With the unstable economic situation in late 2008 and early 2009, many import enterprises encountered difficulties due to the increase in USD price, the main reason was the pessimism about the value of VND and the government's interest rate support policy, which made VND and USD interest rates approximately equal, so enterprises did not want to sell foreign currency back to banks to hedge against future exchange rate risks. In such situations, the State Bank also affirmed that it has enough capacity to intervene in the market when necessary with a strong enough foreign currency source. Currently, foreign currency reserves are around 22 billion USD. The State Bank sells foreign currency to banks with negative foreign exchange status. Widen the exchange rate trading band from 3% to 5%. Launch a group of solutions to support 4% bank loan interest rates to the market. The State Bank maintains the USD mobilization interest rate at only 1-2%, on that basis, pulling the lending interest rate down to 1.5-3.5%.
In short, it can be seen that after a long journey, the Vietnamese banking market now has a unified organization and operates effectively. The interbank foreign exchange market is not only a place for foreign exchange trading to satisfy customers' monetary needs but also a place where the State Bank effectively intervenes in the supply and demand of foreign exchange and exchange rates in the market.
1.5 The main foreign currency for business is USD.
Due to the characteristics of international trade, Vietnam is increasingly integrating into the world economy, so import and export activities are also developing rapidly, the supply and demand of foreign currency also increase accordingly and transactions are mainly carried out in US dollars. Moreover, due to its high liquidity not only in Vietnam but also in most markets in the world. Therefore, in the Vietnamese foreign exchange market, it also plays a leading role in commercial transactions and foreign exchange trading.
2. Goals and orientations for developing Vietnam's foreign exchange market
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2.1 Develop a unified code of conduct and practices for Vietnam's foreign exchange market activities
The State Bank has established a Drafting Committee for the Vietnam Foreign Exchange Market Practices, with members including representatives of the Vietnam Banking Association, a number of Vietnamese commercial banks and foreign banks with experience in foreign exchange trading. Accordingly, these rules must be consistent and standardized according to international practices, protecting the health of the financial system.
The Vietnam Foreign Exchange Market Practices provide standards for business conduct of market participants and establish market practices for transactions to ensure healthy and fair relationships between market participants. At the same time, it creates efficiency for the market, minimizes disputes between partners and lays an objective foundation for arbitration between disputing parties when necessary.
The rules of operation in the foreign exchange market are given in the Vietnam Foreign Exchange Market Practices, which are:
Professional ethics
Set ethical and behavioral standards that traders and brokers must comply with in performing their functions and duties; that is, market participants are not allowed to disclose information to unrelated parties, not to intentionally spread rumors or false information for personal gain, always be vigilant to detect fraudulent behavior and disseminate to other members if there are signs of fraud to avoid damage.
Forex Trading Principles and Market Practices
Set out the main principles in conducting market activities, responsibilities and obligations of market members towards market activities.
activities such as quoting, completing transactions, early termination of contracts, placing and receiving trading orders, determining value dates, determining holidays, determining trading volumes, market trading hours, after-hours trading, etc.
Principles of risk management in forex trading
Each institution is responsible for managing the risks that may arise from its market operations in accordance with its legal documents and other policies or regulations. At the same time, market participants are required to establish written policies and regulations for managing risks in foreign exchange trading, which stipulate the instruments allowed to be traded, risk limits, risk monitoring and reporting mechanisms, methods for determining the level of risk and contingency plans for risk events.
Transaction process :
The processing procedures should ensure that transactions are executed and settled efficiently while reinforcing risk control, which is essential for the soundness of all financial markets. As such, a number of issues need to be addressed, such as pre-trade preparation, transaction recording, confirmation procedures, payment instructions, payment monitoring and late payment penalties, records of executed and confirmed transactions, bilateral clearing, etc., which should be followed by market participants.
Management and personnel issues
The leaders of the market participants are responsible for controlling the activities of traders in the foreign exchange market. And traders are responsible for ensuring honest actions when trading in the market and complying with the rules of foreign exchange trading.
Resolve disputes
When a dispute arises, the parties promptly notify and discuss with each other to find a suitable solution. Resolving by conciliation will
Save time, money, ensure confidentiality and maintain better relationships than resorting to economic arbitration.
Issuing the Code of Conduct is one thing, but how to implement it is another big question. The regulations and rules set out need to be thoroughly understood, directed and strictly implemented, only then can we contribute to perfecting the Vietnamese foreign exchange market.
2.2 Exchange rate management in the coming period will continue to follow the government's regulated floating mechanism.
IMF studies show that most countries tend to maintain a less than perfect exchange rate regime. It is the “fear of floating” that causes many central banks to maintain nominal exchange rates within the band. There are three possibilities:
In a highly developed international capital market on a global scale, a fixed exchange rate regime would hinder independent monetary policy.
If we switch to a completely floating exchange rate regime, it will be impossible due to the excessive volatility of exchange rates along with the process of international economic integration in countries.
The third possibility is a managed floating exchange rate system. This solution has been pursued by many governments, but such an exchange rate system also faces complications, which is having to have strong enough foreign exchange reserves to intervene when necessary. However, this can be considered a suitable direction for Vietnam in the integration process.
In fact, in recent times, the State Bank of Vietnam has taken positive actions, contributing to ensuring stability in the monetary market.
2.3 Completing and developing the interbank foreign exchange market
The initial purpose of establishing the interbank foreign exchange market (IFX) was to establish a basic exchange rate for the market, meaning that the interbank foreign exchange trading rate would reflect foreign exchange supply and demand.
currency on the market. However, in Vietnam, due to the market being in its infancy and still constrained by many administrative policies, the transaction turnover in this market is only about 13% - compared to 85% in developed economies - so the average transaction exchange rate here is not typical for the whole economy, and does not accurately reflect the supply and demand relationship in the foreign exchange market. To have an effective interbank foreign exchange market in Vietnam, in addition to the exchange rate factor, other factors must be considered, which are:
Enhancing the role of the State Bank (SBV)
When the exchange rate has not yet fulfilled its function of regulating supply and demand in the foreign exchange market, the State Bank should participate in the foreign exchange market as both a member and an organizer, manager and operator of this market. The State Bank performs the function of being the final buyer and seller in the foreign exchange market, regulating supply and demand of foreign currency, in order to lubricate and help the foreign exchange market operate smoothly.
The intervention of the State Bank must be timely and closely follow market developments with an appropriate scale, only then will the market operate smoothly. Once the State Bank intervenes untimely or at an inappropriate scale, it will create a waiting and doubting mentality, causing the market to fall into a lull, stimulating speculation and putting pressure on the exchange rate.
For example, in the first months of 2009, the foreign exchange market in Vietnam was in a rather tense situation. The economy was experiencing a phenomenon of the banking system having "excess" foreign currency to lend, lacking foreign currency to sell, the foreign exchange market was tense, with very few transactions. Commercial banks did not have enough USD to sell to businesses, while they could not mobilize USD from the people, leading to the situation that businesses had to buy USD on the black market at sky-high prices, at the same time, they did not sell USD earned from exports back to the banks but kept it as a reserve to avoid exchange rate risks, making the USD shortage even more serious. In this situation, the State Bank intervened.
immediately into the market with 3 main groups of solutions: information and propaganda, using economic tools and market regulation, anti-speculation. Specifically:
- The State Bank has promptly and publicly provided necessary information on foreign exchange reserves and import-export turnover so that businesses and people can understand the situation.
- The State Bank has forecast the balance of payments for the whole year of 2009 under many different scenarios. Accordingly, the average deficit of the balance of payments is about 1 billion USD. Even in the worst scenario, the deficit is only nearly 2.5 billion USD. Meanwhile, our country's foreign exchange reserves are still maintained at 20 billion USD, enough to cover any deficit in the balance of payments.
- In addition, the State Bank will also use groups of solutions using economic tools and measures. Currently, the USD mobilization interest rate of commercial banks is commonly between 2% and 3%. Because they cannot lend out, the more USD banks mobilize, the more they will lose because: banks have to deposit this foreign currency abroad with interest rates much lower than 2 to 3% and the risk is also very high. Banks can also deposit at the State Bank with almost no risk but the interest rate is only 0.1%. Thus, in terms of economic nature, banks must work together to lower the USD mobilization interest rate even further.
Only then will there be conditions to lower the USD lending interest rate (estimated to be between 1.5% and 3.5%). This will create a difference in interest rates between USD and VND loans of between 2% and 3% - a more attractive condition to encourage businesses to borrow USD instead of just buying USD.
- Currently, the State Bank is conducting large-scale foreign currency swaps with commercial banks to create more VND capital for commercial banks and solve the problem of "surplus" foreign currency for lending by commercial banks.
- Regarding the group of solutions to regulate the market and combat speculation, the Prime Minister has requested to rectify and strictly handle violations of foreign exchange management, especially illegal foreign exchange activities. The State Bank also has many professional measures, on-site inspections of foreign exchange trading activities of commercial banks, and strictly handles acts of deliberately trading foreign exchange exceeding the prescribed ceiling.
Up to now, with the timely intervention measures of the State Bank in the foreign exchange market, the situation of foreign currency supply and demand has been less tense, the liquidity of the foreign exchange market has had positive changes, the situation of foreign currency hoarding has been significantly improved. Thereby, the role of the State Bank in the foreign exchange market is more clearly seen.
The State Bank needs to consider some unreasonable points in the regulations on swap operations between the State Bank and commercial banks. Specifically:
The State Bank needs to re-regulate the spot exchange rate accordingly. According to international business practice, the spot exchange rate in the swap service is the “average exchange rate of the buying rate and the selling rate”, but the State Bank stipulates that in the swap transaction, the buying and selling rates are the buying and selling rates of the State Bank. This is not only inconsistent with international practice but also makes people think that the State Bank has the motive to “buy cheap, sell expensive” through the swap transaction.
Expand the number of market participants
Currently, there are about 60 members recognized as members of the interbank foreign exchange market, but the number of members actively participating in the market is still limited, causing the market to operate quite quietly. Moreover, transactions in the market are one-way, meaning that some banks specialize in selling, while others specialize in buying, causing the interbank foreign exchange market to lose its uniqueness. Therefore, on the one hand, it is necessary to open up
Expanding the number of members, on the other hand, it is necessary to create an environment for members to participate more actively.
It is necessary to modernize the transaction system and equip banks with advanced information technology.
Banks must be connected seamlessly. Currently, only a few banks have conducted transactions through Reuter's Dealing 2000 system, the rest are done through official documents, and telephone is not accepted. This is clearly a major limitation of the Vietnamese interbank foreign exchange market.
Provide training to bank staff on business skills, new foreign exchange operations and proficiency in information technology and specialized software.
2.4 Improving currency convertibility and overcoming dollarization:
Improving the convertibility of VND in the current context of economic globalization is of great significance to economic development and international integration. A highly convertible currency will link the domestic economy with the international one, promote the development of foreign economic relations, strongly attract foreign capital, and create a position for the country in the international market. A highly convertible currency will also reduce the phenomenon of “dollarization”, thereby improving the effectiveness of monetary policy and exchange rate policy.
2.5 Converting the exchange rate method to the market rate tool
Foreign exchange is a measure that forces enterprises with foreign currency income to immediately sell a portion of it to commercial banks. At specific times, this measure has a certain effect in limiting the hoarding of foreign currency by enterprises. However, it also goes against the trend of reducing direct intervention measures and strengthening economic measures in foreign exchange management.