New g-bond futures contract needs trading mechanism

October 15, 2018 - 11:00

The coming derivative product for government bonds (known as g-bonds) is expected to help financial institutions hedge risks, but experts have raised concerns about the trading mechanism.

The new government bond futures contract, which will be released soon by the Hà Nội Stock Exchange, is expected to help investors and traders hedge risks. It also requires market regulators to soon release new policies on both trading and accounting mechanisms. — Photo
Viet Nam News

HÀ NỘI — The coming derivative product for government bonds (known as g-bonds) is expected to help financial institutions hedge risks, but experts have raised concerns about the trading mechanism.

According to Đỗ Ngọc Quỳnh, general secretary of the Vietnam Bond Market Association, the fact that only seven commercial banks having been allowed to operate in the derivatives market would make trading more like a one-way road.

When bond yields increase, all banks would like to buy as many g-bond futures contracts as possible as a risk hedging tool for their g-bond portfolios, he told the online newspaper

The total value of g-bond portfolios held by commercial banks is estimated at VNĐ800-900 trillion (US$35.5-40 billion).

The number of foreign investors holding g-bonds is modest, so there is little demand among foreign investors to trade g-bond futures contracts for hedging, Quỳnh said.

To lure more investors and traders, such as investment funds and securities and insurance companies, to the g-bond futures market, there must be good policies on charges and taxes as well as the implementation of comprehensive solutions to improve the trading mechanism, he added.

At the moment, commercial banks are struggling with how to create a specific financial account for g-bond futures trading.

The best way to solve this issue is for the Ministry of Finance and the State Bank of Việt Nam soon release instructional documents on accounting mechanisms for financial institutions that want to take part in the g-bond futures market, Quỳnh said.

In case the market regulators have not figured out how to do that, the best solution is to learn from other commercial banks, he added.

For example, the Joint Stock Commercial Bank for Investment and Development of Việt Nam (BIDV) has developed an accounting mechanism that meets international practices and its new accounting mechanism has been submitted to the State Bank of Việt Nam.

If the central bank find no problems with that mechanism, other financial institutions may develop their own accounting methods based on BIDV’s model, Quỳnh noted.

According to Nguyễn Thị Thu Hà, director of derivatives trading department at the Hà Nội Stock Exchange (HNX), g-bond futures contracts will be soon available for trading.

“We began designing g-bond futures contracts in 2014-15. We planned to trade two products – the three-year and five-year g-bond futures contracts,” Hà told a meeting in early October.

The State Securities Commission has chosen the five-year g-bond futures contract for release as the three-year version proved infeasible, she said.

The five-year g-bond futures contract refers to the five-year g-bond with face value of VNĐ100,000. The bond has an annual yield rate of 5 per cent, interest payment dues every year and bondholders will receive the deposit on the maturity date.

Nguyễn Như Quỳnh, general director of HNX, said that the derivates market had made great achievements after one year of operation with a higher-than-expected growth rate, luring more and more investors to the market.

In the past five years, the g-bond market has developed strongly in both size and quality with an annual growth rate of 15 per cent and its market capitalisation reached 21.6 per cent of Việt Nam’s gross domestic product in 2017.

The average trading liquidity of the g-bond market was VNĐ10 trillion in each session of 2018, raising the demand for risk hedging among investors in g-bond trading. — VNS