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Vietnam will launch an effective hedging and investment instrument, called covered warrants, with the aim to draw foreign capital into the country’s listed companies as there is no foreign ownership limit on the new securities product.
The long-awaited securities product, which will be traded on the Ho Chi Minh Stock Exchange from June 26, is expected to provide investors with more options and attract a large number of investors since they have lower investment costs and can be leveraged more than conventional financial products.
In the context that foreign ownership limits at many Vietnamese firms have been reached and the roadmap to loosen the cap has not been approved by the government, covered warrants will be an alternative technical tool as foreign investors are not limited to buy the securities product and can freely trade it as domestic investors do.
Covered warrants, issued by a securities company, give the holder the right to buy or sell an underlying asset at a specified price on or before a specified date. Underlying assets can be a single stock, a basket of stocks, an index, a commodity or a currency.
According to Nguyen Duc Thong, securities derivatives transaction director at Saigon Securities Incorporation (SSI), covered warrants are a popular security on many developed markets.
Markets that have developed covered warrants such as Taiwan, Thailand, Hong Kong, and South Korea, and Vietnam’s securities market have many similarities, including having high rate of individual investors, short-term trading accounting for a majority and large demand for using leverage.
Bringing such premium-structured products to Vietnam is a correct and necessary step, Thong said, adding covered warrants would help diversify asset classes and help hedge risks in the context of market volatility.
To issue them, securities companies must meet certain financial norms and obtain a permit from the State Securities Commission, the stock market watchdog. Accordingly, they are required to have charter capital and equity capital of at least VND1 trillion (US$42.92 million) and not to incur accumulative losses.
Currently, only 10 out of more than 70 securities companies in Vietnam are qualified to issue them. They are SSI, Ho Chi Minh Securities Company (HSC), VNDirect Securities Company (VND), Viet Capital Securities Company (VCI), Military Bank Securities Company (MBS), Bao Viet Securities Company (BSC), Viet Dragon Securities Company (VDSC), Vietnam Bank For Industry & Trade Securities Company (CTS), KB Securities Company (KBSV) and VB Bank Securities Company (VPBS).
As many as 21 stocks in the VN30-Index are qualified to be underlying stocks of covered warrants. Such stocks meet requirements in terms of market capitalization of more than VND5 trillion (US$214.59 million), sufficient liquidity and free-float, and decent business performance.
No price manipulation
There is very little chance of price manipulation with covered warrants, said Tran Anh Dung, director of VNDS’ Market Strategy Department.
The total amount of covered warrants to be issued was capped at 10 percent of the company’s total floating shares, so the amount of covered warrants is too small to make an impact on the underlying stock prices, he said.
The State Securities Commission regulated the trading price of a covered warrant based on the underlying stock’s five-day average price, Dung said.
“That makes it difficult for anyone to manipulate the price of covered warrants,” he said.
Individual investors should not worry about securities firms colluding with group of buyers to control the price of covered warrants as it would be too costly for them, he said, explaining if any investor wants to buy covered warrants to manipulate prices, securities firms will ask the State Securities Commission to allow them to issue more covered warrants to stabilize prices.