Securities market liberalisation in vietnam

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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 CONTENTS

1 OBJECTIVE OF REPORT ......................................................................................................................................... 4
1.1 Methodology ............................................................................................................................................................... 4
1.2 Structure ...................................................................................................................................................................... 4
2 EXECUTIVE SUMMARY......................................................................................................................................... 5
3 BACKGROUND OF SECURITIES MARKET IN VIETNAM ................................................................................ 8
3.1 Supervisory Framework .............................................................................................................................................. 8
3.1.1 Securities Regulator ................................................................................................................................................ 8
3.1.2 Securities Law ......................................................................................................................................................... 9
4 LIBERALIZING THE SECURITIES SECTOR ...................................................................................................... 16
4.1 Liberalizing the Securities Sector in Vietnam .......................................................................................................... 16
4.1.1 Introduction ........................................................................................................................................................... 16
4.1.2 Securities as a sub-sector of the broader “financial services sector” – Vietnam’s WTO Commitments .............. 16
4.1.3 Liberalization of Financial Services in the GATS – The Regulatory Framework ................................................ 18
4.1.4 The Benefits of Securities Market in the Economy .............................................................................................. 22
4.1.5 Liberalization of Capital Markets: the Issues at Stake .......................................................................................... 24
4.2 Financial liberalization in ASEAN securities markets.............................................................................................. 31
4.2.1 Malaysia securities exchange and investor overview ........................................................................................... 31
4.2.2 Thailand securities exchange and investor overview ............................................................................................ 33
4.2.3 Indonesia securities exchange and investor overview........................................................................................... 35
4.2.4 Conclusion on Foreign securities companies in ASEAN markets ........................................................................ 36
4.3 Challenges for the regulator from market development and market opening ........................................................... 36
4.3.1 Introduction - Adapting to market liberalization................................................................................................... 36
4.3.2 Review of regulatory powers and effectiveness.................................................................................................... 37

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4.4 Challenges for the domestic securities companies from market development and market opening ......................... 55
4.4.1 Domestic Market Conditions ................................................................................................................................ 55
4.4.2 External Sector developments: WTO Financial liberalization .............................................................................. 56
4.4.3 Joint ventures with foreign securities companies.................................................................................................. 56
4.4.4 Potential new entrants to Vietnam securities market ............................................................................................ 57
4.4.5 Domestic Securities Companies: Enhancing Compliance with Regulations ........................................................ 58
4.4.6 Opportunities for domestic companies.................................................................................................................. 62
4.4.7 Action points for Vietnam securities companies .................................................................................................. 63
5 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 ............................................................................................................................................ 77
References…………………………………………………………………………………………………………………. 72

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1 OBJECTIVE OF REPORT
In 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 securities
market liberalization, the challenges posed by this liberalization to both the SSC and to the domestic
securities companies and to recommend policy changes and action points to enable the SSC and the
securities companies to prepare for these challenges.

For the SSC, we recommend policy changes to strengthen its ability to meet the challenges of market
opening in general and to strengthen its existing regulatory surveillance and enforcement powers in
particular.

For the securities companies we recommend how domestic firms can best prepare for the challenge of
foreign competition and how they should enhance their compliance with national legislation.

1.1 Methodology
The 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 and
other international securities markets and regulations and considering the international experience of
bodies such as IOSCO, World Bank, ADB.

1.2 Structure
Following the Executive Summary below, we begin our study by providing background on the Securities
market 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 regulatory
framework set out in the GATS; the relevant literature on the benefits of a well functioning securities
market; and the economic implications deriving from the liberalization of the securities market in the light
of the WTO framework and in the context of the much broader discussion regarding the pros and cons of
liberalization of financial services.

From this general analysis of liberalization, we then in Section 4 consider the opportunities and threats
presented to the SSC and to the domestic securities by market opening. To assist with this we first draw
on the example of neighbouring ASEAN securities markets and the experience of their domestic
securities 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 foreign
securities companies already, from the over 20 already established foreign invested joint venture
securities companies in Vietnam, and what is the likely effect from the potential new 100% foreign
invested 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 the
current effectiveness and how they should improve their compliance with national legislation in order to
prepare for market opening and the anticipated higher compliance standards of foreign securities
companies.

In Section 5, following this analysis of the challenges and risks of market opening, we make
recommendations for the SSC on how to adapt to market opening and to improve the effectiveness of the
prevailing surveillance and enforcement system; we also consider some important steps which domestic
securities companies can take, if they did not do so already, to develop a strategy to prepare for greater
competition 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 equity
markets rather than the bond market. This is due to the fact that our two core topics, surveillance and
enforcement, and the future of the domestic securities companies is more closely linked currently to the
equity market (the bond market is currently largely confined to the Government bond market). However
further development of the bond markets, corporate bonds and convertible bonds is an integral part of the
overall development requirements of Vietnam’s securities markets to broaden the range of capital market
products.

2 EXECUTIVE SUMMARY
The Vietnam securities market has made considerable progress since 2000, in particular since 2005. The
institutional and legal framework is in place and the securities market has grown to over 600 listed
companies and over US$ 30 billion in market capitalization. These notable achievements have benefited
from 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 to
World Bank, GDP growth is expected to be in the range of 6.5% to 7.5 % for the period to 2015. Vietnam
has a large population of some 87 million, with a young workforce, and a growing pool of corporate talent
and listed companies; the local population, in particular the urban young, has growing prosperity.

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International investors already demonstrated significant interest in Vietnam, with an estimated
approximately US$ 7 billion of foreign indirect investment; this has slowed during the global financial
crisis and is still tempered currently by macroeconomic concerns, however many foreign investors also
believe that Vietnam has attractive long term prospects. This foreign capital has already benefitted many
Vietnamese companies and foreign investors have helped in some cases to raise standards by introducing
best 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 of
foreign securities companies. In line with Vietnam’s 2007 WTO commitments, foreign securities
companies have been permitted to form local joint ventures since 2007 and as a second step in market
opening, from January 2012, 100% foreign invested securities companies will be permitted to establish in
Vietnam.

The SSC faces a number of significant challenges. Market opening will bring the additional challenges of
regulating foreign securities companies, cooperating with foreign regulators and developing a healthy
market with strong local players able to hold their own against foreign competition. The SSC therefore
needs 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 improved
cooperation with domestic and foreign regulators; achieve faster implementation times for consultation
and approval of new laws and policies for the securities market; encourage consolidation of the
overpopulated domestic securities companies.

For SSC there are considerable challenges in surveillance and enforcement also. SSC has inadequate
powers of investigation and enforcement, resulting in an inability to adequately fulfill its surveillance and
enforcement responsibilities. In addition the compliance obligations of securities companies are not well
understood or enforced internally, training for securities company staff is required and also closer
inspection by external bodies and more accountability for senior management. Administrative penalties
have been too low, so the deterrent has not been effective; with recent changes to increase penalty
amounts and plan to introduce “ill gotten gains” recovery, this may start to improve, SSC will need to
monitor and if not effective consider further reinforcements.. A full set of recommendations for SSC for
market 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 skills
and experience of Vietnamese staff; also possible partnership agreements between foreign firms and
domestic firms. Foreign securities companies will bring new foreign investors and they can also act as a

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catalyst for faster domestic market changes, such as introduction of new products, with their experience
of more complex products such as derivatives, which can assist market development. Looking at the
example of other countries the entry of more foreign securities companies has resulted in greater
competition 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. They
are now faced with a number of strategic choices which they need to evaluate in order to fix an
appropriate strategy. This includes questions such as if they should seek a foreign partner, maintain the
status quo or if the shareholders wish to sell and find a new buyer. The experience of ASEAN and other
countries shows that as the securities market opens up to foreign competition, in some cases the domestic
companies form equity partnerships with foreign securities companies, in other cases they prefer to
pursue their own strategy under the control of domestic shareholders. The past experience indicates that
there is room in the market for both good domestic and foreign securities companies, however a proactive
strategy is better than a reactive one.

Domestic firms therefore need to decide now how best to operate in this more competitive and open
market. They should develop their strategy and business plans, inter alia assessing and securing their
medium term funding needs, deciding if they wish to explore the possibility of cooperating with a foreign
securities company and if so which type of cooperation they would prefer, for example equity or non
equity..

At the same time they should strengthen their infrastructure by improving corporate governance and
compliance, risk management and controls, and code of conduct, in order to build a more stable
foundation to their business, less susceptible to the risk of unexpected losses, loss of customer goodwill or
other reputational problems; this includes improving the compliance with national laws and internal
regulations to achieve a better corporate reputation and brand name. On the compliance front, senior
management need to lead these initiatives, ensure proper training of staff is done so that their staff
understand what compliance is, have a general understanding of the firm’s compliance obligations, as
well as a deeper understanding of their own department and personal responsibilities are. Our
recommendations for the domestic securities companies for the market opening challenge of foreign
securities companies and for enhancing their compliance is in Section 5.

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3 BACKGROUND OF SECURITIES MARKET IN VIETNAM

3.1 Supervisory Framework

3.1.1 Securities Regulator
The State Securities Commission (SSC) is the primary regulatory authority over the capital markets and
their participants.

Established in November 1996 SSC is responsible for the organization, development and supervision of
the country’s securities market. The history of the SSC is not within the scope of this study, it is covered
already in the previous MUTRAP report titled “The comprehensive strategy for service sector
development 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), not
an 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 10th
May 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 Stock
Exchange (HNX), which act as frontline regulators of the exchanges and the market intermediaries.

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Functions and responsibilities of the SSC can be seen in the Securities Law and other under legal
documents.
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 Law
Vietnam has experienced increasing interest in its securities market by domestic and foreign investors
during the last decade, in particular from 2005 onwards, and the sharp increase in securities market
listings and trading has been accompanied by a number of related regulatory challenges in order to
develop the market in an orderly and professional manner. In this context, the Vietnam Government, with
the objective of strengthening securities regulation and in anticipation of WTO requirements, introduced
The 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 legal
documents (in total 37 up to 2010). SL is the main legal basis for the regulation of the Vietnam securities
market. It comprises 37 legal documents. This is generally considered by the legal and market
practitioners with whom I spoke to have marked a significant improvement from the previous regulation
and to provide a more solid legal framework for the securities sector. The Securities Law takes account of
the International Organization of Securities Commission (IOSCO) principles, placing emphasis on market
surveillance 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 been
formulated by SSC, with market consultation, such as private placement and tender offer, and submitted
for the approval process through the MOF up to the Government. The amendment of and supplements to
the Securities Law were adopted by the National Assembly meeting session in 24 November 2010.

Legal framework preparation for WTO
We also understand from previous reports by experts and our discussions with the SSC that SL fulfils
Vietnam's commitments under its 2007 World Trade Organization (WTO) accession.

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In terms of legal framework preparation the Securities Law was being prepared in anticipation of WTO
requirements 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 national
legislation against GATS obligations and commitments”, dated June 2008, has stated that domestic legal
documents on securities services promulgated in 2006/07, in principle, are appropriate with the WTO
commitments 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 securities
firms, 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 domestic
securities firms and fund management companies. Therefore, to ensure the transparency as well as
prudential management in this sector, this report contains a recommendation by local experts for the
necessary 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, as the current
framework is not sufficiently detailed; for example, there are some aspects, which would need more
clarification, such as translation, authentication or certification of Embassy or Consular application
documents. This document would help the mode 3 market access commitment implementation.

MARKET STRUCTURE
The 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 of
trades.

Key market intermediaries include: 105 securities companies (of which there are 103 securities brokers
and 2 firms provide investment advisory services only) and 46 fund management companies. The number
of 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 securities
company 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 unfortunate
timing 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 2009

Source: SSC July 2010

Note: (*) 1 Securities firm was de-licensed (licence revoked)

There are now many foreign securities companies in joint ventures with local partners. These joint
ventures, limited to a 49% stake, have been allowed since 2007 under Vietnam’s WTO commitments. We
will consider in more detail the foreign securities companies and the opportunities and threats which they
present, in the next Section.

There are a number of licensed businesses for which securities companies can apply, including
underwriting of new issues of securities, which requires a larger capital base, total capital requirement for
all business area is VND 300 billion. The number of trading accounts opened by investors has risen
strongly from nearly 3,000 to close to 1 million between 2000 and 2010, but still a low percentage
compared to the 87 million population, offering good future growth prospects.

Figure 2: Number of investor accounts as of 31 December (annually)

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Year 2005 2006 2007 2008 2009 30/9/2010

Total accounts 31.241 86.184 305.298 531.428 822.914 1.003.297
at securities
firms

Source: SSC November 2010

In terms of current business mix the core business of the domestic securities companies is brokerage
business, some have a relatively high weighting to proprietary trading and some are also developing their
investment banking services, such as private placement, IPO advisory and M&A; in the latter case, the
strategic 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 in
low single digits %) to revenues at the moment.

As for financial innovation, market practitioners are pushing for a faster launch of new products and
market innovation, pushing for, inter alia, margin lending, same day buying and selling, multiple trading
accounts for investors. SSC has been coordinating discussion and approval, however the process takes
longer 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 likely
some years away in terms of the required process of building expertise, investing in the necessary
technology and infrastructure and expertise training of practitioners, as well as drafting and approving the
laws and regulations.

The number of listed companies has witnessed rapid growth. HOSE and HNX listed approximately 548
companies at July 2010, 245 on HOSE and 303 on HNX.

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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 2010


There are two stock exchanges, HOSE and HNX. It is unusual to have two exchanges, in view of the
relatively 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 for
securities firms of dealing with two separate SE entities. However, it appears that the two exchanges will
remain for the time being and the SSC plan is for HOSE to reinforce its role as the market for larger size
stocks (above VND 80 billion) and HNX to be the market for small and medium size companies (below
VND 80 billion), for UPCOM and for Government bonds. This is not strictly demarcated at the moment
with 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, the
rationale for the market is to encourage OTC stocks to list on UPCOM, where the shares will be
registered and cleared by VSD, where they can be regulated and provide a safer and more transparent
investor market, reducing the risks for investors and for market reputation from the unregulated OTC
market where there are no investor protections. The OTC market in Vietnam has traditionally been very
large and active, so encouraging the best companies to enter the regulated securities markets should foster
increasing 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 off
strongly from 2006. The HNX, itself starting in 2005 accounted for some 20% of the combined market
capitalization 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 1,645,481 495,094 123,547 618,641

This 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%

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Trading volumes have grown considerably over the same period from 2006, though with a dip in 2008
due 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 2009

Trading volumes have averaged around US$ 120 million daily average in 2010, however daily volumes
have sometimes fallen much lower in the last few recent months, amid macroeconomic concerns and
pressure on the dong. The VN index stood around the 450 level at mid November. The market PE at mid
November 2010 is currently below 10x and is considered by many market observers to be attractively
priced, in view of the forecast double digit growth in profit of many Vietnamese corporates for 2011, as
well as compared to the higher PE valuations of other ASEAN markets such as Thailand, Indonesia and
Philippines.

Before turning to consider the challenges for the SSC and for the domestic securities companies, we will
review Vietnam’s WTO commitments and consider financial liberalization in general, as this is a key
issue for the development plans of the SSC and for the domestic securities companies.

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4 LIBERALIZING THE SECURITIES SECTOR

4.1 Liberalizing the Securities Sector in Vietnam

4.1.1 Introduction
Until very recently most of the academic discussions on the benefits of financial services liberalization
were 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 the
process of opening of the financial services market was not subject to a comprehensive academic
investigation 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 capital
market compared to what happens with the banking sector. Indeed, while studies on the effects of the
opening of the banking sector have been conducted since the early fifties, it is only until very recently that
the relationship between economic growth and securities markets development has been studied and with
this 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 outmost
importance to set a framework that will guide the reader in understanding the economic and regulatory
context in which the liberalization will take place. In this respect, it is worth a reminder that liberalization
is a threefold process in which, although the economic issues plays a substantive role in determining the
final outcome of the process, the legal and political economy framework determine the boundaries that
will 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 WTO
commitments regarding the securities sector and the regulatory framework set out in the GATS. In the
second part, it will be briefly analyzed the relevant literature on the benefits of a well functioning
securities market. In the third part it will be analyzed the economic implications deriving from the
liberalization of the securities in the light of the WTO framework and in the context of the much broader
discussion 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 Commitments
The 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 Services
Sectoral Classification List provided by the WTO Secretariat, in the broader macro sector of Financial
Services 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 the
modern business model of modern financial conglomerates that do not limit themselves only to pure
banking 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 being
one of the few countries that explicitly divided its commitments in FS between insurance, banking and
securities. While some of the services scheduled do not overlap, in few instances some subsectors of
banking 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

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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 Framework
The process of opening of domestic markets to foreign competition is called liberalization. While this
economic choice is completely independent from any legal commitment at the international level, when a
country chooses to embark into the process of progressive liberalization in the ambit of its WTO
membership, 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 the
General Agreements on Trade in Services (GATS). Under this set of rules, Vietnam unilaterally
committed 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 the
horizontal and specific obligations arising from the GATS. This peculiar set of rules is briefly explained
here 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

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commitments. This means that while the provision of a service under mode-1 could be prohibited, this
could 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 four
modes 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 Clause

Unlike the MFN clause on trade in goods, which does not apply to subsidies1, Article II of the GATS
imposes on the Members the obligation to “accord immediately and unconditionally to services and
service suppliers of any other Member treatment no less favourable than that it accords to like services
and service suppliers of any other country”2, provided that they did not inscribe an exemption in their
schedule of commitments. The potential of the MFN obligation is limited by Paragraph 3 of the GATS
Annex 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 border
in connection with importation or exportations. See GATT, Article I.
2
GATS, Article II

19

recognition agreements on financial services. Those agreements can comprise Memorandum of
Understanding on capital adequacy, on cross-border banking supervision and also on safety-net systems
and insolvency procedures3.

Transparency and Domestic Regulations

Article 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 six
kinds 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 the
requirement of an economic needs test;

(c) Limitations on the total number of service operations or on the total quantity of service output
expressed in terms of designated numerical units in the form of quotas or the requirement of an economic
needs test;

(d) Limitations on the total number of natural persons that may be employed in a particular service sector
or that a service supplier may employ and who are necessary for, and directly related to, the supply of a
specific 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 a
service supplier may supply a service; and

(f) Limitations on the participation of foreign capital in terms of maximum percentage limit on foreign
shareholding or the total value of individual or aggregate foreign investment.

National Treatment

The national treatment clause applies only to the specific sector and modes of supply listed in the
schedules of commitments of each Member, and obliges member to “accord to services and service
suppliers 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 it
clarifies: “Formally identical or formally different treatment shall be considered to be less favourable if it
modifies the conditions of competition in favour of services or service suppliers of the Member compared
to like services or service suppliers of any other Member”. Under this provision, a Member would be
obliged to apply the same procedures that apply to its domestic securities firms also to foreign firms. In
this respect the explanatory note at GATS Art. XXVIII clarifies that the national treatment obligation
cannot be extended to any other parts of the supplier located outside the territory where the service is
supplied5. This limits the territorial application of the national treatment only to the territory of the
Member. Therefore, this provision would affect only foreign firms present in the host state territory
(mode 3 liberalization).

The Prudential Carve-Out

The Annex on Financial Services is a specific agreement to the GATS that clarifies existing GATS rules
as they apply to the specificities of the financial services sector. Indeed, an unregulated liberalization of
the financial services sector would have in some cases a negative effect on macroeconomic stability
because it would not allow to Member that degree of regulatory freedom necessary to maintain the
soundness of the financial system necessary to cope with market failures. Thus, the regulatory constraints
entailed in the trade of financial services products, as regulated under the GATS, obliged negotiators to
inscribe in the Annex a provision that would prevent that a strict obedience to the rules of the GATS
would undermine the stability of the financial system. For this reason it was inserted in the Annex a
provision that would guarantee the freedom of the Members to adopt any measure apt at maintaining the
soundness 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 taking
measures for prudential reasons, including for the protection of investors, depositors, policy holders or
persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and
stability of the financial system. Where such measures do not conform with the provisions of the
Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations
under 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 the
GATS can be none the less justified on prudential grounds once it is proven that it has been adopted to
accomplish prudential objectives. In brief, this clause operates as an escape clause that derogate to the
general obligation of the GATS, based on the prevalence of macroeconomic stability against the positive
effects of trade liberalization.

Hence, when assessing the legitimacy of a measure to banks or securities firms, the carve-out operates as
an overarching principle that imposes a preliminary evaluation of the economic objectives behind the
measure. In spite of the simplicity of the approach adopted in this provision, there are a number of
implications that render particularly complicated such analysis. In fact, as some authors suggested7, the
prudential carve-out suffers from an intrinsic ambiguity, especially in the definition of the benchmark on
which evaluate what consists a prudential measure. In this regards, it seems unclear whether the states
retain a full control over the definition of prudential measures or they should be linked to other authorities
beyond WTO, such as the Basel Committee on Banking Supervision or the IOSCO. Another major
ambiguity consist in the fact that in paragraph II there is no necessity test to assess the degree of
prudential protection beyond which the subsidy would be considered a protectionist measure.

4.1.4 The Benefits of Securities Market in the Economy8
The role of capital markets in the economy is still a matter of debate. Most of the literature demonstrates
that a coordinated and safe development of the stock market contributes positively to economic growth by
increasing and improving the allocation of savings and investment. In this respect, it has been showed that
capital markets and all the various financial instruments associated with the development of capital
markets can raise domestic and personal savings levels and contribute to a more efficient allocation of
those savings, even in less developed economies (Engberg, 1975). Another important benefit of capital
markets is that it constitutes a liquid trading and price determining mechanism for a diverse range of
financial instruments. This allows risk spreading by capital raisers and investors and matching of the
maturity preferences of capital raisers (generally long-term) and investors (often short-term), that in turn
stimulates investment and lowers the cost of capital, contributing in the long-term to economic growth.

7
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, p 30.
8
This paragraph largely draws on: J. Irwing, Regional Integration of Stock Exchanges in Eastern and Southern
Africa: Progress and Prospects, IMF Working Paper, 2005

22

There are other benefits as well. For example, development of other parts of the financial system can
benefit from the existence of an active securities market because a well functioning and competitive
securities 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 a
means to securitize their debt and better manage the maturity watch and risk profile of their balance
sheets. And beyond the financial sector, the success of privatization programs depends to a degree on the
availability 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, by
providing a means of trading the ownership of firms (shares) without disrupting the operating and
productive processes within those firms and by providing a way for investors to diversify their portfolios
can have beneficial spillovers to other sectors of the economy and therefore have a positive effect on the
overall economic growth (Levine, 1990).

Other researches, in contrast, argued that Securities market development can producing economic
instability and adversely affecting savings allocation and the reallocation of existing real wealth and
disrupt economic growth in least developed countries. For instance, Hamid and Singh (1992) found in
their empirical studies of developing economies that, while large corporations “clearly” benefited from
stock market activity, the host economy as a whole “gained little” because, in many cases, investment in
portfolio shares replaced bank savings, with no increase in the economy’s aggregate savings or
investment.

Another important question is whether the development of the securities market has the same benefits that
the development of the banking sector and whether the two are complementary to each other. There also
has been considerable lack of consensus within the literature on the appropriate priority that should be
given to stock market development within overall financial and economic development. Levine and
Zervos (1995, 1996) suggested that banks and stock markets have a complementary relationship in
contributing positively to economic growth. Arestis, Demetriades, and Luintel (2001) conclude that both
banks and stock markets could potentially promote economic growth, albeit with banks having stronger
effects.

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 stable
macroeconomic 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 to
ensure its efficient, fair, and stable operation. Many analysts have also stressed that building institutional
capacity is a key element in successful securities market development (Calamanti, 1983; Chuppe and
Atkin, 1992; Pardy, 1992; Bekaert, 1993). Indeed, securities markets are highly susceptible to
manipulation and other practices which distort pricing and allocation decisions, and have a negative
impact on investor confidence so that the supply of funds to the market is reduced. Securities markets also
rapidly transmit external shocks and which may have little or no relation to the domestic economy but
simply reflect the mood of the international securities market. Another important issue has to do with the
information asymmetries that can jeopardize the development of securities markets. In this respect,
regulations such as disclosure requirements for public companies, complemented by good accounting
standards, along with credible contract enforcement and restrictions on the intermediaries licensed to
participate in trading are extremely important. For this reasons, it is of outmost importance that regulators
lay down a prudential regulatory framework capable to absorb any negative externalities of securities
market development (Pardy, 1992). Bekaert (1993) included high and variable inflation rates and
exchange controls among the major economic impediments to equity market development and integration
globally.

Also foreign institutional investors have a role for in facilitating securities market development since the
activities of these investors—which tend to be less affected by informational asymmetry than individual
investors—can improve information flows about company prospects.

Furthermore also traditional factors such as low stock exchange turnover rates, the small number of local
investors, the small number of listed securities, and a limited number of potential issuers can also pose
significant 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 by
foreign capital, further impeding activity on the exchange. Even those local companies that would qualify
for a listing were reluctant to do so for fear of losing control of ownership/management. Among the
measures she recommended to address these traditional impediments was the promotion of institutional
investors, along with improved regulatory, disclosure, and institutional arrangements.

4.1.5 Liberalization of Capital Markets: the Issues at Stake
Liberalization is the decision of the government to relax regulatory and other kind of measures that
protect a certain sector of the economy from foreign competition in its domestic market. The reasons that
led 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 foreign
competitors is threefold, as the political economy of free competition requires the adoption of various
economic, legal and political reforms.

In the case of financial services, such process is rendered even more complicated by the intrinsic complex
nature of financial services and by their pivotal and crucial role as the “engines” of modern economies. In
order to understand the complications deriving by the entry of foreign financial institutions in the host
economy is to bear in my that F.I. while providing useful capital to the economy could in some cases be
subject to market failures that would be likely to impact severely the economy. Indeed, the liberalization
of financial services stands in the middle of a triangle made by trade in financial products, capital
liberalization and the need of prudential regulations. In this respect the decision of a government to ease
protectionist measure to liberalize its FS sector must take into account the two other variables (capital
liberalization and need of prudential regulations). In many cases what could be considered as a barrier to
free trade could be nonetheless justified under prudential grounds.

Figure 8: The Links Between Financial Services Trade, Capital Flows and Financial Sector
Stability10

10
M. Kono and L. Schuknecht, Financial Services Trade, Capital Flows and Financial Stability, World
Trade 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 foreign
investors 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 increased
liquidity brought by new investors will provide a new fuel in the economy. Second, bigger and better
structured foreign securities companies, once entered into the market will be more likely to bring their
clients base and thus attracting more easily foreign capital into the host market. This in turn will have
beneficial effect to the economy as it will divert capital to local industries especially those in need to and
asset market. Furthermore, once they are allowed access, foreign investors will exploit the benefits of
diversification and will consequently drive up domestic equity market values; In this respect it has been
argued (BH and Henry 2000) that the cost of capital falls subsequent to major regulatory reforms that
permit 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 will
promote greater innovation among firms and more efficient operations and processes. Finally, as foreign
investors may demand improved corporate governance and transparency in these countries, liberalization
may reduce the wedge between costs of external and internal financing at the firm level, stimulating
corporate 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 development

Problems Usually Associated with Liberalization

In some cases, a number of developing countries experienced banking sector problems following the
adoption of liberalization policies or following the adoption of “light” regulatory policies. Most of these
crises were associated with banking or monetary crises and given the devastating effects that such crises
have on the economic system, many have argued that financial sector liberalization will lead to financial
instability.

Indeed, while it is true that financial crises can have a highly negative impact on the economy, it is
questionable the direct and unequivocal link between financial liberalization and systemic crises.

The relation between financial stability and financial services liberalization is usually depended on some
variables that would determine whether the decision to open the domestic sector would bring additional
benefits or would worsen pre-existing problems. Most of the commentators agree that financial sector
problems have usually their causes in unsound macroeconomic policies, inadequate government
28

regulation and supervision, and inappropriate intervention in financial markets (Galbis, 1994; Harris and
Piggot, 1997; Jacquet, 1997; various BIS publications).

For instance, easy monetary policies can encourage excessive foreign exchange exposure of banks or
imprudent lending. Furthermore, as financial services liberalization requires the opening of the market to
foreign competition and foreign capital, poor performance of domestic financial sector provider will push
them out of the market. In addition to that, given that liberalization of the capital account would attract
capital inflow, in case of crisis or loss of confidence the abrupt outflow of foreign capital could pose
substantial monetary and financial instability.

In order to offset the risks associated with opening of the financial services sector, principles have been
developed 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 markets
Financial liberalization has already taken place in the other ASEAN countries and 100 % foreign owned
securities companies are operating there. We can therefore review the impact of liberalization on the
competitive 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 impact

In 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 the
liquidity 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 of
commercial bank groups and therefore have more funding available than stand alone securities firms. In
the case of both CIMB and Aminvest both offer investment banking services such as mergers and
acquisitions, 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. For
example, it acquired an independent securities company in Singapore, GK Goh in 2005. This broadening
of their geographic coverage was also a defensive measure in view of the increased competition deriving
from financial liberalization and the arrival of foreign securities companies in their home market of
Malaysia.

Other domestic controlled Malaysian securities companies, such as Aminvest, have brought in foreign
strategic partners. In Aminvest’s case, it is ANZ with 19.1%. This minority shareholding structure allows
Aminvest to retain control but at the same time it can benefit from the opportunities of ANZ’s foreign
know 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 individual
circumstances of each firm, their strengths and weaknesses, as well as the strategic priorities of
shareholders and management.

As for the competitive effect, the local firms have been subject to competition since 2005. In the case of
both CIMB and Aminvest they maintain positions in the Top 10 by brokerage share. Local firms have
remained stronger in retail brokerage business and indeed most foreign firms in Malaysia target only
foreign and domestic institutional business so far, the Malaysian authorities are encouraging them to
target 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 of
the Top 10 is 100% foreign owned, that is CSFB at No.8 with 5.4%. Other foreign names such as CLSA
and JP Morgan are in the 10 - 20 segment. A key reason for this is that the strategy of large global
investment banks is often not to aggressively pursue market share but to focus on building a business
platform to service their foreign clients and to target selectively higher margin and or higher profile IPO
and M&A work, often cross border work such as cross listings.

4.2.2 Thailand securities exchange and investor overview

 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)

 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 impact
Thailand allows 100% foreign securities companies to establish. In terms of the strategy of domestic Thai
securities companies, some have chosen not to tie up with a foreign partner, but they have succeeded in
maintaining their largely retail client base and a profitable business model with good market share. In
many 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 and
has a client base still predominantly retail (80%) with some domestic and foreign institutions. They
acquired the local operation of a foreign broker, ABN in 2004. Asia Plus Securities has done well since
then 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 systems
to manage the business, with the result that they kept tight control of costs and their breakeven point for
trading volumes was the lowest among the Thai brokers.

One of the Top 10 domestic brokers, Bualuang Securities, has adopted a different strategy, bringing in a
US investment bank, Morgan Stanley, as its exclusive partner. BLS first signed a research support
agreement with Morgan Stanley Dean Witter Asia Limited in 2006 and then in 2007 this was followed by
them entering into an Exclusive Partner Agreement with Morgan Stanley. This provides them with access
to 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 both
parties as a prudent first step before entering a deeper equity based relationship. The lower commitment
level has this advantage and also that it is generally easier to unravel the cooperation if either partner
wishes to terminate it later, but also the disadvantage in that with a lower commitment level and financial
risk by the foreign partner, technical cooperation may be slower. On a more positive note a cooperation
agreement between a local securities firm and a foreign securities firm, if the initial relationship and
commitments of each party develop well, then a capital injection can be a second step towards fulfilling a
closer win-win relationship.

The Thai Capital Market Development Plan is focused on boosting the growth of their stock market in
response to domestic concerns that their market is falling behind compared with regional peers. This
foresees, inter alia, that some local securities firms will have to “adjust by forming alliances with strategic
partners to increase efficiency by offering new products and services”. The regulator sees that the
strategic 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 in
Malaysia and most developed markets the majority tends to be institutional investors, Top 10 brokerage
ranking 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, for
similar 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

 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.

 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 impact
Indonesia allows 100% foreign securities companies. Indonesia’s investor structure is not similar to that
of Malaysia or Thailand, in that foreign investor penetration is significantly higher in Indonesia than in
those ASEAN countries (at over 50% of market cap. held by foreign investors). Indonesia also has a very
small retail investor base, thus the natural local retail client base which is a typical advantage for local
securities 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 such
as Merrill Lynch, JP Morgan, UBS and Macquarie are in the 10 - 20 segment. Though foreigner securities
company penetration is higher in Indonesia for the reason of the investor structure its profile may be less
instructive for Vietnam than Malaysia or Thailand.

In terms of brokerage penetration, the Top10 have 37% of market by brokerage trading value, a relatively
low concentration compared with Malaysia and Thailand with 29 firms having 1% or more share. (IDX
Factbook 2010).

4.2.4 Conclusion on Foreign securities companies in ASEAN markets
In these ASEAN markets we have seen the securities market opening and the arrival of foreign securities
companies to establish partnerships and 100% foreign owned local companies.

However many leading domestic securities companies have so far maintained good franchises and market
shares. The global foreign brokerages tend to have different strategic priorities and client focus to the
local firms and so they do not tend to compete strongly for retail accounts for example. Some domestic
firms have maintained independence from foreign firms, while others have formed partnerships of an
equity and non-equity variety with foreign firms, to benefit from skills transfer and in the case of equity
partnership, from capital also. Financial liberalization brings both challenges and opportunities to the
securities 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 liberalization
The SSC, supported by the MOF, has the responsibility to regulate the market. For this the SSC needs the
regulatory powers and capacity to fulfill its multiple responsibilities, which include to maintain an orderly
and efficient securities market with transparent information on the listed companies, with professionally
run securities companies which operate in the best interests of its investor clients, and to develop the
securities market into a modern, competitive market with a wider product range and good risk control and
systems. The regulator also faces the challenge arising from market opening to manage the foreign
securities 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 the
adequacy 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 these
challenges.

We have used as a reference framework for our analysis the IOSCO (“International principles, from the
Assessment on Objectives and Principles of Securities Regulation (IOSCO Principles), which provides
for the best international practice principles for securities regulations for the regulator, securities
companies and stock exchanges . We refer to those principles most relevant to our topics of adapting to
market opening and to the regulator’s supervision and enforcement role.

4.3.2 Review of regulatory powers and effectiveness

4.3.2.1 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 2010
on Administrative penalties in the securities market, which provides new, improved regulatory powers for
the 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)

Independence

The SSC is an agency of the MOF. The SSC has its Chairperson and no more than 3 vice chairpersons
and appointment and dismissal of these is by the MOF. The Minister of Finance appoints all Commission
members. SSC senior level management does not currently have any independent representatives from the
private sector and there is no specific requirement to have a legal expert, a financial expert, an accounting
expert at SSC senior management level.

Major regulatory and policy decisions are formulated and drafted by the SSC, the approval is required at
MOF level or higher and not made by the SSC itself. The SSC has the authority to issue guidance and
interpretation but not to set policy and enact rules. In conclusion the regulatory function is not completely
independent in its operation.

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Under IOSCO best practice the securities regulator should be independent to provide assurance to the
market that the regulator is able to operate on an arm’s length basis without undue political involvement
and with sufficient industry experts.

One practical disadvantage of the current model in Vietnam for the securities market is that the approval
process in Vietnam for legal amendments or new policies, requiring MOF approval or approval at
Government/ the Prime Minister Office level for Decisions for example, can be lengthy and can impede
market progress. The demands on the regulator from the securities market participants for new securities
market products and policies is increasing and there is frustration with the slow approval times. With
market opening and the likely additional lobbying of foreign securities firms and foreign investors, this
reform pressure on the SSC is likely to further increase. This is one reason why some domestic securities
companies are “experimenting” with new products before they are formally legalized, such as margin
trading 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 policies
and legal amendments can be introduced to reduce time to market. The best policy should be to fix an
efficient and achievable deadline for consultation and approval with the backing of MOF and the relevant
decision making bodies, involve the industry in consultation on new policies and clearly communicate the
process to the market. This market reform process should balance efficiency with prudence and careful
consideration of the risks; for example, the market is not yet ready for derivatives. Balanced evaluation
will be assisted by market expertise and independence, and it is important that SSC and the authorities
have available and use the necessary technical and market expertise in reaching their decisions. The more
the market sees transparency and a commitment to timely but prudent market development, the more the
market will gain in confidence and stability.

We understand that no changes are currently contemplated to the current operational model and that the
SSC is due to remain under the management of the MOF. The IOSCO best practice model is for the
securities regulator to be fully independent. In view of Vietnam being still at an early stage of
development this full independence process for SSC may take some time; however, this objective should
be incorporated in the medium term Capital Market Development Plan in order to signal pro market
policies and give confidence on the strategic direction which Vietnam is taking.

Accountability

The SSC, being a statutory body, is accountable to the Minister of Finance, Government and Prime
Minister and is required by law to submit its financial statements to the Minister of Finance. The
statements are audited by the State Auditor.
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The SSC releases its annual report to the public. However, content of the annual reports are focused on
policies, market operation, regulation and supervision. The SSC’s accounts statements are made public
annually and provide details of its use of resources over the financial year according to the regulation on
public disclosure of financial operation.

The SSC is mandated by law to protect investors. The SSC makes information available on its website
information.

All administrative actions taken by the SSC are documented in writing with reasons provided. The
Securities 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 been
signed 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 to
issue prompt policies in response to market movements; (ii) limits the power to submit draft legal
documents to the National Assembly or Government for promulgating. The disadvantage of this is that
market practitioners become increasingly frustrated and experiment with new market mechanisms before
they are passed into law as mentioned above.

For investigation and enforcement powers we consider in Principle 8 and 9 respectively below.

Financial resources

There 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

Securities market liberalisation in vietnam

Securities market liberalisation in vietnam

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