Vietnam Eases Foreign Access to Stock Market, Removes Pre-Fund Requirements for Stock Transactions

Posted by Written by Vu Nguyen Hanh Reading Time: 5 minutes

Vietnam recently removed a major barrier to foreign investor access in its stock market by eliminating the 100-percent pre-funding requirement for transactions. Following this regulatory change, foreign-held securities trading accounts saw a steady increase, reflecting the market’s positive response to the removal of this significant constraint.

On September 18, the Minister of Finance (MoF) issued Circular 68/2024/TT-BTC (herein after, “Circular 68”), amending and supplementing several provisions related to stock market transactions, clearing, settlement, and information disclosure.

Under this circular, foreign institutional investors are now exempt from the minimum fund requirement for share purchases. This means the MoF will no longer mandate that foreign investors have sufficient funds available when placing stock purchase orders. Instead, securities firms are tasked with conducting due diligence to assess their clients’ financial capacity.

Effective November 2, 2024, Circular 68 assigns responsibility for implementation to the State Securities Commission, the Vietnam Stock Exchange, the Hanoi Stock Exchange, the Ho Chi Minh City Stock Exchange, the Vietnam Securities Depository and Clearing Corporation, as well as securities companies, depository members, and other relevant organizations and individuals.

Overview of Vietnam’s stock market: Current status and developments

Vietnam’s stock market is projected to reach a market capitalization of approximately US$267.5 billion in 2024, with an anticipated annual growth rate (CAGR) of 7.89 percent from 2024 to 2025, reaching an estimated US$288.6 billion by 2025, according to Statista. The market volume is expected to reach US$0.87 billion in 2024.

FIND BUSINESS SUPPORT
Grow Your Presence in Asia with Complete Market Entry and Cross-Regional Support

Investor engagement in Vietnam has shown notable growth. In October, domestic individual accounts increased by 156,568, maintaining steady growth similar to September, as reported by the Vietnam Securities Depository and Clearing Corporation (VSDC). Cumulatively, there has been a growth of 1.73 million domestic accounts in the first 10 months of this year, averaging around 173,000 new accounts monthly. By the end of October, the total number of individual securities trading accounts in Vietnam reached 8.96 million, representing 8.9 percent of the population.

Institutional investor interest has also strengthened, with 121 new domestic institutional accounts added in October, up from 90 in September, bringing the year-to-date total to 1,257. Foreign investors opened 230 accounts in October, comprising 202 individual and 28 institutional accounts, for a cumulative total of 47,436 foreign-held accounts.

Overall, 156,919 new accounts were opened last month, resulting in 9.02 million securities trading accounts in the Vietnamese market by the end of October.

Key changes

Amendments to four circulars

Circular 68 introduces amendments to four key circulars governing Vietnam’s stock market, enhancing the regulatory framework for foreign investors:

These amendments introduce significant regulatory changes, and foreign investors are encouraged to incorporate these updates into their business strategies and operations.

Eliminating 100 percent pre-fund requirement

Under Circular 68, foreign institutional investors are now exempt from the requirement to have sufficient funds available when placing orders to purchase securities, as stipulated in the newly added Article 9a of Circular No. 120/2020/TT-BTC. This provision removes the minimum fund requirement for these investors when buying shares.

Instead of requiring full pre-funding, Article 9a mandates that securities companies assess the payment risk of foreign institutional investors to determine the necessary funds when placing stock purchase orders. These assessments are to be conducted based on an agreement between the securities company and the institutional foreign investor or their authorized representative.

In cases of unmet payment for stock purchase transactions:

If an institutional foreign investor fails to fully fund a stock purchase transaction, the payment obligation for the shortfall is transferred to the securities company where the order was placed, through its proprietary trading account.

However, securities companies are exempt from this obligation if:

  • The custodian bank, where the foreign institutional investor’s securities depository account is held, provided an inaccurate confirmation of the investor’s deposit balance to the securities company; and
  • This inaccurate confirmation directly led to insufficient funds for the stock purchase transaction.

In such cases, the custodian bank assumes responsibility for covering the payment shortfall for the transaction and any related costs.

Transfer of stock ownership

FIND BUSINESS SUPPORT
De-Risk Your Asia Business with a Company Health Check Review and Professional Advisory

Securities companies are now permitted to transfer ownership of shares outside the stock trading system or sell through negotiation within the system for shares credited to their proprietary trading account due to insufficient payment by foreign institutional investors, as outlined in Clause 2, Article 9 of Circular 120/2020/TT-BTC.

The conditions for such transfers are:

  • The transfer must occur by the next trading day after the shares are credited to the securities company’s proprietary trading account.
  • The foreign ownership of these shares must remain within the legally prescribed limit.

Additionally, securities companies may sell shares credited to their proprietary trading account directly on the securities trading system.

For both types of transactions, any profits, losses, and associated costs will be managed according to the agreement between the securities company and the institutional foreign investor or their authorized representative.

Market response

Experts have praised the recent updates as a significant milestone toward Vietnam’s goal of advancing its stock market classification from frontier to emerging market status by 2025.

The amendments introduced under Circular 68 offer foreign institutional investors a substantial advantage in market access by removing the pre-funding requirement, which had posed a considerable barrier. This requirement previously exposed investors, especially foreign institutions, to foreign exchange risks regardless of transaction completion. In contrast, most modern stock markets now use collateral-based mechanisms to manage risk instead of pre-funding requirements.

Currently, both MSCI and FTSE Russell classify Vietnam as a frontier market. However, FTSE Russell has placed Vietnam on its watchlist for a potential upgrade to emerging market status, signaling promising progress for the market.

Vietnam’s stock market outlook

According to Morgan Stanley, international funds could potentially invest up to US$9 billion in Vietnamese equities if the country’s stock market is upgraded from frontier to emerging market status. Should this upgrade occur, passive funds tracking FTSE indexes could invest approximately US$800 million, while those following non-FTSE indexes might contribute around US$2 billion. Young Lee, Managing Director and COO of IED Asia-Pacific at Morgan Stanley, specifically anticipated that passive funds tracking FTSE indexes would likely invest US$800 million, with funds tracking non-FTSE indexes possibly investing US$2 billion.

Earlier this year, the World Bank presented a more optimistic forecast, estimating that Vietnam could attract up to US$25 billion in international investments to its stock market.

These optimistic projections are contingent on resolving two key issues: the pre-funding requirement and foreign ownership limits. While the pre-funding requirement has been eliminated under Circular 68, experts argue that restrictions on foreign ownership should only apply to sectors where they are necessary.

As outlined in the stock market development strategy approved by the Prime Minister, Vietnam aims for its stock market capitalization to reach 100 percent of GDP by 2025 and 120 percent by 2030. Additionally, the country seeks to increase the number of investor trading accounts to 9 million by 2025 and 11 million by 2030, with a focus on developing institutional and professional investors while attracting more foreign capital.

Conclusion

The issuance of Circular 68 marks a significant turning point for Vietnam’s stock market, as it removes the long-standing requirement for foreign investors to secure 100-percent pre-funding for their stock market transactions. This regulatory update simplifies the investment process for foreign institutional investors and has the potential to elevate Vietnam’s market status from frontier to emerging, paving the way for substantial foreign capital inflows.

About Us

Vietnam Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, China, and India. For editorial matters, contact us here and for a complimentary subscription to our products, please click here. For assistance with investments into Vietnam, please contact us at vietnam@dezshira.com or visit us at www.dezshira.com.

Dezan Shira & Associates assists foreign investors throughout Asia from offices across the world, including in Hanoi, Ho Chi Minh City, and Da Nang. We also maintain offices or have alliance partners assisting foreign investors in China, Hong Kong SAR, Dubai (UAE), Indonesia, Singapore, Philippines, Malaysia, Thailand, Bangladesh, Italy, Germany, the United States, and Australia.