determining mechanism for a diverse range offinancial instruments. This allows risk spreading by capital raisers and investors and matching of thematurity preferences of capital raisers (generally long-term) and investors (often short-term), that in turnstimulates investment and lowers the cost of capital, contributing in the long-term to economic growth.                                                            7 Joel Trachtman, “Addressing Regulatory Divergence Through International Standards: FinancialServices”, in P.Sauvé & A. Mattoo (eds), Domestic Regulation and Services Trade Liberalization, The World Bank, WashingtonDC, 2003, p 30.8 This paragraph largely draws on: J. Irwing, Regional Integration of Stock Exchanges in Eastern and SouthernAfrica: Progress and Prospects, IMF Working Paper, 2005 22  
  •  There are other benefits as well. For example, development of other parts of the financial system canbenefit from the existence of an active securities market because a well functioning and competitivesecurities market will stimulate competition in other commercial banks in the provision of debt financing,thus forcing the banks to improve their efficiency and service levels, as well as providing the banks with ameans to securitize their debt and better manage the maturity watch and risk profile of their balancesheets. And beyond the financial sector, the success of privatization programs depends to a degree on theavailability of secondary markets to allow investors to liquidate their holdings at a time of their choosing,thus making their initial investment more attractive9. Furthermore, a well functioning capital market, byproviding a means of trading the ownership of firms (shares) without disrupting the operating andproductive processes within those firms and by providing a way for investors to diversify their portfolioscan have beneficial spillovers to other sectors of the economy and therefore have a positive effect on theoverall economic growth (Levine, 1990).Other researches, in contrast, argued that Securities market development can producing economicinstability and adversely affecting savings allocation and the reallocation of existing real wealth anddisrupt economic growth in least developed countries. For instance, Hamid and Singh (1992) found intheir empirical studies of developing economies that, while large corporations “clearly” benefited fromstock market activity, the host economy as a whole “gained little” because, in many cases, investment inportfolio shares replaced bank savings, with no increase in the economy’s aggregate savings orinvestment.Another important question is whether the development of the securities market has the same benefits thatthe development of the banking sector and whether the two are complementary to each other. There alsohas been considerable lack of consensus within the literature on the appropriate priority that should begiven to stock market development within overall financial and economic development. Levine andZervos (1995, 1996) suggested that banks and stock markets have a complementary relationship incontributing positively to economic growth. Arestis, Demetriades, and Luintel (2001) conclude that bothbanks and stock markets could potentially promote economic growth, albeit with banks having strongereffects.It is widely accepted that much of the outcome of capital market development lies in the regulatory,macroeconomic and governance framework set out by the regulators. In this regard, a sound and stablemacroeconomic environment is a critical prerequisite to the proper functioning of a stock market and the                                                            9 R. Pardy, Institutional Reforms in Emerging Securities Markets, World Bank working paper, 1992. 23  
  •  government pays a central role in facilitating a healthy growth of the market in developing countries,beginning with laying solid legal and institutional foundations, followed by supervising the market toensure its efficient, fair, and stable operation. Many analysts have also stressed that building institutionalcapacity is a key element in successful securities market development (Calamanti, 1983; Chuppe andAtkin, 1992; Pardy, 1992; Bekaert, 1993). Indeed, securities markets are highly susceptible tomanipulation and other practices which distort pricing and allocation decisions, and have a negativeimpact on investor confidence so that the supply of funds to the market is reduced. Securities markets alsorapidly transmit external shocks and which may have little or no relation to the domestic economy butsimply reflect the mood of the international securities market. Another important issue has to do with theinformation asymmetries that can jeopardize the development of securities markets. In this respect,regulations such as disclosure requirements for public companies, complemented by good accountingstandards, along with credible contract enforcement and restrictions on the intermediaries licensed toparticipate in trading are extremely important. For this reasons, it is of outmost importance that regulatorslay down a prudential regulatory framework capable to absorb any negative externalities of securitiesmarket development (Pardy, 1992). Bekaert (1993) included high and variable inflation rates andexchange controls among the major economic impediments to equity market development and integrationglobally.Also foreign institutional investors have a role for in facilitating securities market development since theactivities of these investors—which tend to be less affected by informational asymmetry than individualinvestors—can improve information flows about company prospects.Furthermore also traditional factors such as low stock exchange turnover rates, the small number of localinvestors, the small number of listed securities, and a limited number of potential issuers can also posesignificant impediments to the development of securities markets in less developed economies. Calamanti(1983) found that the larger companies that could qualify for a listing tended to be mostly financed byforeign capital, further impeding activity on the exchange. Even those local companies that would qualifyfor a listing were reluctant to do so for fear of losing control of ownership/management. Among themeasures she recommended to address these traditional impediments was the promotion of institutionalinvestors, along with improved regulatory, disclosure, and institutional arrangements. 4.1.5 Liberalization of Capital Markets: the Issues at StakeLiberalization is the decision of the government to relax regulatory and other kind of measures thatprotect a certain sector of the economy from foreign competition in its domestic market. The reasons thatled to that decision usually rely on the general benefits associated with a free market. As it was briefly 24  
  •  mentioned at the beginning of this chapter, the process of opening the domestic market to foreigncompetitors is threefold, as the political economy of free competition requires the adoption of variouseconomic, legal and political reforms.In the case of financial services, such process is rendered even more complicated by the intrinsic complexnature of financial services and by their pivotal and crucial role as the “engines” of modern economies. Inorder to understand the complications deriving by the entry of foreign financial institutions in the hosteconomy is to bear in my that F.I. while providing useful capital to the economy could in some cases besubject to market failures that would be likely to impact severely the economy. Indeed, the liberalizationof financial services stands in the middle of a triangle made by trade in financial products, capitalliberalization and the need of prudential regulations. In this respect the decision of a government to easeprotectionist measure to liberalize its FS sector must take into account the two other variables (capitalliberalization and need of prudential regulations). In many cases what could be considered as a barrier tofree trade could be nonetheless justified under prudential grounds.Figure 8: The Links Between Financial Services Trade, Capital Flows and Financial SectorStability10                                                            10 M. Kono and L. Schuknecht, Financial Services Trade, Capital Flows and Financial Stability, WorldTrade Organization, Geneva, 1998, p. 11. 25  
  •     Capacity  - Transparency and information - Regulation & supervision  - Infrastructure & market  development, risk management          Capital flows  Financial Financial ‐  Quantity services trade sector  - Structure (term, instrument) stability  - Volatility           Efficiency - Competition  - Technology transfer  - Skill transfer & development     The liberalization of the securities sector (the process of removing regulatory barriers to allow foreigninvestors to enter into the market) carries many benefits to the domestic economy. First of all, the current 26  
  •  literature argues that that a deeper financial sector will stimulate economic growth as the increasedliquidity brought by new investors will provide a new fuel in the economy. Second, bigger and betterstructured foreign securities companies, once entered into the market will be more likely to bring theirclients base and thus attracting more easily foreign capital into the host market. This in turn will havebeneficial effect to the economy as it will divert capital to local industries especially those in need to andasset market. Furthermore, once they are allowed access, foreign investors will exploit the benefits ofdiversification and will consequently drive up domestic equity market values; In this respect it has beenargued (BH and Henry 2000) that the cost of capital falls subsequent to major regulatory reforms thatpermit foreign investors access to domestic equity markets.As for all the other financial services, the entry of foreign firms will raise the competition among firms,and therefore raise the efficiency and the standards of compliance with international regulations.Arguably, foreign firms will adopt more advanced technology and management techniques that willpromote greater innovation among firms and more efficient operations and processes. Finally, as foreigninvestors may demand improved corporate governance and transparency in these countries, liberalizationmay reduce the wedge between costs of external and internal financing at the firm level, stimulatingcorporate investment (see Love, 2000).Why Countries Liberalize?There are a number of reasons that push towards greater liberalization in financial services.  New entrants will enhance the competition between firms. The increased competition will have a number of collateral effects in the market. First, the increased number of firms can allow economies of scale and will allow greater specialization based on comparative advantage. Specialized institutions will then offer better tailor made financial services to the consumers. Second, the increased number of firms will reduce the price and the costs of financial products and services offered. Third, the vast spectrum of products available could in some case allow big financial firms to benefit of economies of scope and therefore offer a wide range of services that would not be available otherwise.  Increased competition from more experience and better-managed foreign financial services companies will allow in the long-term transfer of skills to Vietnamese personnel. Furthermore, financial institutions will be forced to care more about consumer’s needs such as better investment advice, thus leading in the long term to improved quality of the final service.  Foreign players will bring in the long-term transfer of technology and knowledge that will benefit the domestic sector. 27  
  •    Increased number of available services and the emergence of new available financial instruments will allow companies to better structure their investment portfolio and find a good combination of bonds, loans, equity and other products to finance their projects.  Need to increase foreign investment and the need to have large amount of capital to boost the development.  There is a growing body of literature that suggests that liberalization of financial services will promote better macroeconomic policies. Indeed, given the critical nature of financial services trade and the need to balance precautionary measures with the access to new capital, the role of macroeconomic policies is crucial to ensure that the benefit of liberalization are not offset by market failures.Drivers of Liberalization  Technological and managerial innovation and management and technology transfer.  General globalization and interdependence of economies.  Need of foreign firms to seek new markets and subsequent political pressure to liberalize coming from WTO, IMF and in FTAs  National development priorities and the use of liberalization as a tool to enhance the competitiveness of the domestic securities sector.  Need of liberalizing countries to increase foreign investment and the need to have large amount of capital to boost the developmentProblems Usually Associated with LiberalizationIn some cases, a number of developing countries experienced banking sector problems following theadoption of liberalization policies or following the adoption of “light” regulatory policies. Most of thesecrises were associated with banking or monetary crises and given the devastating effects that such criseshave on the economic system, many have argued that financial sector liberalization will lead to financialinstability.Indeed, while it is true that financial crises can have a highly negative impact on the economy, it isquestionable the direct and unequivocal link between financial liberalization and systemic crises.The relation between financial stability and financial services liberalization is usually depended on somevariables that would determine whether the decision to open the domestic sector would bring additionalbenefits or would worsen pre-existing problems. Most of the commentators agree that financial sectorproblems have usually their causes in unsound macroeconomic policies, inadequate government 28  
  •  regulation and supervision, and inappropriate intervention in financial markets (Galbis, 1994; Harris andPiggot, 1997; Jacquet, 1997; various BIS publications).For instance, easy monetary policies can encourage excessive foreign exchange exposure of banks orimprudent lending. Furthermore, as financial services liberalization requires the opening of the market toforeign competition and foreign capital, poor performance of domestic financial sector provider will pushthem out of the market. In addition to that, given that liberalization of the capital account would attractcapital inflow, in case of crisis or loss of confidence the abrupt outflow of foreign capital could posesubstantial monetary and financial instability.In order to offset the risks associated with opening of the financial services sector, principles have beendeveloped to minimize the likelihood of financial and monetary instability. Such principles require:  Macroeconomic stability;  Stability-oriented monetary policies;  Adoption of structural reforms;  Increased prudential supervision of financial institutions;  Adoption of liberal market entry and market exit rules in case of bankruptcies;  Adoption of adequate prudential safety nets in case of systemic crisis;  Improved management techniques and development of more advanced technology. International Monetary Fund: Principles of Financial Sector Liberalization • “Liberalization is best undertaken in the context of sound and sustainable macroeconomic policies. • Capital market development-cum-financial stability hinges on establishing the institutional infrastructure for controlling both macroeconomic and financial risks. Financial system reforms that support and reinforce macroeconomic stabilization and effective conduct of monetary and exchange rate policies should be accorded priority. This principle entails living priority to central banking reforms to develop monetary policy instruments and money and foreign exchange markets. • Financial liberalization and market development policies should be sequenced to reflect the hierarchy and complementarities of markets and related institutional structures. Market development policies should be comprehensive. Technically and operationally linked measures should be implemented together, and linkages among markets should be 29  
  •   considered. • Capital market development requires a careful sequencing of measures to mitigate risks in parallel with reforms to develop markets. Policies to develop markets should be accompanied by prudential and supervisory measures, as well as by macro prudential surveillance, to contain risks introduced by new markets and instruments. • The pace of reforms should consider the initial financial condition and soundness of financial and nonfinancial firms, as well as the time needed to restructure them. • Institutional development is a critical component of building capital markets and financial risk management capacity. Establishing good governance structures in financial institutions, including internal controls and risk management systems, is among the most critical of markets reforms. • Similarly, the operational and institutional arrangement for policy transparency and data disclosure need to be adopted to complement the evolving sophistication of financial markets. • Pacing, timing, and sequencing also need to take account of political and regional considerations that could strengthen ownership of reforms. • Reforms that require long lead times for technical preparations and capacity building should start early. The following are additional principles for external financial liberalization: • The liberalization of capital flows by instruments and sectors should be sequenced in a manner that reinforces domestic financial liberalization and that allows for institutional capacity building to manage the additional risks. • Reforms need to consider the effectiveness of controls on capital flows in place or the implicit restrictions on capital flows from the ineffectiveness or absence of markets. • Transparency and data disclosure practices should be adopted to support capital account opening”.11                                                            11 International Monetary Fund (IMF), Financial Sector Assessment: A Handbook, International Monetary Fund,Washington D.C., 2002, p. 323 30  
  •   4.2 Financial liberalization in ASEAN securities marketsFinancial liberalization has already taken place in the other ASEAN countries and 100 % foreign ownedsecurities companies are operating there. We can therefore review the impact of liberalization on thecompetitive landscape in those countries and the strategies of domestic and foreign securities companies,to see if there are any lessons which can be learned for Vietnam’s market opening process. 4.2.1 Malaysia securities exchange and investor overview Securities Market background information  Bursa Malaysia established in 1976.  Holding company for 3 exchanges, securities and derivatives exchanges, and Labuan Offshore Financial centre. No formal OTC market  Foreign investor limits apply (30% of any listed or unlisted company with certain exceptions)  Short selling and same day turnaround permitted  Opening hours: 9-12.30 a.m. and 2.30 to 5 p.m.  Market cap. at 12 November 2010 US$ 322 bn. Malaysia Investor Value Traded  15.6% 20.9% Local Retail Local Insitutional 26.5% 37.0% Foreign  institutional Other Source: Bursa Malaysia (Year to October 2010) Investor Value Traded  Large portion of domestic institutional at 37%  Foreign institutional at 26%  Retail at some 21% is lower than the combined institutional of 63.5% 31  
  •  4.2.1.1 Malaysia liberalization impactIn 2005 Malaysia allowed market entry to 5 special scheme 100% foreign owned securities companies.Now by 2010 there are 6 foreign securities companies and plans to issue 3 new licences to foreign firms(part of which is to expand Islamic finance) under the ongoing liberalization initiatives to increase theliquidity and size of Malaysia’s securities market. Citigroup won a licence in 2010.Many of the domestic securities companies have developed a full service model, some are part ofcommercial bank groups and therefore have more funding available than stand alone securities firms. Inthe case of both CIMB and Aminvest both offer investment banking services such as mergers andacquisitions, underwriting and other advisory.Domestic firms have pursued various strategies as far as foreign securities companies are concerned.CIMB has not tied up with a foreign partner. CIMB instead, in addition to broadening its service offering,chose to expand overseas as part of a pan ASEAN strategy, seeking new revenues in new markets. Forexample, it acquired an independent securities company in Singapore, GK Goh in 2005. This broadeningof their geographic coverage was also a defensive measure in view of the increased competition derivingfrom financial liberalization and the arrival of foreign securities companies in their home market ofMalaysia.Other domestic controlled Malaysian securities companies, such as Aminvest, have brought in foreignstrategic partners. In Aminvest’s case, it is ANZ with 19.1%. This minority shareholding structure allowsAminvest to retain control but at the same time it can benefit from the opportunities of ANZ’s foreignknow how in technology, research and investment banking services.It is not possible to say categorically which strategy is the best, since this will depend on the individualcircumstances of each firm, their strengths and weaknesses, as well as the strategic priorities ofshareholders and management.As for the competitive effect, the local firms have been subject to competition since 2005. In the case ofboth CIMB and Aminvest they maintain positions in the Top 10 by brokerage share. Local firms haveremained stronger in retail brokerage business and indeed most foreign firms in Malaysia target onlyforeign and domestic institutional business so far, the Malaysian authorities are encouraging them totarget retail business also in order to make the sector more competitive and to raise the standards. 32  
  •  In terms of the impact of the foreign firms’ market entry on the brokerage market share table, only one ofthe Top 10 is 100% foreign owned, that is CSFB at No.8 with 5.4%. Other foreign names such as CLSAand JP Morgan are in the 10 - 20 segment. A key reason for this is that the strategy of large globalinvestment banks is often not to aggressively pursue market share but to focus on building a businessplatform to service their foreign clients and to target selectively higher margin and or higher profile IPOand M&A work, often cross border work such as cross listings. 4.2.2 Thailand securities exchange and investor overview Securities Market background information  SET established in 1974. Also has an Alternative Investment Market for SMEs. No official OTC market  Derivatives – index futures started in 2006 and index options in 2007  Foreign investor limit 49% but plan to introduce non-voting depository receipts (NVDRs)  Short selling and same day turnaround  Open hours 10-12.30 and 2.30 to 4.30  Market cap. at November 2010 US$190 bn. Thailand Investor Value Traded 13.0% Local Retail Local Insitutional 21.8% 58.0% Foreign institutional Other 7.2% Source: SET (Year to October 2010) Investor Value Traded  Retail accounts for over half of traded value (58%)  Institutional investor is mainly foreign at some 22%, domestic institution is 7.2% 33  
  •  4.2.2.1 Thailand liberalization impactThailand allows 100% foreign securities companies to establish. In terms of the strategy of domestic Thaisecurities companies, some have chosen not to tie up with a foreign partner, but they have succeeded inmaintaining their largely retail client base and a profitable business model with good market share. Inmany cases such as KTZ and Phatra they are subsidiaries of domestic commercial banking groups.Asia Plus Securities does not have a foreign partner. Asia Plus Securities has a top 2 market position andhas a client base still predominantly retail (80%) with some domestic and foreign institutions. Theyacquired the local operation of a foreign broker, ABN in 2004. Asia Plus Securities has done well sincethen and part of their strategy was to be more prudent with margin lending than some of their competitors,so that they did not have significant credit losses. Also, they instituted good internal controls and systemsto manage the business, with the result that they kept tight control of costs and their breakeven point fortrading volumes was the lowest among the Thai brokers.One of the Top 10 domestic brokers, Bualuang Securities, has adopted a different strategy, bringing in aUS investment bank, Morgan Stanley, as its exclusive partner. BLS first signed a research supportagreement with Morgan Stanley Dean Witter Asia Limited in 2006 and then in 2007 this was followed bythem entering into an Exclusive Partner Agreement with Morgan Stanley. This provides them with accessto Morgan Stanley expertise and client base. It is a cooperation agreement not an equity holding.Although it does not provide an equity cash injection, as in the case of ANZ with Aminvest in Malaysia,or in the case of Daiwa Securities and ANZ with SSI in Vietnam for example, it may be viewed by bothparties as a prudent first step before entering a deeper equity based relationship. The lower commitmentlevel has this advantage and also that it is generally easier to unravel the cooperation if either partnerwishes to terminate it later, but also the disadvantage in that with a lower commitment level and financialrisk by the foreign partner, technical cooperation may be slower. On a more positive note a cooperationagreement between a local securities firm and a foreign securities firm, if the initial relationship andcommitments of each party develop well, then a capital injection can be a second step towards fulfilling acloser win-win relationship.The Thai Capital Market Development Plan is focused on boosting the growth of their stock market inresponse to domestic concerns that their market is falling behind compared with regional peers. Thisforesees, inter alia, that some local securities firms will have to “adjust by forming alliances with strategicpartners to increase efficiency by offering new products and services”. The regulator sees that thestrategic partners offer opportunity as catalyst for product development of local firms. 34  
  •  As for investor composition in the Thai securities market, it is more similar to Vietnam than is Malaysia,in the sense that retail investors still account for the majority of investors by traded value, while inMalaysia and most developed markets the majority tends to be institutional investors, Top 10 brokerageranking includes three foreign majority owned firms, Kim Eng (11%), Phillip Securities from Singapore(5%) and CSFB (3%). Other foreign names such as UBS and Macquarie are in the 10 - 20 segments, forsimilar reasons to that mentioned in the Malaysia section, that brokerage share is not the highest priority. 4.2.3 Indonesia securities exchange and investor overview Securities Market background information  Indonesia Stock exchange (IDX) established 2007 from merger of Jakarta and Surabaya exchanges. Trades in equity, fixed income and index futures.  Jakarta Futures Exchange for index and commodity futures  No foreign ownership restrictions for listed companies except for broadcasting companies  Short selling and same day turnaround permitted  Open hours 9.30-12.00 a.m. and 1.30 to 4.00 p.m.  Market cap. US$ 190 bn. Investor Value Traded  Local investors 75% and foreign 25% (IDX Factbook 2009)  For Q1 2010 the foreign proportion had risen to 33%4.2.3.1 Indonesia liberalization impactIndonesia allows 100% foreign securities companies. Indonesia’s investor structure is not similar to thatof Malaysia or Thailand, in that foreign investor penetration is significantly higher in Indonesia than inthose ASEAN countries (at over 50% of market cap. held by foreign investors). Indonesia also has a verysmall retail investor base, thus the natural local retail client base which is a typical advantage for localsecurities companies is not currently so developed as in the other markets or indeed in Vietnam. 35  
  •  Six of the Top 10 are foreign majority owned, the highest CLSA with 4.64%. Other foreign names suchas Merrill Lynch, JP Morgan, UBS and Macquarie are in the 10 - 20 segment. Though foreigner securitiescompany penetration is higher in Indonesia for the reason of the investor structure its profile may be lessinstructive for Vietnam than Malaysia or Thailand.In terms of brokerage penetration, the Top10 have 37% of market by brokerage trading value, a relativelylow concentration compared with Malaysia and Thailand with 29 firms having 1% or more share. (IDXFactbook 2010). 4.2.4 Conclusion on Foreign securities companies in ASEAN marketsIn these ASEAN markets we have seen the securities market opening and the arrival of foreign securitiescompanies to establish partnerships and 100% foreign owned local companies.However many leading domestic securities companies have so far maintained good franchises and marketshares. The global foreign brokerages tend to have different strategic priorities and client focus to thelocal firms and so they do not tend to compete strongly for retail accounts for example. Some domesticfirms have maintained independence from foreign firms, while others have formed partnerships of anequity and non-equity variety with foreign firms, to benefit from skills transfer and in the case of equitypartnership, from capital also. Financial liberalization brings both challenges and opportunities to thesecurities market and the domestic securities companies. 4.3 Challenges for the regulator from market development and market opening 4.3.1 Introduction - Adapting to market liberalizationThe SSC, supported by the MOF, has the responsibility to regulate the market. For this the SSC needs theregulatory powers and capacity to fulfill its multiple responsibilities, which include to maintain an orderlyand efficient securities market with transparent information on the listed companies, with professionallyrun securities companies which operate in the best interests of its investor clients, and to develop thesecurities market into a modern, competitive market with a wider product range and good risk control andsystems. The regulator also faces the challenge arising from market opening to manage the foreignsecurities companies and to cooperate more extensively with foreign regulators.We will first review and assess the current powers and effectiveness of the SSC, this both in terms of theadequacy of its capacity building and its needs to deal effectively with the pressures of market opening,as well its capacity and resources in the specific area of surveillance, investigation and enforcement.. We 36  
  •  will then in Section 5 make some policy recommendations for the SSC to strengthen it to meet thesechallenges.We have used as a reference framework for our analysis the IOSCO (“International principles, from theAssessment on Objectives and Principles of Securities Regulation (IOSCO Principles), which providesfor the best international practice principles for securities regulations for the regulator, securitiescompanies and stock exchanges . We refer to those principles most relevant to our topics of adapting tomarket opening and to the regulator’s supervision and enforcement role. 4.3.2 Review of regulatory powers and effectiveness4.3.2.1 The responsibilities of the regulator should be clearly and objectively stated (IOSCO Principle 1)The SSC’s functions, powers and responsibilities are provided in Decision No. 112/2009.In addition to Decision No. 112/2009, there is another Decree No. 85/2010-ND-CP, dated 2 August 2010on Administrative penalties in the securities market, which provides new, improved regulatory powers forthe SSC in enforcement in the stock market.4.3.2.2 The regulator should be operationally independent and accountable in the exercise of its powers and functions (Principle 2)IndependenceThe SSC is an agency of the MOF. The SSC has its Chairperson and no more than 3 vice chairpersonsand appointment and dismissal of these is by the MOF. The Minister of Finance appoints all Commissionmembers. SSC senior level management does not currently have any independent representatives from theprivate sector and there is no specific requirement to have a legal expert, a financial expert, an accountingexpert at SSC senior management level.Major regulatory and policy decisions are formulated and drafted by the SSC, the approval is required atMOF level or higher and not made by the SSC itself. The SSC has the authority to issue guidance andinterpretation but not to set policy and enact rules. In conclusion the regulatory function is not completelyindependent in its operation. 37  
  •  Under IOSCO best practice the securities regulator should be independent to provide assurance to themarket that the regulator is able to operate on an arm’s length basis without undue political involvementand with sufficient industry experts.One practical disadvantage of the current model in Vietnam for the securities market is that the approvalprocess in Vietnam for legal amendments or new policies, requiring MOF approval or approval atGovernment/ the Prime Minister Office level for Decisions for example, can be lengthy and can impedemarket progress. The demands on the regulator from the securities market participants for new securitiesmarket products and policies is increasing and there is frustration with the slow approval times. Withmarket opening and the likely additional lobbying of foreign securities firms and foreign investors, thisreform pressure on the SSC is likely to further increase. This is one reason why some domestic securitiescompanies are “experimenting” with new products before they are formally legalized, such as margintrading and options; this practice of experimenting increases risk and should not be permitted.The authorities should consider if a more streamlined consultation and approval process for new policiesand legal amendments can be introduced to reduce time to market. The best policy should be to fix anefficient and achievable deadline for consultation and approval with the backing of MOF and the relevantdecision making bodies, involve the industry in consultation on new policies and clearly communicate theprocess to the market. This market reform process should balance efficiency with prudence and carefulconsideration of the risks; for example, the market is not yet ready for derivatives. Balanced evaluationwill be assisted by market expertise and independence, and it is important that SSC and the authoritieshave available and use the necessary technical and market expertise in reaching their decisions. The morethe market sees transparency and a commitment to timely but prudent market development, the more themarket will gain in confidence and stability.We understand that no changes are currently contemplated to the current operational model and that theSSC is due to remain under the management of the MOF. The IOSCO best practice model is for thesecurities regulator to be fully independent. In view of Vietnam being still at an early stage ofdevelopment this full independence process for SSC may take some time; however, this objective shouldbe incorporated in the medium term Capital Market Development Plan in order to signal pro marketpolicies and give confidence on the strategic direction which Vietnam is taking.AccountabilityThe SSC, being a statutory body, is accountable to the Minister of Finance, Government and PrimeMinister and is required by law to submit its financial statements to the Minister of Finance. Thestatements are audited by the State Auditor. 38  
  •  The SSC releases its annual report to the public. However, content of the annual reports are focused onpolicies, market operation, regulation and supervision. The SSC’s accounts statements are made publicannually and provide details of its use of resources over the financial year according to the regulation onpublic disclosure of financial operation.The SSC is mandated by law to protect investors. The SSC makes information available on its websiteinformation.All administrative actions taken by the SSC are documented in writing with reasons provided. TheSecurities Law requires the SSC to give the person the opportunity to be heard before any action is taken.The Inspectorate of the SSC will meet the person and the action is taken after a memorandum has beensigned by the violator(s) and the SSC to recognize that the person already violated the SL. Furthermore,persons who wish to contest the SSC’s decisions can appeal to the Court.4.3.2.3 The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers (Principle 3)Since the SSC operates under the MOF, this places some limits on their powers: (i) limits the power toissue prompt policies in response to market movements; (ii) limits the power to submit draft legaldocuments to the National Assembly or Government for promulgating. The disadvantage of this is thatmarket practitioners become increasingly frustrated and experiment with new market mechanisms beforethey are passed into law as mentioned above.For investigation and enforcement powers we consider in Principle 8 and 9 respectively below.Financial resourcesThere are two funding resources for the SSC:(1) State Budget provides approximately 1/3 of income. This source covers normal operational expenses for the SSC as a state budget funded organization. This includes: expenses for infrastructure, procurement or renovation of fixed assets; annual fee for membership of international organizations and consideration for international projects; funding for national projects; funding for special tasks assigned by the Government; funding for streamlining of staff (if available); funding for training of staff and science researches; and funding for other special tasks.(2) Self -funding from fees and charges provides approximately 2/3 of income. This includes licensing fee, market supervision fee, public company regulation fee and other fees specified in the relevant 39  
  •   legal framework; revenue from providing training services on securities market; revenue from selling the Securities Review and advertisement; revenue from providing IT services and other services; funding from donors. These fundings are used to ensure: (i) a double salary for the SSC’s staff compared to that of other state budget funded organizations; (ii) using of services and procurement; (iii) study tours, training oversea and other international cooperation activities; (iv) supervisory and regulatory activities; and other operational expenses.The sufficiency of the SSC’s income is less of a concern (as the revenue from fees and charges has goodpotential), than the mechanism for using its income. As a state budget funded organization, expendituresof the SSC are subject to the regulations applied for that type of organization and they cannot be overcertain limits. For example, even the SSC’s staff enjoy a double salary compared to other governmentofficers in other ministries, the salary is much less than salaries paid in the securities industry and notlarge enough to keep good people at the SSC.Human resourcesAt present, the SSC has 318 staff, allocated to 14 departments and subsidiaries. However, the number ofstaff cannot meet the current workload, especially in departments such as Securities Issuance Department(30), Securities Inspectorate (23) and Market Surveillance Department (24).The salary level in the SSC is not large enough to compete with the securities industry for the best humanresources. However, recently the SSC has achieved some improvements in human resource development.Last year, the SSC started a special recruitment examination for graduates with Master Degrees or higherDegrees and English proficiency (TOEFL or IELTS). The people who passed the special examination canenjoy a higher salary than the ones, who passed the normal examination and they will not have toexperience one year of internship with only 85% salary as is the case for those SSC staff who pass thenormal examination. This is a good initiative. The SSC currently has few fluent English speaking staff;this should be remedied in preparation for 2012. Increasing the English speaking ability of the SSC staffwill become increasingly important in order to have effective communication with foreign regulators,foreign securities companies and foreign investors.The SSC is now drafting a system of performance based human resources evaluation and assessment,which will help to enhance efficiency in the employment and use of human resources.Consideration should be given to making the salary packages more attractive in order to attract and retainthe right people; sufficient industry and technical experience is required to understand and manage theissues and challenges of market development. 40  
  •  As for protection of SSC staff carrying out their allocated responsibilities there are no detailed regulationsunder the Securities Law for any action or proceedings for damages made in respect of any act orstatement made or omitted under any securities law or in the performance of any function or the exerciseof any power under the securities law. This should be amended to give the SSC staff the necessaryprotection, except in case of negligence.TrainingEvery year, the SSC carries out training courses for the SSC’s staff. The courses include: - Professional training courses: every staff of the SSC must obtain 3 basic certificates on securities market provided by the Securities Science Research and Training Center (Fundamental Securities Market, Legal Framework on securities and securities market and Securities Analysis). In addition, annually the training courses on law, accounting and auditing, financial statements, market supervision, inspection and enforcement, IT and other field of securities market are organized with the involvement of domestic and international speakers; - Training course for Government officers: training courses are held to provide necessary knowledge and understanding on public services and duties of a public servant. They are compulsory courses for the SSC’s staff; - Oversea study tours and Training Programs: with multilateral and bilateral relationship with countries and international organizations, the SSC always sends its staff for the study tours short term and long term training course overseas. The study tours are usually for experience exchange and training courses may be professional or post- graduate courses (JoinVienna –IMF courses, IOSCO’s Courses, SECO Program for International Investment Analysis Certificate)Technical resourcesThe IT resources of the SSC are lacking, they are without an automatic market surveillance system,information disclosure system and reporting system. Most of the workload of licensing, regulating andsupervising is done manually with PCs rather than with advanced IT tools and systems. This makes itvery difficult for SSC to adequately police the market.SSC understands the need for a new system, the main challenge is not financial but technical in terms ofdesigning a customized system with appropriate locally tailored rules and alert settings in terms for 41  
  •  example of the SL definitions for the different categories of market violation. Therefore, in the nearfuture, the SSC needs to build up a whole new IT system for regulation and supervision activities.At the exchanges themselves, which also have regulatory responsibilities under the authority of the SSC,the IT Project for both HOSE and HNX is in progress to provide a new trading system, stock watchsystem and clearing and settlement system for the exchanges. The Project was initiated around 2003-2004, we understand that similarly to the proposed SSC IT system the main reason for the long time it istaking is the technical difficulties of customizing a system to local requirements. This proposed new ITsystem for the SSC was estimated to cost in the region of USD 15 million for development of IT systems.4.3.2.4 The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality (Principle 5)The SSC staffs are subject to the requirements of confidentiality applied to government officers and theofficers who work in the finance industry. There is a list of confidential data and information the SSCstaff should respect. The SSC does not have established internal disciplinary procedures and guidelinesfor investigating and resolving alleged violations of their Terms and Conditions of Employment andgeneral government employee requirements or any conduct which is inconsistent with a staff’s faithfuldischarge of his duties.If not already done so the SSC should ensure that its own staff dealing rules are at least as strict as thosefor securities companies. There should be regular monitoring of staff compliance with this. This derivesfrom the need for the securities regulator such as the SSC to maintain the highest standards in order toprotect its integrity.There is no specific Code of Conduct for SSC staff relating to matter such as the avoidance of conflict ofinterest, restrictions on investing in securities, by which SSC staff are required to abide. SSC shouldconsider introducing a formal written Code of Conduct for SSC staff. Such Code would provide for theavoidance of conflict of interest, restrictions in investing in securities and observance of confidentialityand would establish internal disciplinary procedures and guidelines for investigating and resolving allegedviolations of the Code of Conduct, Terms and Conditions of Employment and any conduct which isinconsistent with a staff’s faithful discharge of his duties. This serves to maintain SSC’s good name andreduce risk of reputational risk and is also in line with being a role model to the securities companies, thelisted companies and to all market participants to adopt, internalize and take ownership of their own Codeof Conduct. 42  
  •  4.3.2.5 The regulatory regime should make appropriate use of self regulatory organisations (SROs) that exercise some direct oversight responsibility for their respective areas of competence and to the extent appropriate to the size and complexity of the markets (Principle 6)HOSE or HNX both have powers and responsibilities to conduct the function of a front-line regulator ofthe markets which they operate. HOSE or HNX are vested with regulatory powers under the law and hasa statutory responsibility to ensure a fair and orderly market and prudent risk management. Theseresponsibilities relate to the regulation and surveillance of securities markets.4.3.2.6 SROs should be subjected to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities (Principle 7)The SSC is in charge of registration of securities firms (license for establishment and operation) andsupervision of the compliance of securities firms with the rules and regulations for the securities market,provided for under Regulation No. 27/2007/QD-BTC dated 24 April 2007 on the organization andoperation of securities firms and under Decision No.126/2008/QD-BTC dated 26 December 2008 onamendments of and supplements to the Regulation No. 27/2007/QD-BTC.The HOSE and HNX exchanges are responsible for monitoring the securities members’ compliance withtheir Regulations on Securities Members.As for market surveillance, HOSE and HNX are in charge of identifying abnormal transactions, usingtheir set of criteria for alerts (21 for HNX and for 20 for HOSE). HOSE and HNX report on abnormaltransactions to the SSC on a weekly basis. Then the SSC provide the second tier of market surveillance:the SSC makes a deeper analysis, using trading data reported by the SEs. The SSC may require HOSEand HNX to provide more information or to participate at on-site inspections undertaken by the SSC atsecurities firms, listed companies or collaborating with investors who are under investigation. Sometimesthe SSC authorize the HOSE and HNX to carry out on-site examinations on trading at securities firms.HOSE or HNX is required to prepare an annual regulatory report within 20 working days- Circular No.151/2009/TT-BTC dated 23 July 2009 to provide guidelines on supervision by the SSC over securitiesoperation of the SEs and Depository Center). The SSC carry out an annual on-site examination of HOSE,HNX and VSD. This examination is not an audit and there is no regulatory report. The examination iscarried out to ensure compliance of the institutions with laws and regulations and that they are operatingin a fair and transparent manner. All aspects of their operation are inspected The Minister of Finance mayalso require a special report from HOSE or HNX on its compliance with securities laws at any time. 43  
  •  Based on my discussions with SSC and the stock exchanges all parties informed me that in their view thecooperation between SSC and HOSE and HNX is working well. There was some frustration expressedhowever that the approval process takes too long for market launch of new products such as marginlending and of new trading structures such as same day buying and selling.4.3.2.7 The regulator should have authority to share both public and non-public information with domestic and foreign counterparts (Principle 11)Certain aspects of regulation may require the involvement of other domestic regulators, such as thebanking regulator. To facilitate greater co-operation and communication among the authorities, there wasa proposal for signing a memorandum between the MOF and SBV on cooperation in stock marketsupervision. However, agreement has not been obtained and the MOU is still a draft until now.A formal MOU for MOF/SSC with the State Bank of Vietnam should be agreed, providing for a fullexchange of information on all regulatory actions to be taken or contemplated by the signatories. TheMOU with SBV and other domestic institutions should also provide for advance warnings of potentialfirm failures to ensure effective and timely response to possible systemic risks. Formalized cooperationof MOF/SSC with the SBV should be supported by regular bilateral dialogues to foster effectivecooperation.There is no formal coordination mechanism which would enable the SSC to be informed of policydecisions while they are still under consideration that might materially affect the Vietnam securitiesmarkets and which would allow the SSC to communicate its views on the likely impact of such decisions.In terms of domestic sharing of public and non-public information SSC currently has significant obstaclesto completing its work as, in addition to not being able to access bank records due to lack of MoU withSBV (the main problem is the Bank secrecy Laws), SSC is not permitted to access the phone or computerrecords of persons under investigation.In terms of other cooperation in force to assist the securities regulator, there is an Inter-ministerialCircular No.46/2009/TT-BTC-BCA dated 11 March 2009 on cooperation between Ministry of Financeand Ministry of Police in enforcement of violations in securities market. 44  
  •  4.3.2.8 Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts (Principle 12)In addition to domestic information sharing issues discussed in the previous section, it is essential for theSSC, as part of its institutional capacity building, to formalise and develop its co-operation andinformation-sharing arrangements with foreign regulators.The IOSCO Multilateral Memorandum of Understanding (IOSCO MMoU) governs information sharingbetween its signatories, the securities market regulators. The IOSCO MMoU, adopted in 2002, is basedon the IOSCO Objectives and Principles of Securities Regulation adopted in 1998 and the experiencegathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardizedframework for sharing enforcement-related information and a gradually expanding network ofparticipating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in acomprehensive screening process to establish that they have the legal capacity to fully comply with theterms of the IOSCO MMoU. Being a signatory to the MMoU implies that the IOSCO screeningcommittee considers the countrys legal framework to be compliant with IOSCO Principles 11, 12, and 13and that the country’s securities regulator has therefore the legal capacity to share supervisory informationwith and provide assistance to its foreign counterparts.We understand Vietnam’s discussion on joining the IOSCO MMoU are in progress. This should beexpedited to assist SSC to adapt to market opening by making more readily available the assistance andexperience of foreign regulators and so that SSC can seek information on behalf of foreign regulatorybodies, consistent with international standards for cooperation.Therefore any necessary legal changes should be approved in order to enable the SSC to sign the IOSCOMMoU.4.3.2.9 The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers (Principle 13) This should be in place once SSC has become a signatory to the IOSCO MMoU. 45  
  •  4.3.2.10 Regulation should provide for minimum entry standards for market intermediaries (Principle 21)Securities companies LicensingSecurities companies must be licensed in order to carry on permitted activities under the Securities Law.Decision No.27 Regulations on Organization and Operation of Securities Companies provides that nosecurities company should carry on a business in any regulated activity or holds itself out as carrying onsuch a business unless it has the relevant licence.Licensing requirements, criteria and conditions are detailed in Decision No.27. Decision No.27 details thelicensing criteria for entry for both companies and individuals. Requirements for a license includeorganisational requirements, fit and proper requirements for applicant’s directors, shareholdingcomposition requirement, and the adequacy of financial resources.The SSC conducts an assessment of applicants and its principal officers.A Securities company must hold the relevant licence to carry on either one or more of these four regulatedactivities: 1. Securities brokerage; 2. Securities proprietary trading (self-trading); 3. Underwriting of securities; 4. Securities investment consultancy. Securities depository services providers should be registered with the SSC, securities firms and custodian banks. Financial consultancy such as M&A and restructuring are side business, which the securities firms are allowed to provide.Ongoing Requirements for Securities companiesLicensing requirements must be met on an ongoing basis. Licensees are required to periodically report tothe SSC any change of information required to be entered in the register of licence holders, or any changein information submitted to the SSC.In addition, licensees are required to lodge with the SSC the annual financial statements together with anevaluation of the operation of its internal control system. The annual financial statement should be audited 46  
  •  by independent auditors in the list approved by the SSC and sent to the SSC in at least 10 working dayssince the deadline for auditing of annual financial statement (31 March).Decision 27 provides for reporting requirements to SSC for periodical information and for extraordinaryevents such as losses equal to more than 10% of the value of the assets. Circular No. 09/2010-TT-BTCdated 15 January 2010 on Information Disclosure on securities market covers in Section V securitiescompanies and there are disclosure requirements (public disclosure e.g. on website) for periodical andextraordinary events. In addition there are various requirements for disclosure of important information,such as investigations into market abuse or criminal case, also regarding significant changes in businesscomposition (defined as >10%). The SSC publishes on its website a list of licence holders, the status andcategory of the licences.In addition securities firms should meet the requirements of the Circular on financial prudence, which isexpected to be issued in early 2011 and also listed securities firms should comply with requirements onlisted companies.Securities practitionersThere is Decision No. 15/2008/QĐ-BTC dated 27/03/2008 of Finance Minister on Regulation onSecurities PractitionersEducational levels and prior securities experience are detailed. In particular the general director musthave inter alia at least 3 years’ professional experience in the finance, banking and or securities sector andat least 3 years operational and managerial experience.Also he must have a securities practising certificate earned after passing the relevant basic exams andexams for his area of responsibility, for example underwriting or financial consultancy. SecuritiesScience Research and Training Center provides training courses and exams for practitioners).Applications are processed based on set requirements and fit and proper criteria background checks areused (qualifications of university graduate or post graduate, certificates of practitioner, number ofworking experience years in relevant field) and the process is considered effective.Compliance with professional ethics during securities business activities is also required –the SecuritiesBusiness Association of Vietnam has issued a Code of Conduct. This is a good initiative, however theassociation operates on a voluntary basis, hence the Code of Conduct is not mandatory However, withthe experience of other jurisdictions to go by, it is important that effective application of a code of 47  
  •  conduct needs to be led from the top i.e. by management vision that this is a vital part of their long termprosperous future.SSC’s authorityThe SSC can conduct routine and adhoc inspection and monitoring of securities companies. HOSE andHNX can carry out examination to ensure the securities firms have adequate equipment for providingservices of trading or online trading through SEs system. HOSE and HNX does not have to power toconduct inspection. Only the SSC has this power and inspections by the SSC cover all fields of the stockmarket.4.3.2.11 There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake (Principle 22)RequirementsAll licensed intermediaries are required to comply with initial and ongoing capital requirements.All securities companies are required by the HOSE or HNX Securities Rules to maintain a prescribedcapital adequacy ratio at all times in which the liquid capital requirement ensures that the financialresources of a securities company is in a readily realisable form, to meet its total risk requirement.The capital adequacy requirements take into account the risks undertaken by an intermediary, includingoperational risk, counterparty risk, position risk, large exposure risk, and underwriting risk. Capitaladequacy of market intermediaries is monitored by the the SSC semi-annually, based on audited financialstatements submitted by the securities firms.4.3.2.12 Regulation should be designed to detect and deter manipulation and other unfair trading practices (Principle 28)Article 9, Securities Law, and Decree No. 85/2010-ND-CP dated 02 August 2010 on Administrativepenalties in the securities market set out the forms of prohibited conduct and offences such as marketmanipulation and insider trading, but these are in simple terms and not adequate. It is expected that 48  
  •  another Circular on Trading (being submitted to the Minister of Finance) will provide more details onthese market abuses.4.3.2.13 Regulation should aim to ensure the proper management of large exposures, default risk and market disruption (Principle 29)Monitoring of Large PositionsHOSE or HNX have mechanisms and triggers in place to monitor and evaluate the risk of open positionsor credit exposures that are sufficiently large to expose a market or clearing risk? There are 20 triggers forHOSE and 21 for HNX.For the equity market HOSE or HNX monitor participants’ ability to meet the net amounts due forsecurities clearing. Clearing and settlement is made through VSD with confirmation on transaction fromHOSE and HNX, T+3 is settlement day, clients are required to have 100% money and securities forplacing an order at securities firms.Margin trading has not been allowed on the Vietnam stock market, though there is current provision formargin trading in the draft amendments to SL. However, some securities firms have been illegally lendingmoney to their clients to buy stocks or giving advances to clients from the proceeds of share sales. This isa risky situation and some securities firms are facing troubles now with illiquidity of their clients.Authorised personnel from the SSC and HOSE or HNX have access to information on the size andbeneficial ownership of positions held by direct customers of market intermediaries.Under HOSE and HNX’s rules, HOSE or HNX is empowered to take action against participants who donot make requested market information available. Rules are also in place to compel market participants incarrying/controlling large positions to reduce their exposures. HOSE and HNX have rules on trading ofbig lots and put-through transactions.4.3.2.14 The regulator should have comprehensive inspection, investigation and surveillance powers (Principle 8)Supervision and inspection powers 49  
  •  SSC has a number of surveillance rights and procedures both directly and also via the surveillanceprocesses of the HOSE and HNX stock exchanges over the exchange activities and the securitiescompanies themselves.At present, the surveillance collaboration between the SSC, HOSE and HNX is quite good. The problemsencountered are mainly of a technical nature to due to the lack of advance IT tools and systems.SSC does not have any specific supervision process for clearing and settlement. The VSD has theresponsibility to ensure an adequate clearing and settlement process. The SSC supervise it indirectly byapproval of regulations drafted and issued by the VSD, periodically reporting by the VSD on itsoperation, including clearing and settlement and annual on-site examination. In necessary cases, the SSChas the power to carry out adhoc examination. From discussions with market participants and with VSDitself it appears that most market participants are satisfied with the clearing and settlement process.Investigation powersSSC has a Securities Inspectorate department, however their power is limited with regulated entities suchas securities firms, investment funds, fund management companies and public companies. In the case ofsuspicious individuals, the Securities Inspectorate can only invite the individual(s) concerned forinterview and require them to submit necessary books and documents, but it does not have the power tosearch any premises where the suspicious individual keeps his/her books and document. Also, asmentioned already, the SSC does not have the right to have direct access to clients’ bank accounts details,internet and telephone statements. This causes inevitable difficulties for supervision, inspection andenforcement. SCC’s powers should be increased to permit direct access to the investigated person’s dataand premises.4.3.2.15 The regulator should have comprehensive enforcement powers (Principle 9)The Securities Law provides for the enforcement powers of the SSC. In terms of the three categoriessanction normally available to a securities regulator, administrative, civil and criminal, SSC has beenlargely confined to administrative sanctions.For civil actions the SSC only has the power to recommend the civil action to the Supreme People’sProcuracy of Viet Nam. The SSC needs the involvement of the Investigation Bureau of Police in order toseek orders from the High Court to ensure compliance with its regulatory requirements. 50  
  •  Under the recent amendments to the Criminal Law three violations of the Securities Law, namelyintentional fraud in reporting, insider trading, and securities price manipulation have become criminaloffenses from January 2010. However for enforcement of criminal actions the SSC does not conductcriminal prosecution for breaches of securities laws under the SL, it must instead collaborate with theInvestigation Bureau of Police.In enforcing compliance with securities laws, SSC has the power to appoint investigating officers or otherspecially trained staff to carry out investigations for any securities offence. However their powers arelimited as already described above.Enforcement power shortcomingsThe enforcement problem of the SSC is the SSC only has power to use administrative penalties, whichare not tough enough (currently under Decree No. 85/2010/ND-CP of August 2, 2010, at a maximum ofVND 300 million for market manipulation or insider trading, they were previously at the low level ofVND 50 million).There have been very few enforcement actions issued in Vietnam. Of the cases there have been, theadministrative penalties issued in the period since December 2009 have been in the range US$ 5,000 TOUS$10,000, which is too low to provide a credible deterrent in terms of the potential profits manymultiples higher which could be made by the violators.In this way there has been a lack of a sufficient deterrent to wrongdoers, who are more likely to take therisk of committing an offence if they know that the potential reward can be much larger than the relatedpenalty if they are caught. There has been no legal provision for having to repay the profit made by theillegal activity. The SSC cannot apply a higher sanction as the maximum sanction is limited by theOrdinance on Administrative Penalties of the Government.The SSC has drafted Guidelines on Confiscation of ill-gotten gains. This is drafted to provide forreimbursement of ill gotten gains and avoided losses and will be an important progress. It is scheduled tobe approved towards the end of 2010.Ultimately the experience of developed markets shows that deterrent effect starts to make most impactwhen it is a multiple of ill gotten gains that wrongdoers stand to lose i.e. they know that they may losemore than they may gain. The U.S., viewed as having built one of the more successful enforcementsystems, has a civil sanction that may require up to three times the illegal incomes to be given up.However, this does not preclude the possibility of monetary penalties, criminal fines and imprisonment, 51  
  •  and being barred from employment with licensed market participants or service as an officer or director ofa public company.In terms of enforcement powers, the SSC does not have the right to prosecute. In the area of criminalenforcement action it is good that insider trading and market manipulation are now criminalized but theSSC needs the collaboration of the Investigation Bureau of the Police if criminal procedures are taken, sothis inevitably makes it less efficient for the SSC to move a case successfully forward as its direct powersare limited.In many developed securities markets, such as UK and Australia, for example, the securities regulator hasthe right to prosecute. The SSC development model should include a move towards wider powers ofinvestigation and taking increasing responsibility for enforcement and prosecution. This right to prosecutecould be given to the regulator in progressive stages, starting with smaller cases, in step with SSCbuilding its capacity and experience in these matters.Insider trading definitionsFrom discussions with legal practitioners it appears that the definition of insider trading should be madeclearer in order to guide investors, securities companies, all market practitioners as well as to assist nonindustry expert judges. There is some disparity for example between the definition of insider trading inthe SL and in the Criminal Code, though neither is believed to be wholly satisfactory. Some legalpractitioners believe it would be useful to define more clearly terms such as for example what is thedefinition of major, where it states in the SL that insider information has a “major impact on the price ofsecurities prices”4.3.2.16 The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance programme (Principle 10)Market surveillanceThe function of the surveillance system is to identify irregular trading activities, such as manipulativetrades and insider trading. The problem with the effective implementation of surveillance is that the SSCdoes not have adequate IT or human resources to adequately police market abuse. 52  
  •  The exchanges do not yet have a fully automated market surveillance system, nor does the SSC. BothSSC and the exchanges are currently developing these systems. Full technical and financial support isneeded to complete these projects and have effective systems up and running.InspectionsThe SSC conducts routine periodic inspections of securities companies. The inspection process iscurrently based on an equal basis and the SSC is now preparing to move towards a more risk basedregulation. To date the SSC has used a compliance framework, which is based on the merit regulationapproach. However, the SSC is now developing a risk based supervision approach, especially withsecurities firms, which may be ready in early 2011. This move is in line with best practice and shouldhelp SSC to adopt a more effective and targeted approach to risk supervision.Compliance programmeCompliance by securities companies with securities regulations and with their own internal regulations,internal controls and code of conduct is a key to long term success. Past experience has shown a positivecorrelation between high compliance standards of a firm and its high popularity with investors andpositive effect on shareholder value. Briefly put, high compliance standards build trust and value.However, compliance, like risk management, is often neglected by management. Therefore the SSC needsto act as the catalyst to give the compliance issue the attention which it deserves. This should involveestablishing formal procedures for approving the designated compliance officer of a securities company.The rules of the exchange provide for each participating organisation to conduct regular and periodicreviews over its supervisory, compliance and internal control systems and for the maintenance of awritten record of such reviews. The compliance officer of the regulated entity is required to submit acompliance report on a monthly basis to the exchange.Currently the securities companies with whom I spoke confirmed that they have the compliance functionin place and that there have been no material issues with SSC. However, anecdotal evidence suggests thatin some securities companies, less attention and importance is paid to compliance issues than should bethe case; for example, the authorization process for staff trading, which is designed to prove a disciplinedprocess for staff trading and to reinforce the concept of acting in the best interests of the customer, is notstrictly enforced. 53  
  •  Internal policing should be reinforced by more significant penalties for non compliance and by morethorough external review by SSC and increased requirement on the external auditor to identify anddisclose non compliance to the SSC.EnforcementAs discussed above the enforcement powers of the SSC are weak, therefore their use is not so effective.The majority of complaints settled in the recent past has related to public companies regarding publicoffering and regarding reporting and information disclosure. Disclosure of such non compliance tends tobe easier to identify than more sophisticated market abuse by securities companies or investors. As formarket abuses, there has been a rise in more sophisticated violations, such as concert party transactionsand this makes more pressing the need for the regulator to have a stronger tools of IT equipment andmore, suitably trained staff.It is useful to look briefly at the case of a respected securities regulator, the FSA in the UK. The FSA hasstated its strategy to use credible deterrence as a tool to “change behaviour in the industry”. It uses itssanctions to deliver strong, visible, enforcement outcomes. “To achieve credible deterrence, wrongdoersmust not only realize that they face a real and tangible risk of being held to account, but must also expectto face a significant penalty”.FSA has at its disposal the threat of a custodial sentence, which it considers to be a significant deterrent tomarket misconduct. It is committed to bringing appropriate criminal prosecutions against those who abusethe markets. In 2009/10 there were several successful prosecutions of individuals for insider dealingresulting in custodial sentences of between 12 and 24 months.In FSA experience they consider that action against individuals has a greater deterrent effect than actionagainst firms and they are committed to holding senior managers to account for inadequate competencyand integrity. In 2009/10 they published prohibitions of 56 individuals. In order to improve theenforcement process FSA seeks formal feedback from those involved in the enforcement process andsupervisors provided feedback about the behaviour of firms after FSA published enforcement outcomes.FSA has noted that publishing enforcement action, along with appropriate supervisory follow up, hasoften led other uninvolved securities companies and other firms to consider whether the enforcementaction has implications for their business, systems and controls. There is evidence of firms beingcontacted by their peers to discuss disciplinary action taken against them. 54  
  •   4.4 Challenges for the domestic securities companies from market development and market opening 4.4.1 Domestic Market ConditionsThe leading Vietnam securities companies have focused on building their client bases and market sharesby targeting a variety of different strategies, including offering clients good quality research andinvestment ideas, offering an efficient sales and trading platform and good customer service, and offeringcompetitive financing terms for share trading. Many of the leading are diversifying their business modelsand maintain profitability during the current difficult market conditions.Overall however, the sector has too many securities companies, 105 as at November 2010. As can be seenfrom the chart below, the number of securities companies is considerably higher than most regional peers,both in absolute terms and in particular when compared with the relatively low market capitalization ofthe Vietnam securities market. No. se curities Mkt. cap firms USD bn. 2010 China 107 3589 Indonesia 119 249 Vietnam 105 33 Philippines 55 92 Thailand 41 190 Malaysia 35 322 Singapore 24 492Source: SSC and market dataDuring the bull market phase up to 2007 the growth in new securities companies was strong, now in aslower market it is difficult for some of them to survive.Many of the smaller Vietnamese securities companies have negligible market share and little businessfranchise, however some of them do appear to be offering aggressive brokerage commission rates, evenzero commission in some cases, which disrupts a more rational fee structure. For example, during 2010where trading volumes have been frequently low, many securities companies have been reporting losses;in Quarter 3 2010 only 51 out of 105 securities companies reported profits to SSC. SSC has indicated that 55  
  •  as of mid November all securities companies meet the current capital requirements, though future capitalpressures may force some to seek an exit.Clearly rationalisation needs to take place. Some has taken place with foreign companies forming jointventures with domestic companies, however this has not reduced the overall number of securitiescompanies. Domestic mergers have been difficult to achieve: mergers among securities companies can bedifficult to execute, due to inter alia, differences in pricing expectation and agreeing who will get the topjobs in the new merged company, in addition coping with the risk that the best staff and clients can moveafter a merger, so the “value” paid for the merger can quickly evaporate. It may not be appropriate forSSC to force companies to close down or merge, however raising the capital requirements threshold is amore acceptable option to encourage rationalisation.SSC has put a cap on the overall number of securities companies by not permitting new licenceapplications, so that new entrants must seek existing licences. However, this policy will be amended byJanuary 2012 when under the WTO commitment schedule 100% foreign securities companies are allowedto establish in Vietnam. 4.4.2 External Sector developments: WTO Financial liberalizationVietnam’s securities industry commitments under the WTO and the resulting market opening can beexpected to increase competition, based on the experience of other countries.The WTO commitment provided for a two step process for securities market liberalization. First step,completed in 2007, was permitting a foreign securities company to form a joint venture with a localpartner (with a maximum 49% shareholding in the joint venture). The second step, from January 2012, isto permit a 100% foreign owned securities companies to establish operations in Vietnam.We will first review what impact these foreign joint ventures have already had on the local securitiesmarket and in particular on competition with the domestic securities companies. We will then consider,in respect of the second step for 100% foreign owned securities companies in Vietnam, what newchallenges and opportunities and this is likely to bring for the domestic securities companies. 4.4.3 Joint ventures with foreign securities companiesSince 2007, over 20 foreign players (for the large part foreign securities companies, with a few financialinvestors) have formed joint ventures with domestic securities companies. A complete list of Local jointventures with foreign securities companies (“Foreign JVs”) is in Appendix 1. 56  
  •  These foreign investors are predominantly Asian regional players who have invested in Vietnam as partof a regional development strategy to diversify from their own competitive domestic brokerage marketse.g. Japan and to provide access for their clients to invest in Vietnam. Six JV investors are from ASEANcountries, namely Malaysia, Singapore and Thailand. Nine are from East Asia, Korea, Taiwan, Japan.There are also some financial investors such as Dragon Capital in Ho Chi Minh Securities Company.It is premature to evaluate the performance of these joint ventures on a profitability or market share basissince the strategic priority of the foreign partners tends in many cases to focus on building a sustainablebusiness and client base for the medium term, rather than short term market share targets; in addition theoperating environment has been very difficult in the last couple of years due to the effects of the globalfinancial crisis, with low trading volumes by foreign investors who are the natural client base and revenuebringers of such foreign JVs; in addition, it appears that some foreign and local partners have found itdifficult to agree between themselves a common development and funding plan. Thus in terms of thebrokerage market share benchmark, only one foreign JV, Kim Eng Securities, has reached the Top 10.In conclusion these foreign JVs have not yet seriously threatened the significant market share held by thestronger local players. 4.4.4 Potential new entrants to Vietnam securities marketAbsent in Vietnam so far in terms of local on the ground securities operations via joint venture orminority investment are some of the larger global US and European players who are already present inmarkets such as Malaysia or Thailand. Also some of the large regional brokers who already expandedfrom their home markets into neighbouring ASEAN markets are also not yet established.One reason for the absence of some large names is that the market size at around US$33 bn is stillrelatively small in terms of critical mass for a core brokerage business, as in view of the investment offunds and resources the market will need to be larger to provide a more attractive payback possibility.For this reason some players may not want to set up their own operations in Vietnam for the next fewyears. However some may look for a local partner in order to provide a good access platform for theirforeign clients to invest in the Vietnam market. Thus, to take one example, Macquarie and Vina Securitieshave agreed to cooperate in areas such as co branded research and some investment banking services.While foreign securities companies can be a threat, in many cases they offer an opportunity also. Theycan be a valuable source of finance, foreign institutional investors and expertise in new, innovativeproducts (e.g. derivatives), technology and investment banking services. I understand various domestic 57  
  •  firms are in discussions with potential foreign partners and these are some of the benefits which theycould gain from such a tie up.In terms of good preparation for such discussions, the key strategic issues for local partner investmentcriteria for most foreign securities companies includes: management and human resources, servicequality ( research, sales and trading), risk management (avoid credit or other losses, reputation risk),corporate governance and innovation culture.4.4.5 Domestic Securities Companies: Enhancing Compliance with Regulations4.4.5.1 Market intermediaries should be required to comply with standards for internal organisation and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters (Principle 23)Compliance by securities firmsThe purpose of compliance is to ensure observance of the regulations. This is important in order toachieve an orderly market and a fair and level playing field for all investors and market participants.Compliance by securities companies with securities regulations and with their own internal regulationsand internal controls is a key to long term success. Past studies show a positive correlation between thequality of compliance standards of a firm and its popularity rating with investors and effect onshareholder value. Briefly put, high compliance standards build trust and value.However, compliance is often neglected by management. As the management and staff of a securitiescompany are responsible for making money, without the necessary internal and external disciplinescompliance issues risk being overlooked. A company with proven high compliance standards will bemore easily able to attract clients if they believe that this company will be transparent, respect theregulations and put customer interests first.Senior Management ResponsibilityIn a securities company or in any company wishing to follow best practice, individual senior managersneed to ensure that the business area which they run is properly organised and is capable of beingcontrolled. It is important to have clear internal rules and allocation of responsibilities to specifiedindividuals in order to be perfectly clear who is accountable for what in the organisation and to avoid 58  
  •  “grey areas” around accountability. This is essential, in particular when problems arise, since it is only atthat time that weaknesses in a governance framework are identified. Therefore all securities companiesshould look at whether their overall framework is absolutely clear about who is responsible for what, andthe senior management should discuss the current approach to compliance and any improvements theyfeel they should make.Allocation of Responsibilities and Internal supervisionIn this respect senior management should be clear which of them has what responsibility in the area ofinternal controls, and take reasonable care to ensure that the systems and controls that support thoseoperations are in place, and that they are appropriate to the nature and complexity of the business, bearingin mind that different firms have different needs.Compliance in VietnamIn Vietnam the licensing regulations stipulated by Decision 27 April 2007 requires that the business of asecurities have an organisational structure which provides a physical separation between the workingareas and staff to avoid conflict of interest between company and clients and between clients. Thelicensing criteria also require at least one director with the requisite relevant experience to be licensed toensure proper board involvement in the business. Market intermediaries are required to have put in placeadequate supervisory and internal controls, procedures and systems and avoid any situation which maycreate a conflict of interest.Overview of compliance functionEach securities company is required to have a formal compliance officer in all, who is the contact pointfor SSC. Such compliance officer would be responsible for the overall supervision of the intermediary’scompliance with securities law, regulations and guidelines, and with internal policies and procedures.Regulation No. 27 /2007/QD-BTC dated 24 April 2007 on Organization and Operation of SecuritiesFirms, Article 21 has specific requirements on the qualification of this compliance officer. However, thecompliance officer is not required to pass any relevant examinations and there is currently no compliancetraining provided by the SSC.In Vietnam a securities company must have an internal control system which is subject to administrationand management by the general director of the company. A company must have internal control staff,whose qualifications include that they are undergraduate or postgraduate in economics or law. Internalcontrols must ensure compliance with the Securities Law, and with business processes, and with client 59  
  •  money separation. In addition each company must assess their internal control system once a year andsend the report to SSC together with the annual financial statements.Currently the securities companies with whom I spoke confirmed that they have the compliance functionin place and that there have been no material issues to report to the SSC. However, anecdotal evidencesuggests that in some securities companies, less attention and importance is paid to compliance issuesthan should be the case; for example, the authorization process for staff trading, which is designed toprove a disciplined process for staff trading and to reinforce the concept of acting in the best interests ofthe customer, is not strictly enforced.Self assessment needs to be reinforced by rigorous external review by the SSC. It could possibly also besupplemented by an increased requirement on the securities company’s external auditor to disclose anyidentified cases of non compliance to the SSC. In addition, the senior management person responsible forcompliance needs to be accountable for significant compliance violations.Compliance trainingLeading firms in financial services typically have leading training programmes for their staff; in theirexperience, training is a key priority. Their motivation is clear: they regard the staff of their company asthe custodians of the company’s personal reputation and business success; it is the staffs who protect theircompany’s brand and drive customer satisfaction. Therefore, spending the time and effort to put in place asystem to produce appropriately trained staff who operate within the regulatory and internal controlframework is absolutely vital to everything they do as managers of the business,In Vietnam currently there are no specific requirements for compliance training for staff. In general thereseems to be a lack of awareness and attention paid to compliance. From past market experience, as themain business of a commercial company is to make money the disciplines and checks and balances ofeffective compliance tend to need to be imposed by external bodies tough regulations for non compliance.In the UK and various other developed markets training videos for all staff on compliance issues aremandatory and this should be a good practice to introduce in Vietnam.Market intermediaries are required to have in place policies and procedures on conflict management.There are explicit requirements to act honestly and in the interest of the clients. ( Regulation No. 27/2007/QD-BTC dated 24 April 2007 on Organization and Operation of Securities Firms, and Decision 60  
  •  No.126/2008/QD-BTC dated 26 December 2008 on amendments of and supplements to the RegulationNo. 27/2007/QD-BTC)Market intermediaries are required to maintain books and records, including accounting records and otherrecords that explain the transactions and financial position of the entity. The records must be retained for15 years (Regulation No. 27 /2007/QD-BTC dated 24 April 2007 on Organization and Operation ofSecurities Firms). The SSC will ascertain compliance with record keeping requirements when it conductsexamination on the market intermediaries.Customer protectionThere are detailed requirements on the segregation and safekeeping of client’s assets. Marketintermediaries are expected to obtain and maintain information sufficient to “know your client” andmarket intermediaries are required to provide a client with a Client Agreement setting out the rights andresponsibilities of the clients and the securities company. Market intermediaries are required to provideclients with a full and fair statement of account, and a monthly statement explaining the movement ofclients’ assets. In addition, market intermediaries should put in place an adequate mechanism to handlecomplaints received. Market intermediaries are required to make an assessment of the clients knowledgelevel, risk awareness and tolerance and investment targets under the “know your client” principle-(Regulation No. 27 /2007/QD-BTC dated 24 April 2007 on Organization and Operation of SecuritiesFirms).Corporate GovernanceIn addition to the corporate governance requirements for Listed Companies under the SL and for nonlisted companies under the Enterprise Law, we understand that the SSC/MOF is working with the IFC onThe Corporate Governance Scorecard for Vietnam. This provides recommendations to shareholders,corporations and government for implementing and monitoring good governance standards. Itsmethodology is to rate a company based on a range of corporate governance criteria such that it obtains ascore for different areas and a total score. The criteria include compliance with laws and regulations,including local governance regulations and globally recognized governance practices. 61  
  •  It is starting with a review of the CG practices of the 100 largest companies listed on HOSE and HNX. Inthis way individual companies are rated on a systematic basis and this encourages a strengthening ofcorporate governance standards. Over time this can be rolled out to cover more companies.One benefit of adopting more transparent, timely and standardized practices is to enable Vietnamesecompanies to integrate into an increasingly competitive and selective global market. 4.4.6 Opportunities for domestic companiesAs we have seen from the previous commentary the arrival of foreign securities companies in ASEANmarkets such as Malaysia and Thailand has brought opportunities for cooperation as well as increasingcompetitive challenge.While the government and regulator of these countries, as also in Vietnam’s case, agreed to liberalize thefinancial markets with the goal of boosting the capital markets, foreign investment and economic growthand generally they regarded the resulting increased competition from the arrival of foreign securitiescompanies as a desired catalyst for faster, more effective change in terms of expertise, product rollout,corporate governance and general best practice, at the same time they wished to preserve an effectivelocal securities companies sector.In Vietnam, the domestic securities companies can also benefit from opportunities which market openingcan bring.International securities companies bring:• Latest technology;• Technical and product know how;• Improvements in the market by acting as a catalyst;• More liquidity and foreign investors in the market;• Research from a different perspective, comparing companies to international standards.However, the domestic securities companies should be prepared for increasing challenge and competitionfrom the potential threat of increased competition from existing foreign JVs and possible new 100%foreign owned companies from 2012 onwards. We consider below some action points which domesticsecurities companies can take. 62  
  •   4.4.7 Action points for Vietnam securities companiesAction pointsWhile there is not a single strategy which will be appropriate for all domestic securities companies, welist below a number of suggested action points which these companies may can take, if they did not do soalready. These are all typical best practice business planning measures, which will be familiar to a numberof domestic practitioners already. Nevertheless it is a useful discipline to set out the action steps, inparticular for those who may not yet have fully thought through these issues. Key action points include:1. Set your strategy  Top management should discuss and set a medium term business strategy, with the necessary level of consultation and approval by shareholders and other stakeholders.  This should take account of a realistic SWOT assessment of the company and establish the optimal business model to achieve the company’s goals. For example, should the company only focus on retail customers, or should they try to also win foreign institutional investors, perhaps with the aid of a foreign securities company partner?Set the strategy: which services?Some leading domestic companies have already been diversifying their services to reduce reliance onpure brokerage business and enter the potentially more lucrative investment banking products. Theprevious review of markets such as Malaysia showed some domestic securities companies using thisstrategy, as it has been used extensively by many Western firms. There are various attractions of this fullservice model, namely diversified revenue sources, potentially higher margin services, enhanced prestigeand brand value of high profile services such as IPOs and M&A, and ability to identify attractivecompanies earlier pre IPO and have more time to cement client relationships. Other advisory servicesinclude private placement and valuation. However this full service model has its risks; the expertise andservice levels can be demanding so investment is required in personnel (the cost base will grow assuccessful persons with investment bank track record tend to command high salaries) and capital forunderwriting. It also depends on senior management understanding the investment banking business andrelated risks. The investment banking model will not realistically be the right solution for all thedomestic securities companies. 63  
  •  We note that margin lending has been popular among a number of domestic firms in 2010 as an attractiverevenue earner to supplement falling revenues, however there is a credit risk must be carefully assessed soas not to suffer losses.Another possible strategy for some domestic companies may be to specialize in SME companies, thefuture high growth champions. This is an area which some retail investors and some more growthoriented foreign investors like to invest in, and which it is difficult for 100% foreign securities companiesto cover without local assistance. It may be an area where some domestic securities companies canspecialize in some cases in partnership with foreign securities company to provide advisory services toSME on best practice skills in terms of analysis of business and risk management, as well as offering thedomestic company a pool of new foreign investor clients via their foreign partner.Target if possible a balanced customer base as some are more volatile than others. If the business is retailbased currently the feasibility should be examined of developing an institutional client base to providebetter stability. Set the strategy: other key issues Some of the key areas where successful securities companies typically outperform their peers are: a. Strong infrastructure i. Management and Human resources ii. Risk management, avoid credit or other losses, reputation risk iii. Corporate governance b. Service quality, strong research and sales to attract and retain customers c. Innovation culture Strong Infrastructure: for a business to be sustainable it is critical to have a solid infrastructure; this requires well trained and professional human resources, operating within a corporate environment based on strong risk management, internal controls and corporate governance, and founded on good business ethics and quality standards. Such companies earn the clients’ confidence and respect and can enjoy the dividend of high reputation, growing client base and sustainable, profitable business. It is often the case that management, in their focus of running the business and achieving growth and profits, pay too little attention to housekeeping issues such as risk management and corporate governance. However, just as the example of the global financial crisis highlighted glaring 64  
  •   deficiencies in risk management and corporate governance of many large institutions, it is sound advice to companies in developing as well as developed markets to implement and maintain strong control systems to reduce all forms of risk. Awareness and implementation of risk management, internal controls and compliance systems is generally not so developed in Vietnam companies. The level of awareness and training should be increased to enhance employee awareness. For securities companies wishing to have robust systems to enjoy a more sustainable future and reduce all forms of risk, both credit risk for example and reputation risk from scandals, it is better to proactively address this area now rather than to wait reactively for the arrival of better controlled foreign firms later. Service quality: Most foreign investors and wealthier retail investors choose a securities company which can consistently offer high service levels in all aspects of their business, from research, sales and trading through back office. Research and sales are key areas, as such investors like to receive well researched, reliable analysis which provides good ideas. Innovation culture: The securities markets globally are evolving very fast. As securities markets develop they look to offer a wider product range to investors. New industry drivers such as high frequency trading and dark pools significantly impacted Western markets such as the US and Europe. Though Asian securities markets were so far less affected by some of these changes, due to more fragmented structure and more protective regulatory environment, some changes are now developing in ASEAN countries. Now that the Vietnam market is opening, the domestic securities companies who wish to succeed need to be innovative, to follow market trends and be responsive to client needs. 2. Business Plan  Based on the above approved strategy management should write a business plan which details the key ideas and development plan to take the business forward; this should be an integrated plan, addressing all areas of the company’s business, including, target customer base, services and products, marketing, sales & trading, research, human resources, technology and other investment, costs and marketing.  It is often useful to frame this by setting a company mission statement and establishing a code of business conduct, as many leading companies in other countries have done. 65  
  •   3. Financial forecasts  The Business Plan needs to be integrated and fully linked to a supporting set of financial forecasts covering the same 3 to 5 year business plan period. The forecasts should include an integrated set of income statement, balance sheet and cash flow statement. This discipline will help to ensure not only that that the forecasts are technically correct, but will also highlight the costs, capital and cash flow necessary to support the business plan execution and thus aid management to focus on new capital requirements and discuss with the shareholders in order to plan ahead and assess the need to find new shareholders. In this way, if existing shareholders are not able or not willing to support new capital raisings, then a timely search can be made for a new financial or strategic shareholder.  For the financial forecasts the key operating and economic assumptions should be clearly thought out and stated for a base case, including assumed macroeconomic and business/stock market conditions, such that the model can be used for sensitivity analysis for a worst case and best case scenario. The financial model should include assumptions for the macroeconomic variables, such as GDP growth, interest and exchange rates, and from operating side, assumptions on fee rates, brokerage volumes and client growth rates; the model should be well constructed to be capable of running scenario analysis to evaluate the financial impact of different strategic options and different core assumption on macro and operating outlook e.g. so called base case and worst case scenarios.  For example, the financial model can be used to assess the break even and profit/capital impact of a worst case scenario for trading volumes.  If necessary the company’s auditor or other adviser may be able to assist on this exercise. 4. Marketing document for potential partners  To ensure optimal presentation the securities company should prepare a good quality marketing document presenting the company and showing the strengths. This can be in the form of a powerpoint presentation and ideally also brochure for clients. It is important for showing the firm in the best light to potential partners, financiers and to raise the corporate self identity among staff. The presentation should include section on Strategy, Products and Services, Client Base, Financial Information (profit and loss account, balance sheet, capital position and funding needs), Management credentials and experience, Staff information, 66  
  •   Market position and Competition, Market Outlook. All companies have to a greater or lesser degree weaknesses and these should not be hidden or denied. A good potential investor will find them anyway so it is better to be open and show that you are aware of weaker areas and already have a proactive strategy to address them. 5. Industry consolidation and partnershipsIn some cases this exercise may lead management and or the owners of some of the weaker companies toconclude that the best course of action is to seek a buyer for the business. This will depend in part on therealistic profit prospects and the financial resources and commitment of the shareholders, a situationwhere securities subsidiaries of commercial banks may find it easier than some smaller securitiescompanies who are not members of well resourced financial or other groups.All securities companies should consider their strategic options in terms of whether it makes sense to go italone or seek partnerships business wide or in specific areas. For the domestic securities companies themain options in terms of corporate control are: 1. No major change to existing ownership structure - preserve the status quo; 2. Merge with domestic peer(s) to create a stronger, larger local group; 3. Sell 100% to a domestic or foreign buyer; 4. Cooperate with a foreign partner. This could be via: a. Joint venture (49%) b. Minority stake (smaller stake, size depending on the objectives typically between 10% and 30%) c. Non equity cooperation agreementStrategic partner or no partner?We consider below some advantages and disadvantages of each option, in order to stimulate considerationof these options.Strategic Pros ConsoptionNo major change o Avoid time consuming talks with o May be harder to compete in some areasto existing foreign or other equity partners. where foreign expertise is a benefit e.g. newownership products such as derivatives, though expertise can be imported by hiring an 67  
  •  structure experienced team.Acquire/merge o May be opportunities to acquire new o Some securities companies’ intrinsic value inwith other client portfolios and a business with terms of brand name and client base may bedomestic complementary skills relatively low and price agreement betweensecurities o An enlarged entity can attain more buyer and seller may be difficult to reach.companies critical mass and be more stable if it o Acquisition of people businesses can be has a larger and more diversified risky; if disagreements arise people assets revenue and client base. Also cost can walk away, reducing the value of your savings should be possible. purchase o With a domestic merger there will be more overlap in terms of staff and infrastructure so more redundancies are likelySell 100% o If current shareholders do not o If various domestic securities companies are wish/cannot support the next stage of considering an exit and if there is more growth it may be the right time to exit supply than demand from buyers in the now while there is interest from market, this will put downward pressure on foreign buyers attracted by Vietnam’s the sale price of securities companies. long term growth prospectsEquity tie up o Equity investment by a foreign partner o Joint venture at 49% may be less workable inwith a foreign provides fresh capital and is a sign of medium term, we may see some foreignpartner (joint commitment which should be a good partners seek to buy out their local partnersventure or market signal and positive for your to convert to a 100% foreign ownedsmaller minority brand and domestic and foreign client companystake) recognition o A foreign investor strategic investor o A significant minority stake is a committing significant capital to the business popular investment model for a foreign will want some rights such as Board Seat(s), securities company, such as SBI with voting rights so it is important to assess FPT Securities. Normally it shows the carefully before signing that this partner is a wish to be a strategic investor, not just good cultural and business fit and define a passive financial investor clearly both parties rights and obligations o The significant minority stake (as well as exit terms to protect the downside typically between 15% to 30% often in case the relationship does not go well and indicates a good level of commitment needs to be terminated). but at same time the local partner remains in controlCooperation o May be a good first step, provides a o Less commitment than equity relationship,agreement getting to know each other period can normally be more easily broken which if positive can lead to an equity o Does not bring capital relationship later. It is a good idea to sound out the potential partner’s longer term commitment at the initial talks i.e. when agreeing cooperation agreement, develop a clear understanding if the foreign partner aspires also to a second equity investment stage so that goals and expectations are aligned. 68  
  •   o Example is Macquarie and Vina Securities, as per the public announcement this is a non equity strategic partnership.5 RECOMMENDATIONS 5.1 Recommendations for SSC to address market openingSSC capacity building and securities market infrastructure1. The SSC currently is not able to properly fulfill its surveillance responsibilities due to its inadequate IT system. The SSC needs an automatic market surveillance system, information disclosure system and reporting system. Full priority in terms of human resource and technical expertise, as well as continuing funding support should be given to this project. With a modern IT system this would enable SSC to identify more easily and on a more timely basis potential violations. It is a fundamental initial step in developing a more effective surveillance and enforcement system For the securities market in order to raise standards.2. The SSC workload is too high especially in departments such as Securities Issuance Department, Securities Inspectorate and Market Surveillance Department. This also prevents the SSC from properly fulfilling its mandate. Priority should be given to assessing and approving a reasonable increase in the number of suitably qualified staff in order to tackle the workload successfully.3. The proposed new integrated IT system for the two exchanges, HOSE and HNX, to provide a new trading system, stock watch system and clearing and settlement system should also be given priority by the authorities. This will also help HOSE and HNX identify more easily suspected market abuse, as well as increase efficiencies between the exchanges and the VSD.4. SSC should consider amending the law in order to acquire legal protection for its Board members and staff personal liability in the lawful performance of their duties. This is in line with international best practice, as it is important for the SSC staff to be able to carry out their duties in often sensitive areas without unfairly incurring personal liability.5. The SSC should ensure that its own staff dealing rules are at least as strict as those for securities companies. There should be regular monitoring of staff compliance with this. This derives from the 69  
  •   need for a securities regulator such as the SSC to maintain the highest standards in order to protect its integrity and set a good example to the securities companies and other firms which it regulates.6. SSC does not have a formal Code of Conduct. In its capacity as the regulator and upholder of good standards it should introduce a formal written Code of Conduct for SSC staff in line with IOSCO best practice. This is in line with the need for the SSC to serve as a role model to the securities companies, the listed companies and to all market participants to adopt, internalize and take ownership of their own Code of Conduct . By internalizing such a code this could also make it easier for SSC staff to better transfer the understanding to the securities companies management. In light of firm scandals and heavy losses and global financial crises caused by inter alia, lack of ethics and transparency, it is clear that good ethics has an important role to play in business. This should also help to maintain SSC’s good name and reduce the risk of reputational loss.Regulatory independence1. The consultation and approval process for new market policies and products and related legal amendments is lengthy and not transparent. The Vietnam Capital market development plan should provide for the SSC to acquire increasing independence at the same time as ensuring it has sufficient capacity and powers as a regulator in terms of inter alia, having sufficient senior and experienced people, with expertise in the securities market, finance, law and other areas. Regulator independence is in line with IOSCO best practice, because from experience capital markets develop more successfully if they are regulated at arms length from political decisions and influence. By incorporating the goal of independence for the regulator as a development objective, this would give the right signal to the market that the authorities are committed to build a modern and competitive securities market. In view of Vietnam being still at an early stage of development this full independence process for SSC may take some time; however, in the meantime the authorities should implement a more efficient consultation and approval process for new policies and legal amendments in order to avoid undue delays in market reform. In this way, after careful but timely consultation on the risks and benefits of each new product or measure, the time to market for approved policy changes can be speeded up. This should have the benefit of a more efficient implementation of positive market reforms. In the meantime the SSC should strongly discourage experimentation by securities companies in new products which have not been approved.Cooperation with domestic institutions1. Currently there are occasions when SSC is not informed of policy decisions while they are still under consideration that might materially affect the Vietnam securities markets. This means that SSC is not 70  
  •   able to make optimal preparations to ensure a stable market. A formal MoU for MOF/SSC with the State Bank of Vietnam should be agreed, providing for a full exchange of information on all regulatory actions to be taken or contemplated by the signatories. This MoU should allow the SSC to communicate its views on the likely impact of such policy decisions. It should also provide for advance warnings of potential firm failures to ensure effective and timely response to possible systemic risks. Formalized cooperation between MOF/SSC and SBV should be supported by regular bilateral dialogues to encourage effective cooperation. Closer cooperation and early warning communication would allow for better handling of negative events for the securities market pressures and help the SSC to manage the more effectively the associated risks.2. SSC’s investigation powers are too restricted, as it is not permitted direct access to bank records. The MoU with SBV should address this issue and relevant policy change should be approved, so that the SSC can access bank records on a timely basis. This will then allow the SSC to be more effective and efficient in their investigation and enforcement role.Cooperation with foreign regulators and regulating foreign securities companies1. SSC is not yet a member of the IOSCO MMoU. This means that the SSC cannot enjoy the full and more standardized enforcement cooperation which other regulators across the world enjoy (more than 65 signatories). This will help the SSC receive the cooperation and information sharing of foreign regulators when foreign investors or foreign securities companies commit financial crimes in Vietnam. With further market opening in 2012, the SSC should be given full support to expedite its fulfilling the joining requirements for the IOSCO MMoU. One of these requirements is to enact any necessary legal changes to enable the SSC to seek information on behalf of foreign regulatory bodies, consistent with international standards for cooperation. As a signatory to IOSCO MMoU the SSC would be better prepared and equipped to handle cross border enforcement.2. The SSC has few fluent English speaking staff. This makes communication and understanding with foreign, securities companies, investors, regulators and others more challenging and puts a burden on the SSC staff who do have English proficiency. It will become increasingly important for SSC to have sufficient, effective English communication with foreign securities companies and with foreign regulators. The SSC has already taken some new measures to attract staff with English proficiency; this and other necessary initiatives should be taken to properly equip the SSC.Overpopulated domestic sector 71  
  •  1. As identified in the above section “Challenges for the domestic securities companies”, the SSC is faced with the challenge of an overpopulated sector of 105 securities companies, with the prospect of applications for additional licences for new foreign securities companies in 2012. Many of the existing securities companies have no long term strategy and low risk management skills, thus when the markets are difficult as in Quarter 3 2010 many have reported losses. A more healthy market structure would be for a lesser number of larger, better capitalized securities companies which have more business and financial critical mass to provide stability and sustainability. However, market forces have produced little rationalisation to date in terms of mergers. SSC should encourage mergers as a solution for some weaker firms but not force them on securities companies who are otherwise compliant with regulations.2. The SSC should monitor capital adequacy levels rigorously and be disciplined in follow up with firms whose capital falls below the legal threshold. For those companies with capital difficulties and shareholders who do not wish to inject new capital SSC should encourage them to explore the option of sale or merger as an alternative to closing down.3. SSC may also wish to consider raising the capital level further to encourage consolidation.Surveillance1. In addition to a new IT system mentioned in capacity building above, the SSC needs more suitably qualified staff, in particular in departments such as Securities Issuance Department , Securities Business Department, Department of Investment Funds and FMCs, Securities Market Development Department, Securities Inspectorate and Market Surveillance Department. Staff increase depends on the allocation by the MOF and the Ministry of Internal Affairs. Total staff increase in 2011 for the SSC may be 40-50 persons. In order to strengthen its capacity building it would be an advantage if the SSC can offer more attractive salary and employment packages in order to attract and retain good caliber personnel.Inspection1. The SSC selection system for securities companies inspections is based on an equal system, not a risk based one. Best practice among leading regulators is to implement a risk based approach, since the risk level of securities is not uniform. Some carry higher risk, be it from more aggressive business activity, lower risk management skills, moving into new business areas/and it is these firms which more regulatory focus should be concentrated, as insufficient monitoring can lead to greater volatility or failures. The SSC is already in the course of designing a risk based approach and this should be encouraged and facilitated. 72  
  •  2. External compliance audits by SSC should be rigorous and penalties for non compliance need to provide an effective deterrent for the company and for the director responsible for compliance; also, the SSC should consider making public the inspection results for individual securities companies and the grades in order to provide some positive peer pressure.3. External compliance should also be strengthened as part of the upgrading of external auditors professional standards. In the case of important non - compliance matters identified by auditors, it should be mandatory for the auditors to disclose this to the SSC.Investigation1. The law does not currently permit the SSC to visit the premises of a suspected person nor to have the right to have direct access to clients’ bank accounts details (see Cooperation with Domestic Institutions above), internet and telephone statements. Access to this information is a normal right for regulators under best practice and absence of the right deprives the SSC of basic and vital information to enforce effectively. The law should be revised to allow designated SSC investigation personnel to carry out these inspection activities.Enforcement1. Penalties have traditionally been too low to provide an effective deterrent. SSC has taken active steps and in 2010 penalty amounts were increased to VND 300 million from VND 50 million to provide a larger deterrent. This move will now be supplemented with the new legal changes to permit the disgorgement of ill gotten gains or losses avoided. The SSC needs to apply these measures, in conjunction with other surveillance and enforcement improvements, to see if there is an improved reduction in market abuse and higher compliance by market participants or if further penalty increases or other changes are required.2. The SSC is not able to directly initiate civil enforcement actions. Policies should be developed with the objective that SSC should obtain legal authority to be able to directly initiate such actions on its own behalf. This should speed up the process and make successful and efficient civil enforcement more achievable.3. The SSC criminal enforcement process is currently via the MOF and the Inspectorate of Police. The process is not effective or efficient. SSC/MOF need the full and efficient cooperation from the criminal authorities to close successful enforcement cases.4. Existing definitions of insider trading lack clarity in some areas, such as the definitions of “major impact on securities prices” in the SL, and “big illicit profits” in the Criminal Code. This makes it more difficult for judges to make informed assessments of market abuse cases, in particular with a 73  
  •   civil law code and with judges lacking the financial markets expertise to provide more informed confidently assess cases and pass judgement. Drafting of the SL and Criminal Code in respect of insider trading should be clarified, drawing on the experience of other regulators. 5.2 Recommendations for domestic securities companies to address market opening1. Strategy: Many domestic securities companies operate on a short term profit basis and management do not have a clear long term strategy or vision. In bull markets they can make profit like other firms but in bear markets, without clear strategy they tend to be passive and their losses are often increased by proprietary trading positions which they cannot close out. Therefore the management of domestic firms need to set a long term strategy in consultation with shareholders and produce a detailed and well thought out business plan (see for more detail the previous section on action points)2. Business plan and forecasts: Domestic firms need to develop a good business plan and financial model. A number of firms do not have this and their firm risk is increased, since they will inevitably be more reactive than proactive, without a clear idea of where they are going and how they will get there. The business plan will assist by providing the practical steps and timings for each area of the business, and it should be integrated with financial forecasts of matching duration to capture forecast revenues, all anticipated costs and investment requirements, as well as cash flow and financing sources and needs. The financial spreadsheet model should be well constructed, so that it is capable of running scenario analysis to evaluate the financial impact of different strategic options the company’s management may wish to consider. It should also be built on core assumptions for the macroeconomic and operating outlook. Scenario analysis can then be modeled for base case, worst case and best case scenarios in terms of macro and operating variables. (see for more detail the previous section on Action Points).3. Management and Corporate culture: many domestic firms need to move from a short term approach to foster a proactive, innovation culture, where management is open to change and anticipating trends and inspires its staff to focus on skills development, client service, and high professional and ethical standards: financial services in emerging markets is ever changing, as barriers come down, the change rate increases. This needs to be management led and management and shareholders should assess the need for further strengthening of management teams in order to strengthen this process.4. Marketing document: domestic firms should all have a marketing document, which can be in the form of a powerpoint presentation and ideally also brochure for clients. This is important for showing 74  
  •   the firm in the best light to potential partners, financiers, clients and to raise the corporate self identity among staff.5. Partnership/cooperation: Many foreign firms will be interested to discuss cooperation with domestic firms. As part of the strategic planning process the company should decide if it wishes to explore opportunities with new equity investors, domestic or foreign, so that they do not miss out on opportunities.6. Funding: Some domestic firms do not plan well and in advance for their funding needs, which can leave them in a position of unnecessary pressure to find capital in a short space of time. Firms should fix their funding strategy to ensure sufficient capital is available for normal operations, growth plans and some margin for unexpected losses. They should establish if funding will come from existing or new shareholders and verify their resources and commitment.7. Risk management and controls: There is not yet a widespread risk management culture in Vietnam. In order to manage risk effectively it is necessary to understand the importance of the risk management technique and the time and resources it takes to design a risk management system for the company. While some domestic and foreign securities companies do already understand the importance of risk management and are seeking to implement appropriate risk management systems, most firms do not yet understand its importance and are not making the required progress. As a result, in adverse market conditions, these firms are more likely to incur losses. Domestic firms should implement a formal process to address and correct risk management limitations. Important is not only the investment in IT systems but the technical understanding and general appreciation of the importance and benefits of good risk management for long term success.8. Corporate governance: This is still a weak area for Vietnamese securities companies and for Vietnamese enterprises in general, due in particular to the fact that Vietnam has recently transformed from a command economy to a market economy. The concept of corporate governance is still relatively new in Vietnam. Domestic firms are now gradually appreciating its importance and the need to comply with regulations in corporate governance. However, this process is starting and requires more time for firms to comply with corporate governance standards effectively and efficiently. Many firms are still weak and their management practices and governance are not transparent, which can results in abuse of client assets and disputes and litigation. This is an area where foreign securities companies will typically have higher corporate governance standards and domestic firm management should make it a priority to upgrade its corporate governance now. Shareholders should reinforce this where necessary to ensure management is properly focused on this issue to make the firm more stable and sustainable. Management of securities companies should be aware of best practice and should give proper attention to initiatives such as the MOF development of 75  
  •   the Corporate Governance scorecard. This applies in particular to listed securities and other listed companies but non - listed firms should also apply such standards as much as feasible now and be aware of the model to work towards.9. Code of Conduct: incorporate a code of conduct into your internal regulations and terms of employment and ensure that this is understood and adhered to. This contributes to a raising of the firm’s business conduct standards and customer service and should be viewed as an integral part of developing higher corporate governance and compliance standards. This in turn raises the reputation of the forms and attracts customers and investors. Secondary 5.3 Recommendations to enhance compliance of Securities Companies1. Management should understand the importance of compliance to build a long term sustainable and profitable business, to be a brand leader in which the investor community has confidence. Sound compliance is necessary to achieve stable and sustainable securities companies and sound overall market development.2. Management should put the systems in place to ensure securities company staff understand the concept of compliance, its importance and their own personal compliance duties in their business area. Therefore the SSC should implement an industry wide mandatory compliance training programme so that the basic concepts and rules are clearly understood. Individual firms should then be responsible for making sure all staff attend training sessions and have a clear understanding of the compliance concept and the firm specific compliance processes and their individual compliance responsibilities. Ongoing validity of the practicing certificate should be linked to attendance at such compliance training sessions.3. An examination should be set for the designated compliance officer and his team in the securities companies and he should be approved by the SSC before appointment.4. In conjunction surveillance of compliance must be upgraded and enforcement more effective for non compliance and related negligence or willful non-disclosure. An effective deterrent is needed for inter alia, the Board Director responsible for compliance (should be clearly accountable), the compliance officer, internal audit.5. SSC inspection report results including compliance effectiveness rating should be published on the SSC website together with the securities company evaluation grade. Such transparency encourages improved performance. 76  
  •  6. If the securities company external auditor becomes aware of any matter that can have a material effect on the standing of the company or of any non compliance matter, the auditor should report this to the SSC. Legal amendments to enable such reporting should be made. 5.4 Other recommendations 1. The previous MUTRAP Report, “Assistance to the Ministry of Justice and other relevant Ministries and Agencies to scrutinise national legislation against GATS obligations and commitments”, June 2008, contains a recommendation by local experts for the promulgation of an implementation document on the establishment and operation of 100% foreign invested securities companies, fund management companies and branches of foreign securities firms and fund management companies, with time of execution of 11th January 2012, in order to ensure the transparency as well as prudential management in the securities sector. This is because current legislation covers in detail only the organization and operation of domestic securities firms and fund management companies. This recommendation is sensible and should be acted upon by the SSC and other necessary institutions in order to achieve promulgation of the implementation document before January 2012. 2. While the disclosure regime and audit and accounting standards have not been examined under the scope of this report, our discussions with market participants indicate that auditor standards need improving. The SSC already has a list of accredited auditors. However, in general transparency and reliability of financial information is still rated as low by most observers. From a technical aspect, information accuracy can be further improved; I understand, for example, that in several cases in the recent past, the audited financial statements of listed companies contained balance sheets which did not balance. 77  
  •   References Duong Thi Phuong, Deputy Director Market Supervision Department, State Securities Commission: “Recent Developments and Challenges in Viet Nam”, presentation made at Vientiane, 29 July 2010 EU Multilateral Trade Assistance Project Vietnam II (MUTRAP II) SERV-1 Report:“Implication Assessment of Vietnam’s GATS Obligations and Commitments”, July 2007 EU Multilateral Trade Assistance Project Vietnam II (MUTRAP II) SERV-2 Report:“Assistance to the Ministry of Justice and other relevant Ministries and Agencies to scrutinise national legislation against GATS obligations and commitments”, June 2008 EU Multilateral Trade Assistance Project EU – Viet Nam MUTRAP III SERV -2A “The comprehensive strategy for service sector development to the year 2020 (CSSSD) with a vision up to 2025”, December 2009 Hanoi Stock Exchange (HNX) 2009 Annual Report Ho Chi Minh Stock Exchange (HOSE) 2009 Annual Report International Monetary Fund (IMF): “Financial Sector Assessment: A Handbook”, International Monetary Fund, Washington D.C., 2002 Joel Trachtman: “Addressing Regulatory Divergence Through International Standards: Financial Services”, in P. Sauvé & A. Mattoo (eds), Domestic Regulation and Services Trade Liberalization, The World Bank, Washington DC, 2003 J. Irwing: “Regional Integration of Stock Exchanges in Eastern and Southern Africa: Progress and Prospects”, IMF Working Paper, 2005 M. Kono and L. Schuknecht: “Financial Services Trade, Capital Flows and Financial Stability”, World Trade Organization, Geneva, 1998 R. Pardy: “Institutional Reforms in Emerging Securities Markets”, World Bank working paper, 1992 S. J. Key: “Doha Round and The Financial Services Negotiation”, The AEI Press, Washington D.C, 2003 IOSCO: “Objectives and Principles of Securities Regulation”, May 2003 Financial Services Authority (UK): “Enforcement Annual Performance Account”, 2009/10 Bursa Malaysia website 78  
  •   Indonesia Stock Exchange (IDX) Factbook 2009 Stock Exchange of Thailand website 79