An investor sits in front of screens showing information from the stock board of a securities company in Hanoi, Vietnam, July 6, 2018. Picture taken July 6, 2018. REUTERS/Kham/File Photo License Rights Acquired
HANOI, Oct 25 (Reuters) – Vietnam plans to ease its stock market settlement procedures for foreign investors, a critical measure to persuade stock index managers to upgrade the country to emerging market status and attract hundreds of millions of dollars in new investment, sources said.
Following China’s model, Vietnam will allow brokers to vouch for foreign investors when buying shares, a move seen as progress by the FTSE index provider and could see the removal of a regulatory hurdle that has for years prevented the Stock Exchange from upgrading of Ho Chi Minh City (.VNI).
The bourse, the smallest among the major Southeast Asian economies, is now classified by both the MSCI and FTSE indices as a frontier market. This prevents many funds, investors and family offices from investing in companies listed there.
FTSE experts visited the country last week and were presented with details of the new plan to break the long-standing impasse, people familiar with the talks said.
“Last week’s meetings with FTSE were positive and could lead to a possible upgrade to secondary emerging market status by September 2025,” said Le Thi Le Hang, chief strategy officer at leading Vietnamese brokerage SSI, which is directly involved in the plans .
To meet this timetable, FTSE will need to announce the upgrade as early as September next year, six or twelve months before the actual promotion, in accordance with its upgrade procedures.
If improved, Vietnam would join Indonesia, the Philippines, Qatar and China, rising from the fringe index it now shares with less developed markets such as Sri Lanka and Kenya, and where it accounts for a cumbersome 38% of total capitalization.
MULTI-MILLION PIES
Under the new plan, Vietnam will adopt a share transaction payment settlement mechanism that could meet FTSE’s key upgrade requirements.
In advanced markets, investors settle transactions two days after buying shares, but in Vietnam they are required to deliver the money on the same day, leading to higher costs and risks for foreign investors.
To get around the hurdle, Vietnamese authorities and brokers came up with a mechanism similar to that used in China, where securities firms would guarantee payments to foreign funds, effectively giving them credit for the two days until the transactions were completed.
They would take some risks but benefit from new inflows, which SSI says could be about $800 million from passive funds alone, assuming Vietnam’s weighting in the emerging market index is 1%.
Active funds are believed to have five times more investments in the FTSE emerging market, which could lead to much bigger gains for the HCMC market, which currently has a capitalization of $179 billion.
FTSE and Vietnam’s market regulator, the State Securities Commission, did not respond to requests for comment.
In its latest update on Vietnam, published last month, FTSE said that while progress on planned market reforms remained slow, the government had made a new commitment to the necessary work.
“In addition, the State Securities Commission (SSC) has demonstrated renewed energy in seeking a workable solution to remove the need for pre-financing,” FTSE said.
A simultaneous upgrade by managers of the much larger MSCI index is seen as out of the question for now because of MSCI’s stricter requirements, the sources said.
According to Vietnamese rules, banks are not allowed to offer loans to foreigners, hindering their participation and complicating the upgrade negotiations.
The mechanism is yet to be finalized and will go through a month-long trial period while existing regulations are tweaked, the sources said.
Foreign investors should also be consulted. They called on China to remove the pre-financing requirement or at least allow banks to step in to make deals easier to transact and attract more investors.
Reporting by @fraguarascio; Edit by Lincoln Feast
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