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Repo service, a controversial piece of pie
At the end of May 2008, the State Securities Commission officially asked securities companies to halt signing repo contracts. However, most securities companies have resumed the service.
Nguyen Hoang Hai, Secretary General of the Vietnam Association of Financial Investors (VAFI), said that the repo service should not be provided at this moment, and that it is necessary to gradually reduce securities loans.
Hai said that the large number of securities loans was the main reason behind the instability of the stock market in the recent period. In 2006-2007, banks and securities companies were too compliant in giving loans to fund securities investments under the mode of repo service.
“The fact that banks pushed up short-term transactions was what directly led to the falls of the market,” Hai said.
Secretary General of the Vietnam Association of Securities Business Nguyen Thanh Ky also said that it is necessary to prohibit securities loaning when the market is falling. However, Ky said that state management agencies should set up a clear roadmap for this, as abrupt decisions caused serious consequences to the market in early 2007.
Securities companies want to provide repo service as they can collect service fees on the transactions, and get profit from interest rate gaps. However, they have been warned about the high risks of this service.
The director of the Securities Scientific Research and Training Centre said that the repo service has not been legalised yet, and that securities companies should not carry out the service on a large scale.
According to Minh, under the Securities Law, a securities investment is a kind of conditional business. Securities companies are allowed to provide brokerage, guarantee and consultancy services, and to trade securities themselves.
Minh said that in other stock markets, the repo service is only applied to bonds, not to shares. “Securities companies are not credit institutions, so they must not provide loans under any form,” Minh said.
Ky from VASB said that if state management agencies allow companies to carry out repo service, they have to set up a proper legal framework for the operation, with strict control over it. For example, Ky said, securities companies should have to give reports about loaning, weekly or monthly, while figures about loans should be made public.
Ky also said that state management agencies should consider allowing short sale and purchase and derivatives in order to help the market develop in a more sustainable way.
VNN
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