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Securities market liberalisation in vietnam

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Securities market liberalisation in vietnam

  1. 1.   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 
  2. 2.   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  
  3. 3.   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  
  4. 4.  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 
  5. 5.  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  
  6. 6.  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  
  7. 7.  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  
  8. 8.  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  
  9. 9.  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  
  10. 10.  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  
  11. 11.   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  
  12. 12.   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  
  13. 13.  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  
  14. 14.  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  
  15. 15.  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  
  16. 16.  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  
  17. 17.  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  
  18. 18.   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  
  19. 19.  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  
  20. 20.  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  
  21. 21.  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  
  22. 22.  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  
  23. 23.  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  
  24. 24.  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  
  25. 25.  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  
  26. 26.     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  
  27. 27.  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  
  28. 28.    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  
  29. 29.  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  
  30. 30.   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  
  31. 31.   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  
  32. 32.  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  
  33. 33.  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  
  34. 34.  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  
  35. 35.  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  
  36. 36.  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  
  37. 37.  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  
  38. 38.  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  
  39. 39.  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  

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