Strengthening Control, Restriction and Gradually Eliminating Activities of the Unofficial Foreign Exchange Market

meet people's investment needs, limit the situation of storing foreign currency in safes when people have excess capital but are not confident about holding VND.

The development of the official foreign exchange market is also a result of the narrowing of the unofficial foreign exchange market and vice versa.

3.2.4. Strengthen control, restrict and gradually eliminate the activities of the unofficial foreign exchange market.

The existence of an unofficial foreign exchange market has greatly affected the State Bank's foreign exchange control and management activities. A large amount of foreign exchange supply and demand beyond the Government's control makes it difficult to determine the value of the national currency and formulate national monetary policies, especially in an unstable financial situation and affected by fluctuations in the global financial market.

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In Vietnam, the factors for the existence and development of the unofficial foreign exchange market come from the economic situation and the foreign exchange management mechanism of Vietnam, the detailed content has been listed in chapter 2. The current problem, to narrow and completely eliminate the market, requires stronger measures to be applied and at the same time, it is necessary to combine with the authorities to achieve the best results.

Firstly , it is necessary to strictly prohibit the buying and selling of foreign currencies outside of licensed credit institutions. To strengthen the effectiveness of the foreign exchange ordinance, there must be economic sanctions such as fines and confiscation of foreign currencies, to have a deterrent effect and strongly influence the intention to buy and sell foreign currencies in the market. The State Bank of Vietnam should coordinate with the police and market management agencies to achieve good results. At the same time, there should be supporting measures such as propaganda and information about the foreign exchange ordinance on the media, newspapers and radio, so that people can know and implement it well. This is an important step for the current situation of our country, because after a long time, although the ordinance was issued in 2006, very few people understand it, so they unintentionally violate the law, as well as

No one has been fined or had their foreign currency confiscated, so they are not afraid. In addition, due to the convenience of buying and selling foreign currency on the unofficial market, when foreign currency is needed, one can go to a gold shop to buy it easily and quickly, while if one goes to a commercial bank, one must present all kinds of documents, which often do not meet the demand. To compete with the unofficial foreign currency market, the State Bank should allow commercial banks to buy and sell foreign currency at agreed prices as has been piloted at Eximbank.

Second , commercial banks licensed to trade in foreign currencies must provide sufficient foreign currency for individuals and organizations with legitimate, valid and legal needs. Although business is the business of each bank, the State Bank can have measures to manage foreign currency trading activities of commercial banks through surprise inspections. When customers need foreign currency but due to the scarcity of foreign currency, banks hoard and refuse to sell, the State Bank can impose economic sanctions such as when banks need to buy foreign currency on the interbank market, the State Bank will not give priority to selling to those banks.

In addition, commercial banks should also cooperate with the State Bank in creating favorable conditions for individuals who need to buy foreign currency and advise people to replace foreign currency with other means of payment that are both safe and modern. In addition, commercial banks can sell foreign currency in the same currency as the country the individual is visiting to reduce the tension in USD demand, as well as commercial banks that trade in foreign currency must also buy other currencies other than USD.[65]

To reduce the situation of hoarding foreign currency in accounts, commercial banks should have policies to encourage economic organizations when they have foreign currency income, if they sell to banks, they will be given priority to resell foreign currency when the enterprise needs it, or can negotiate to buy foreign currency at a fixed exchange rate. On the part of the State Bank, it is necessary to combine interest rate policy and exchange rate policy in a reasonable way to encourage investors to sell foreign currency to convert to VND in order to increase the foreign currency supply to meet the foreign currency demand of the market.

Third , review and revoke licenses of foreign exchange agents who violate the foreign exchange ordinance, and at the same time strengthen and develop foreign exchange activities conducted by banks, because the number of bank transaction offices has increased significantly and can conduct foreign exchange without having to sign contracts with agents. The State Bank should support banks to open foreign exchange transaction offices at border gates to replace private money trading activities, both meeting the foreign currency needs of individuals and purchasing foreign currency in cash from the population. Through this, the State Bank will manage foreign exchange trading activities and gradually narrow down the activities of the unofficial foreign exchange market.

3.2.5. Limit dollarization and create gradual convertibility for Vietnamese Dong

3.2.5.1. More thoroughly limit dollarization

To limit the causes of dollarization and reduce the convertibility of VND, the State Bank needs to simultaneously implement the following measures:

(1) Establish a legal system with severe penalties for listing and paying in foreign currency domestically. For the above sanctions to be effective, there must be coordination with competent authorities to strengthen inspection and control of the implementation of foreign exchange laws, and thoroughly and resolutely enforce that domestic payments can only be made in Vietnamese Dong.

(2) The State Bank should develop a roadmap to limit the permission for individuals to open foreign currency savings accounts without presenting the legal origin of the foreign currency. In order to concentrate the foreign currency that is still floating outside the banking system, as well as to attract remittances, temporarily during this period, we still allow individuals to open foreign currency savings accounts at licensed banks, if this foreign currency has a legal origin .

According to regulations, economic organizations when importing foreign currency into their accounts must prove the legal origin of that foreign currency, but individuals do not.

not required. This is a loophole in foreign exchange management that causes many consequences such as: economic organizations keep foreign currency in personal savings accounts, this money can come from illegal income or from crimes. However, because the foreign exchange ordinance allows people to keep, save and sell foreign currency to banks, in the short term it is not possible to stop individuals depositing savings accounts in foreign currency, but in the medium and long term it will move towards eliminating this practice.

Limiting the withdrawal of foreign currency will solve the problem of tension in foreign currency supply and demand and effectively use foreign currency in the economy. Besides, limiting the holding of US dollars will cut off the tools that facilitate smuggling and illegal trading.

(3) At important times, it is possible to implement measures to limit foreign currency lending, only lending to enterprises with foreign currency revenue, in order to reduce the tension in foreign currency supply and demand. However, this is only an administrative measure that can only be applied as a temporary solution. In the operating mechanism of a market economy, the choice of borrowing foreign currency or domestic currency depends on the enterprise choosing which borrowing option is more feasible when comparing the interest rates of the two currencies and having exchange rate risk insurance using term derivatives. For individuals borrowing foreign capital, individuals are allowed to receive foreign currency loans on accounts opened at banks but can only withdraw VND to carry out investment and business.

3.2.5.2. Improve the convertibility of VND

Article 3 of the Foreign Exchange Ordinance clearly states: "Implementing the national monetary policy objectives, enhancing the convertibility of Vietnamese Dong", but up to now, the convertibility of VND has not been fully implemented.

To do this, it is necessary to implement synchronous measures and there must be coordination between functional agencies. There must be a roadmap, because this is not something that can be achieved as desired, like China, which has the largest foreign exchange reserves and is the largest economy.

Although it has risen to the second largest in the world, the CNY is still not a highly convertible currency.

To improve the convertibility of VND, it is necessary to proceed step by step according to the roadmap.

program:

Firstly, fully implementing the convertibility of VND for transactions on current accounts, in theory Vietnam has liberalized current accounts, by foreign exchange ordinance, but in reality, there are legal transactions, allowed for payment but cannot buy foreign currency because banks do not have enough foreign currency to supply the legitimate needs of people and businesses.

Second, build a mechanism to gradually introduce VND into import-export payments. According to Mr. Truong Van Phuoc, General Director of the Export-Import Bank of Vietnam (Eximbank), "To some extent, converting local currency in international payments at the present time is possible." According to him, in 2010, the country's import turnover was 84 billion USD, if 10% of this (8.4 billion USD) was paid to partners in VND, the exchange rate pressure would be greatly reduced.[70]

Third, gradually implement the convertibility of VND for capital account transactions by allowing the use of VND in foreign borrowing, debt repayment and foreign investment in Vietnam.

The above measures can only be implemented on the basis of:

(1) Develop a sustainable economy, control inflation, stabilize VND value, promote economic growth and improve balance of payments.

(3) Increasing foreign exchange reserves is a condition to ensure the implementation of transferability.

exchange of VND.

(4) Improve the service quality of the banking system to ensure timely and rapid response to currency conversion to serve the legitimate foreign currency needs of people and economic organizations.

(5) Improve the business capacity of import-export traders to negotiate and sign contracts in order to have the right to choose VND in payment.

Thus, it can be seen that improving the convertibility of VND is a macro-level issue that requires economic development and the improvement of the financial system.

3.2.6. Improving the competitiveness of Vietnamese banks in operations

forex trading

First of all , increasing financial capacity, currently 20/39 banks have not met the minimum capital requirement of 3,000 billion VND (11 banks have charter capital of 1,000 billion VND or less) [66] and are trying to find capital from existing shareholders, strategic investors, issuing shares to raise capital, offering shares to foreign investors. The figure of 3,000 billion VND (at the current exchange rate equivalent to 150 million USD) for small banks in Vietnam is a significant number but compared to regional banks, it is still modest, especially to participate in foreign exchange trading activities in the regional and world banking market; therefore, Vietnamese commercial banks need to focus on improving capital capacity, to be able to develop foreign exchange trading activities, large capital is a necessary condition to carry out this activity and the larger the capital potential, the higher the competitiveness.

Next is to improve the capacity of the team of specialists, because foreign exchange trading with all its activities is a field that requires high professional qualifications and a scientific organizational structure. Therefore, banks that want to develop this business need to: Select highly qualified specialists with good knowledge of derivative products, with experience in the international currency trading market to lead this department, be the leader to guide and train transaction staff, regularly open training courses to update new knowledge as well as learn from experience to improve their qualifications.

The business department is organized according to a highly specialized model with three functional departments and professional staff:

For the business department that deals directly with customers, there must be dealers who have business acumen and the ability to analyze and synthesize factors affecting exchange rates to quote appropriate exchange rates. At the same time, they must determine a business strategy to establish a foreign currency status that is both suitable for the market to ensure increased profits and safety, avoiding high risks.

For the back office, there needs to be attentive and careful staff to limit professional errors that affect business results.

For the control room (Mid office): must be independent from the above two rooms and be responsible for monitoring transactions signed by traders, to ensure that these traders comply with foreign exchange business regulations on foreign currency status limits and transaction exchange rates, in order to promptly detect transactions with signs of violations to minimize business risks. Because, as we know, derivative foreign exchange transactions such as options or futures transactions have very high financial leverage, so there may be reckless traders chasing high profits with great risks, putting the bank at risk of bankruptcy.

Modernize the networked computer system, manage by database system, equip with option fee calculation software and EBS system to be able to reference prices and transaction volume in the world market. Electronic Brokerage System (EBS) is a brokerage system for traders, doing brokerage based on technical basis and payment service. EBS is a member of the North American stock market through EBS, foreign exchange traders can see the money flows in the world market; banks can see the orders in the buy market and the sell market at what level.

Improving risk management capacity in foreign exchange trading, along with measures to develop foreign exchange trading activities, banks

need to pay attention to risk management due to this business activity

arrive.

To limit risks and increase business efficiency, banks need to pay attention to the following measures:

Firstly , build a flexible and reasonable foreign exchange position limit. The limit (or open foreign exchange position limit) is an effective risk management tool in foreign exchange trading. This limit should be determined and limited by the bank to the maximum loss for each foreign exchange transaction depending on the business capacity, experience, and qualifications of each trader. At the same time, sanctions must be issued for violations, fully empowered and autonomously assigned to the supervisory department, to proactively and promptly handle violations to increase business discipline and ensure capital safety for the bank.

Second , pay attention to analysis and forecasting activities . In the period of increasingly deep and wide economic integration of the world today, the increase or decrease in the price of any strong foreign currency, changes in economic policies of countries having trade relations with our country, prices of essential products such as gasoline, oil, gold all immediately affect the exchange rate, affecting the profit or loss on the foreign exchange status of that bank.

For foreign exchange trading, analysis and forecasting play a very important role. The accuracy of this activity will help banks establish business strategies to determine status limits and exchange rate fluctuations for foreign currencies, to quote appropriate prices to implement the proposed strategy, as well as to price and fee transactions reasonably, both highly competitive and risk-preventing.

3.2.7. Completing the legal framework

To develop a safe and effective financial market and ensure national financial security, it is necessary to have a mechanism to monitor market activities, while at the same time, with the viewpoint that the state does not directly intervene in the market but must closely monitor the market.

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