Risk Management in Gold Import-Export Business

any standards of the technology system. Therefore, at times when the number of transactions is large or the gold price fluctuates a lot, the system is very susceptible to network crashes and causes a lot of damage to both the Bank and investors.

Risk of qualifications: some gold asset managers do not have enough qualifications to support or manage gold assets well, thus easily leading to losses for the Bank, while the operating conditions as well as the participation level of investors in gold trading on the floor are increasingly improving.

In view of the above risks, in the recent past, commercial banks in Ho Chi Minh City have developed regulations and procedures for gold trading to ensure the interests of the Bank and customers; established loss limits, stop losses in gold trading, transaction limits granted to each dealer and management level. In addition, the Bank has strengthened control, increased risk management capabilities of internal control, internal audit to promptly prevent risks and negative phenomena from arising to ensure safety for commercial banks in gold trading. Make the most of information sources, compare and select information sources provided to investors. Advise and support investors with legal knowledge, business techniques, the ability to predict gold price fluctuations, use derivative instruments to prevent risks when gold prices fluctuate. Extend evening trading hours to 11 p.m. to match the time developments of world gold prices. Diversify orders for investors such as: take profit orders and stop loss orders as previously applied by many gold exchanges. From the risks occurring in the physical gold business as well as at the gold exchanges of commercial banks, and in countries around the world, the State Bank needs to advise the Government on opening a centralized national gold exchange. This will have benefits such as controlling the amount of gold in the population, attracting money in the form of gold in the population and directing it to serve economic interests; bringing the price of gold in Vietnam and the world to balance; controlling the exchange rate, helping the exchange rate to stabilize, supporting economic growth, because when the difference in gold prices is gone, the need for smuggling and collecting USD will be eliminated. Moreover, trading gold accounts at the centralized national gold exchange, the import of official gold only needs a sufficient amount to

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mainly for jewelry and gold trading will become stable. Since the gold exchange stopped operating, the actual demand of investors is still very large and despite the risks, they have been participating in unofficial gold exchanges, the State has lost tax revenue and gold trading activities at unofficial exchanges are not managed by the State so the interests of investors are not protected.

According to the draft amendment to the Foreign Exchange Ordinance as well as detailed regulations in Decree 24, gold trading activities on foreign accounts of residents are carried out if permitted by the Prime Minister and licensed by the State Bank. The gold market is still waiting for drafts to collect opinions from experts and people on the operation and management of banking business according to standards, under the management of the State and contributing to the development of the national economy. The draft clearly shows the consideration of the level of safety in banking business activities for commercial banks and for the entire banking system as the top priority of competent authorities in the period when the risk management system in banking business of commercial banks is still very weak.

2.3.1.3. Risk management in gold import and export business

Recently, some joint stock commercial banks in Ho Chi Minh City have participated in exporting gold abroad when the domestic gold price is lower than the world gold price, especially when the State Bank of Vietnam stopped allowing credit institutions to trade gold in international accounts. Gold export activities bring in a significant source of foreign currency, contributing to reducing the trade deficit and releasing the "goldenization" of the economy. The State currently has two conflicting goals: on the one hand, the State Bank of Vietnam is concerned that gold export will reduce the gold source, so it wants to keep gold in the people's hands; on the other hand, the State Bank of Vietnam has a policy of always wanting to fight against the "goldenization" of the economy, that is, not encouraging people to keep gold.

In another case, when commercial banks were banned from international gold account transactions and the physical gold status was too surplus in the country, commercial banks needed to find ways to export gold and it showed that almost no commercial banks wanted to keep it.

positive gold position, meaning wanting to transfer the risk of this position to another bank abroad.

To limit gold export, on November 15, 2010, the Ministry of Finance issued Circular 184/2010/TT-BTC (referred to as Circular 184) related to the import-export tax schedule effective from January 1, 2011. To enjoy a 0% tax rate, exported gold products must have a gold content of less than or equal to 99% and a weight of less than or equal to 1 ounce. Otherwise, the tax rate will be 10%, an unprecedented technical barrier regarding the content index and weight index. This is a type of policy risk in the gold import-export activities of commercial banks. Perhaps, Circular 184 aims to limit gold export rather than collect taxes for the budget. If so, it is necessary to consider adjusting the tax rate from 10% to 1%, for example, so that the nominal tax rate is relatively reasonable in form, avoiding the large two-way difference between the 0% gold import tax and the 10% gold export tax. When Circular 184 took effect, in the first 7 months of 2011, banks and enterprises exported about 30 tons of gold, bringing in about 1.5 billion USD, with all export shipments subject to 0% tax. That fact is enough to prove that no enterprise can bear the 10% tax rate. Enterprises only wait for the opportunity to export under the 0% tax when the price difference between domestic and world prices is large enough to offset some costs related to the export shipment such as: gold content processing costs, gold testing costs, manufacturing costs, transportation and insurance costs, bank loan interest and other costs, etc.

Another risk that commercial banks face when exporting gold is the rapid fluctuation of gold prices and can cause losses for the Bank, that is, the gold export price is lower than the domestic physical gold purchase price. In fact, to manage the risks of gold export, commercial banks sell gold accounts abroad to insure the physical gold purchased. Technically, selling gold accounts is also considered as "exporting on the spot" or "exporting without delivery". At this time, commercial banks are in debt to foreign countries for gold accounts and must pay interest on gold accounts until they export physical gold to repay the debt or buy gold accounts to settle the status with the country.

Alternatively, the commercial bank may purchase physical gold as an asset and then deposit it as collateral to access multilateral funding sources at the national level or for other purposes. Sending gold abroad implies an export activity that has taken place even if it has not been sold outright.

From the macro perspective of the economy, gold export helps to recover USD and eventually VND, reduce trade deficit, and eliminate the "goldenization" of the people, but the country's general reserves will decrease while the State does not have a mechanism to buy gold from the people or use the people's gold capital. As for gold import, this activity will consume USD, put pressure on the USD/VND exchange rate, affect monetary policy and the macro economy, but we do not have enough gold reserves to intervene in the market when there are signs of psychological instability. In management, how the world gold price fluctuates is not important, the State always wants domestic prices to be connected in a timely manner, closely following the world gold price. Obviously, this connection is very important because it helps to eliminate the motivation to import and export gold, without which there will be no impact on the exchange rate, specifically no increase in USD supply due to gold export and no increase in USD demand due to gold import. That is the risk of gold import and export activities from the perspective of State management.

At commercial banks today, the management of the above risks appears to be very loose and there are almost no regulations to effectively manage the risks of gold import and export activities. In fact, the gold import and export activities at commercial banks with the risks as analyzed above have not been effectively managed, however, because of such risks, the State cannot prohibit this type of transaction.

2.3.2 Risk management in foreign exchange trading

2.3.2.1. Risk management in foreign exchange derivatives

As for foreign currency derivatives, financial derivatives have appeared in Vietnam since the 1990s, mainly at banks that have transactions with foreign banks. Some large banks such as Vietcombank, BIDV, Vietinbank, .... have also mainly implemented operations such as: buying and selling foreign currencies.

forward currency, swaps, futures contracts, options for businesses that need to use foreign currency and exchange goods and services in international payments. However, the current derivative products at banks are still few and have not attracted businesses to use them, so the income from derivatives still accounts for a very small proportion of the total income of the bank.

Currently, although participating in some derivatives, most commercial banks in Ho Chi Minh City only pay attention to buying and selling foreign currencies for the purpose of meeting international payments, borrowing and lending foreign currencies, but almost do not perform exchange rate insurance, so in the banking business, commercial banks play the main role of transaction intermediaries to enjoy price differences rather than market makers. For that reason, commercial banks are very weak in exchange rate analysis, especially very weak in technical analysis, almost very few banks use technical analysis as an additional support tool for fundamental analysis in exchange rate analysis. That is also the reason why few commercial banks are strong in speculative trading but mainly trade for customers to enjoy price differences, therefore, most commercial banks maintain a very small foreign currency trading status, and most also buy and sell domestic foreign currency derivative transactions with foreign partners to enjoy price differences, depending on each period according to the decision of the Board of Directors and the General Director of the Bank. Therefore, risks occurring in foreign currency trading or foreign currency derivatives rarely occur or if they do occur, they are within a controllable level. The Bank's proprietary trading activities as well as the implementation of derivative transactions by the Bank or enterprises with very little turnover in the recent past also stem from many reasons.

First of all, we realize that the above derivatives are modern and complex operations, so they require the Bank's staff to have high professional qualifications to be able to advise businesses; at the same time, the Bank's promotion and introduction to businesses is not widespread, so businesses do not know or are not interested in the Bank's new derivative services. Moreover, the USD/VND exchange rate has been tending to be stable in recent years.

The past, especially the first half of 2010 and the first months of 2012, is also a reason. Although the USD/VND exchange rate fluctuates frequently over the years in the direction of the Vietnamese Dong's value decreasing compared to foreign currencies, over a long period of time, this fluctuation has only increased in one direction with a narrow amplitude, so the need for exchange rate risk insurance has not been paid attention to. In fact, the pressure to increase the exchange rate is always present and future exchange rate risks are difficult to eliminate, but most import-export enterprises and banks have not yet recognized it and are not interested in risk prevention tools. Specifically, in recent times, the Vietnamese foreign exchange market has always been in a state of USD scarcity and the USD/VND exchange rate has not always been stable. From the second half of 2010 to the beginning of 2011, the USD/VND exchange rate suddenly and continuously increased, making the foreign exchange market increasingly tense and exchange rate risks began to reappear.

However, in early 2009, due to the exploitation of foreign currency derivative products such as USD/VND futures or USD/VND options to trade USD/VND beyond the ceiling exchange rate regulated by the State Bank, the State Bank banned these derivative transactions. After many years of fluctuating within 1%, the USD/VND exchange rate has shown large and tense fluctuations, causing disruption in the market and in business operations. According to regulations, commercial banks are only allowed to sell USD at the listed price and within a specific range in each period compared to the average interbank exchange rate. During times of suffocation, unofficial exchange rates have appeared within the banking system, and USD/VND futures and options are a loophole. At times of foreign exchange market tension, banks and businesses proactively choose to trade American-style options, which means implementing an agreed exchange rate and can expire immediately. This mechanism “gently” bypasses the regulation that spot transactions must be at the listed price. To fill that loophole, the State Bank issued Official Letter 4941/NHNN-QLNH dated July 1, 2009, clearly stating that credit institutions are not allowed to collect fees through service contracts and other forms such as paying commissions, cash management fees, etc. to sell above the ceiling.

According to the draft Circular guiding foreign exchange transactions and the Circular guiding the scope of foreign exchange activities, which have been soliciting opinions since March 2012, derivative products will likely be allowed to be traded again with stricter conditions than the previous regulations of the State Bank. In particular, the draft also mentions the basic risk management principles in banking risk management that the previous regulations of the State Bank did not have. For example: Option transactions can only be selected in the European style, meaning that only USD/VND option transactions can be executed at the time of maturity; the term of the expected transactions is determined to be at least 30 days to 365 days. As for USD/VND futures transactions, the minimum payment term for futures transactions is 3 working days after the transaction date.

2.3.2.2. Risk management in spot foreign exchange trading

In the Bank's foreign exchange business, spot transactions always account for a large proportion of the total foreign exchange transaction turnover, while derivative transactions have not developed much. In the total number of spot foreign exchange transactions, transfer trading accounts for over 90% of turnover, and the Bank's foreign exchange sales transactions are mainly USD sales and meet the majority of international payment and study abroad needs. However, in the past, the Bank's USD sales have always been accompanied by fees in various forms to compensate for the price difference between the Bank's exchange rate and the unofficial market rate (called "exchange rate loss compensation fee"), so in cases where the Bank sells USD to businesses or individuals in need at the listed exchange rate (without collecting any additional fees), it will incur a loss, which is also the Bank's risk in USD transfer trading. Therefore, banks often have the choice of customers' foreign currency usage purposes to sell, specifically for the need to sell and transfer money to pay for studying abroad, the bank will sell USD at the listed price, and at the same time collect an additional fee to compensate for exchange rate losses and this fee is added to the fee for transferring money abroad; for the need for travel and business, most banks try to refuse the transaction because this is a cash foreign currency transaction, the bank does not collect any additional fees so there is no reason to increase the exchange rate loss compensation fee. If analyzing in detail the transaction of selling USD in cash

On the other hand, the Bank has to spend a lot of money: to have USD cash, in most cases it has to be imported from abroad with a fee of about 0.05% of the imported amount, to have the cheapest fee, it has to be imported in large quantities, used gradually for many months, causing a large amount of capital to be stagnant and not generating profit. Therefore, when the Bank sells USD cash at the listed price, it will not be able to cover the cost, this is the reason why many Banks refuse to sell USD cash to customers.

In addition, the current demand for foreign currency is mainly USD, including import-export enterprises in countries other than the US or customers traveling to many places that do not use USD. The reason why customers prefer to buy USD over other foreign currencies is because this exchange rate does not fluctuate much. Meanwhile, the prices of other foreign currencies depend entirely on the world market, with higher risks. In addition, most people do not like to keep other foreign currencies because the interest rates at banks for these foreign currencies are lower than USD. Banks also limit the types of foreign currencies for savings, which also makes people hesitant. Currently, banks almost only accept savings in USD and EUR. Therefore, banks when trading in foreign currencies other than USD also have to bear the risks due to the above reasons.

Therefore, in order to avoid losing money when selling USD, banks must collect fees or buy and sell USD through a third foreign currency, or buy and sell USD through a forward contract or USD option as mentioned in the above sections. However, all three methods are currently prohibited by the State Bank. As of August 2012, the State Bank is seeking comments on a draft circular on permitted foreign exchange transactions, procedures and methods for risk management in the foreign exchange market. The risk of spot foreign exchange trading of banks will remain until the situation of two foreign exchange rates in the market ends and the "preference" for USD by customers for foreign exchange transactions no longer continues. As of August 2012, the gap between the official exchange rate of the Bank and the unofficial market is almost gone, the foreign exchange market is quiet, and customers' needs can be met at the interbank exchange rate (close to the listed exchange rate of commercial banks). However, when the foreign exchange market is active, supply exceeds demand, the difference between the two exchange rates

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