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Decree 42 stipulates rules for derivative securities

Update: June, 24/2015 - 09:30

Nguyen Kim Trang, Legal Assistant – Indochine Counsel

On May 5, 2015, the government enacted decree 42/2015/ND-CP on derivative securities and the derivative securities market ("Decree 42").

The decree is applicable to both Vietnamese and foreign organisations and individuals investing in or involved in derivative securities ("derivatives") and conducting or involved in the activities on the derivative securities market ("derivatives market") in Viet Nam.

According to decree 42, derivatives are securities prescribed in the amended Law on Securities, which means evidence from an issuing organisation (i.e., organisation conducting a securities offer) certifying the lawful rights and interests of an owner with respect to an asset or capital portion. It may take the form of certificates, book entries or electronic data. Derivatives include future contract, purchase/sale options, forward contract and other derivatives, in accordance with the guidelines of the finance ministry.

Derivatives investment means buying and/or selling listed derivatives or reaching agreements to trade derivatives contracts on the derivatives market.

According to decree 42, organisations and individuals are permitted to freely invest in derivatives on the derivatives market, except certain organisations, where their investment is subject to specific conditions as provided by laws, such as securities companies, fund management companies, credit institutions or foreign bank branches and foreign insurers or branches of a foreign insurer, as well as state-owned organisations.

Decree 42 stipulates the following conditions are applicable to the derivatives business organisations that wish to conduct one or more derivatives trading activities, including derivatives brokerage, derivatives self–trading and derivatives investment consultancy, for being issued the certificate of satisfaction of conditions for derivatives trading as a requirement for obtaining the permission to conduct such derivatives trading activities:

(a) be licensed for all securities professional business activities in accordance with the Law on Securities;

(b) satisfies the financial conditions regarding charter capital [and/or] equity;

(c) satisfies the conditions prescribed in the guidelines of the finance ministry on business results, ratios of available capital and professional rules;

(d) must have director/general director and deputy director/deputy general director in charge of professional activities, and at least five staff for each derivatives trading activity, holding securities practising certificates as well as certificates of expertise in derivatives and the derivatives market; and

(e) not be in the process of consolidation, merger or dissolution, or be under control or under special control, or be subject to suspension or temporary suspension pursuant to the decision of a competent authority.

The stock exchange is responsible for arranging and operating the derivatives market and is the only entity permitted to arrange the trading of the listed derivatives prescribed in decree 42.

Derivatives clearing and payment services securities company, commercial bank or foreign bank branches must be granted the certificate for derivatives clearance and payment services, in order to provide derivatives clearing and payment services, with the following required conditions:

(a) be a depository member of the Viet Nam Securities Depository ("VSD");

(b) must have written permission of the State Bank of Viet Nam in case of a commercial bank or foreign bank branch, and must have been issued a certificate for derivatives brokerage in case of a securities company;

(c) satisfies the financial conditions regarding charter capital [and/or] equity;

(d) satisfies the conditions on business results and ratios of available capital in case of a securities company; satisfies the conditions on prudential ratios in the case of a branch, and on issued capital in case of a commercial bank or foreign bank;

(e) has rules regarding the professional activity of clearing and making payment for derivatives transactions in accordance with guidelines of the finance ministry;

(f) not be in the process of consolidation, merger or dissolution, or be under control or under special control, or be subject to suspension or temporary suspension pursuant to the decision of a competent authority.

The activity of clearing and making payment for derivatives transactions by the central counterparty clearing mechanism may only be implemented on VSD, whereby VSD is one party and the clearing member is the other party to the transaction, including transactions.

Decree 42 will come into effect on July 1, 2015.

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