Technology Infrastructure Solutions

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Diagram 3.4 : Transaction and clearing process at the Exchange

3.3.2. Process explanation

Includes 2 phases:

3.3.2.1. Phase 1: Transaction

(1) Investor placing an order: An investor who wants to trade stock options must first open an account at a member securities company, then instruct this company to buy or sell a specific stock option at a specific price on the Ho Chi Minh City Stock Exchange.

(2) The member securities company receives the order, checks the validity of the order, the margin ratio and the number of positions allowed to be opened by the investor (if it is an order to open a position), and checks the number of existing open positions (if it is an order to close a position).

(3) Member securities companies enter orders into the trading system if the orders meet the conditions.

(3a), otherwise return the order to the investor (3b).

(4) The trading system matches the order.

(5) Transfer transaction results to the Clearing Center and notify transaction results: Transaction results will be transferred to the Clearing Center and simultaneously notified to member securities companies.

3.3.2.2. Phase 2: Clearing

(6) Subrogation and obligations: Immediately after receiving the transaction results, the transfer of rights and obligations will be carried out in accordance with the provisions on Subrogation and obligations stated above:

- Between the parties and TTTTBT in case a new position is opened.

- Between parties in case of position closing transaction.

(7) Post-trade clearing: includes 03 tasks (7a, 7b, 7c) carried out after the transaction is matched.

(7a) Initial margin requirement (only in case of open position trading):

The TTTTBT calculates the initial margin of the investor, thereby calculating and notifying the margin to the member securities company based on the summary of the initial margin of all the securities company's customers with transactions occurring during the day. In order to minimize risks, it is necessary to stipulate that the securities company must pay the full initial margin no later than the trading time of the next day. If the member securities company fails to fulfill its obligations within the prescribed time, the TTTTBT has the right to use the mandatory margin that the member securities company paid when registering as a member and the member securities company will be fined at the prescribed interest rate (similar to the basic securities market).

(7b) Settlement after cash account transaction:

After the option trading session ends, based on the trading results,

TTTTBT will proceed to offset into the investor's money account. (7c) Position account offset:

TTTTBT will offset the number of buy and sell positions, offset the number of closed positions and open positions to record, monitor investors' trading activities and to set daily prices.

(8) Daily position account valuation:

After the end of each trading session, the Brokerage Center must calculate the value of all open positions currently in the investor's position account at market prices to monitor the maintenance margin level as prescribed . If the position value is lower than the maintenance margin level, the Brokerage Center will send a notice requesting additional margin to the Securities Company. The additional margin payment will be made no later than the end of the next business day. The notification of additional margin request at the investor/customer level will be made by the Securities Company.

Note:

During the time from when the buy/sell transaction is made to open the position until expiration, the investor has 2 options:

- Close position (withdraw from the trade): the process goes to Step (9a) Place a closing order

position

- Wait until maturity: the process moves to Step (9b) Payment at maturity.

(9a) Place a position closing order:

The process will go back from Step (2) to Step (7).

Investors will not be required to pay an initial deposit and payment for

The parties as well as the calculation of profit/loss will be carried out according to regulations.

(9b) Payment at maturity:

 The exercise of rights and obligations at maturity depends on the investor holding the rights, so there will be many situations that can occur. If the option buyer decides to exercise the option contract at maturity, this investor will notify the member securities company and deposit money or securities corresponding to the option contract. If the right is not exercised, the deposit account will be canceled and the investor will receive back the amount they deposited if they do not want to continue buying and selling options. Immediately after that, this securities company will notify the depository center and the designated payment bank to carry out transactions through

through the securities company's account opened here using the center's payment services.

 The total settlement time is the same as that of stock transactions, which is T+3.

3.4. IMPLEMENTATION SOLUTIONS

3.4.1. Legal framework solutions

 In order for the stock market to attract many investors, it is necessary to first create a mentality for investors to do business fairly in the market. The Securities Law, which came into effect on January 1, 2007, has contributed positively to the development of the stock market in recent times and demonstrated the Government's determination to develop and stabilize the stock market. The issue related to options and derivatives has only been mentioned in the Law but has not covered all activities in this field. On the other hand, up to now, there has been no sub-law document mentioning derivatives on the stock market. Therefore, it is necessary to establish a legal framework for options trading activities in Vietnam.

 Contents to be addressed when building a legal framework for trading activities

Option translation in Vietnam:

 The Securities Law and the Enterprise Law are still the fundamental legal framework for all options activities in Vietnam.

 Based on the Securities Law and the Enterprise Law, the Government will issue decrees detailing options trading activities to create a legal basis for the options trading market to operate and also serve as a basis for state management agencies to regulate and supervise options trading activities in the market. The decree may regulate the following issues:

 For the State Securities Commission: prescribes the specific functions, tasks and powers of the State Securities Commission in state management of options trading, and the responsibility for managing and supervising options trading activities in the market.

 For derivatives exchanges: regulations on establishment, organizational structure, management mechanism

management, board composition, matters relating to the membership of the Department, obligations

of the Department in promulgating regulations, rules, organizing market operations, and managing

risk management, enhance management and supervision capabilities.

 Clearing Center (CCP) and member payment companies: stipulate conditions and standards to become a member payment company, stipulate deposit levels and contribution levels to the payment support fund for CCP, stipulate contract implementation process upon maturity, responsibilities, obligations and fee levels of CCP.

 For brokerage firms, member clearing firms, market makers, credit rating firms:

- Brokerage companies and member payment companies : these are the bridge between investors and transaction organizations and between investors and TTTTBT. Therefore, there should be regulations on the conditions for establishment, regulations on the responsibilities of brokerage companies and member payment companies towards investors in conducting transactions and performing contracts upon maturity...

- Market makers play an important role in creating liquidity for the options market. Therefore, in addition to regulations on responsibilities and obligations to perform contracts upon expiration like other investors, there should be regulations to create favorable conditions for market makers to be ready to buy or sell options contracts.

- Credit rating company : as an independent agency, providing criteria to assess the creditworthiness of listed and unlisted companies, as a basis for decisions on selecting underlying securities by the CKPS trading organization and decisions by investors. Therefore, it is necessary to clearly stipulate the conditions for establishment, organization and operation regulations of these companies.

 In addition, there should be regulations on the legal obligations of the parties participating in the transaction. In particular, there should be specific regulations on the rights and obligations of investors when participating in the market to ensure that investors comply with the regulations on transactions.

3.4.2. Solutions on technical infrastructure

3.4.2.1. Building technical and technological infrastructure to serve trading activities

Option translation:

The technology infrastructure system serving options trading at the Ho Chi Minh City Stock Exchange includes a transaction management system, information disclosure system, transaction monitoring system, risk management system, clearing and settlement system, etc. These systems need to be invested in and built according to the following criteria:

- Low operating costs: The system must be easy to install, easy to operate and easy to maintain.

- High performance: Able to handle large volumes of transactions in the event of unexpected fluctuations in the trading situation. The system must be able to upgrade quickly as required.

- Accessibility: Accessibility is extremely important. In particular, always ensure access to the trading situation of both the derivatives market and the underlying stock market; ensure that the data provided by the two markets does not differ in terms of time.

In order to establish and operate new systems for options trading - which are much more complex than the trading system on the basic stock market, the Ho Chi Minh City Stock Exchange needs to pay special attention to equipping specialized knowledge about options in particular and derivatives in general for the IT staff and related departments of the Department. The knowledge provision must be carried out with the general theory of derivatives first, through documents compiled by the research team of the Research and Development Department or short-term training courses in the country. At the same time, the Department should organize for key staff in charge of derivatives technology infrastructure to participate in long-term training courses abroad, invite experts to teach... to grasp practical experiences.

3.4.2.2. Gradually improve the technological capacity of securities companies:

In addition to a number of securities companies with sufficient financial resources and IT staff, the author finds that for most securities companies, equipping a new system will be a difficulty and obstacle in accessing the derivatives market without long-term investment preparation. Therefore, the Ho Chi Minh City Stock Exchange needs to soon announce the roadmap for developing technical infrastructure so that securities companies have time to invest and prepare. In particular, the Department needs to focus on improving the technological capacity of securities companies in meeting the requirements of fast and accurate clearing and settlement and clearing risk management.

In addition, the Department also needs to support securities companies in training IT staff through organizing training courses and learning from foreign market experiences.

3.4.3. Solutions to the problem of knowledge dissemination

3.4.3.1. Public/investor education:

This is an auxiliary solution but no less important and needs to be implemented as soon as possible to prepare knowledge for the public/investors to be able to participate in a market with many potential risks and more complex commodity nature than the basic stock market, as well as help them understand the meaning of options to support the formation of this market in Vietnam.

In order to effectively and properly educate the public/investors, the Ho Chi Minh City Stock Exchange needs to develop a systematic investor training program that will benefit them and the market. Specifically as follows:

- Identify the role of regulatory agencies and intermediary institutions in investor education.

- Refer to investor education materials and knowledge dissemination methods of other countries and develop appropriate and effective materials for Vietnamese investors.

- Classify investor groups and develop training methods suitable for each group such as training through: publications, documents, internet, media, public seminars, stock training courses...

- Build a website with all the necessary knowledge about options products

for investors

- Develop a specific training roadmap for internal SGDCK and potential investors.

3.4.3.2. Marketing and research and development activities to promote the formation and development of the options market in Vietnam:

a. Marketing activities:

Marketing plays an important role in developing a product. Although it is an intangible financial product, options are no exception to that rule, especially in the preparation stage of putting options into trading. Therefore, to develop an option product,

selected to be accepted and used by the public/investors, marketing is not the solution.

can be taken lightly

Building a marketing strategy suitable for the characteristics of the product is a decisive factor in marketing activities. These strategies must be suitable for each stage of market development and some of the following measures can be applied:

- A hotline number and a website dedicated to learning about rights

The options should be established so that the public/investors can consult them at any time.

- Before options are officially traded, the Ho Chi Minh City Stock Exchange needs to have a simulated trading model on the internet so that investors can try trading. This is a practical way for investors to gain more knowledge and experience with options, as well as fully understand the benefits of options in terms of risk prevention as well as the profitability that options can bring.

- Find effective marketing methods for each specialized market participant. For example: TV programs, leaflets, banners at securities companies...

b. Research and development activities:

Research and development activities are a continuous activity in the process of forming and developing options trading activities in Vietnam. In order for the options market to operate stably and effectively, the Ho Chi Minh City Stock Exchange needs to establish a team to conduct research and analyze the elements that make up the product and measures to successfully put the product into trading on the market.

Therefore, research and development activities need to have the following specific elements:

- Human resources: requires members participating in the research to have expertise and knowledge of the financial market in general; understanding of domestic and international stock markets. In addition, these members must be enthusiastic about research work as well as aware of self-updating knowledge for research purposes.

- Training plan: these members will participate in domestic and foreign training courses on options and CKPS to have an overview and detailed view of the products they will conduct research. In addition, direct consultation and advice will be provided.