Bond Market Development: A Call for Market Makers

Bond Market Development: A Call for Market Makers

The Vietnam bond market was formed between two and three years ago and in that short time the market has heated up considerably, particularly in the last year. However, it is still small in both scale and volume of traded bonds. Foreign financial experts say that the market needs to establish ‘real’ market makers.

Pinpointing Problems

Julius Caesar Parrenas of the Chinatrust Financial Holding Company said that the Vietnam bond market remained too small with total loans from bonds equal to just seven per cent of Vietnam’s gross domestic product (GDP). Meanwhile, this figure is much higher in other countries in the region. In China it accounts for 21 per cent, 33 per cent in Thailand and 62 per cent in Malaysia. The small volume of total loans has resulted in an unsatisfactory structure with government bonds accounting for 93 per cent while corporate bonds account for just two per cent despite them being involved in major goods of the Vietnamese market. In fact, there have only been six companies in Vietnam, including four State-owned commercial banks and two financial companies, to issue bonds for capital mobilisation. Bonds generally have a short duration, with five-year bonds accounting for up to 50 per cent. There are also many other shortcomings in the local bond market. These include a failure to a standardise interest rates, imprecise figures concerning the supply and demand of capital and too few auctioning members. The secondary market also has yet to satisfactorily develop its infrastructure, deposit and clearing payment facilities. In addition, securities companies have weak financial sources, so their support for the market remains weak. As a result, a market for negotiable bond transactions has yet to be formed.

Tran Hoa Binh, chief executive of the Bank for Foreign Trade of Vietnam, said that trust in government bonds was an important premise for the development of the Vietnam bond market and a standard interest rate curve for the market. Financial intermediaries have yet to implement tasks of ‘real’ market makers, such as quotations and ask and bid volumes. A lack of derivative instruments in the market, including swap, option and forward contracts, has resulted in the fact that the Vietnam bond market still lacks decent market players. At the same time, a lack of instruments for risk prevention has constrained transactions in the market.

The role of market makers

Binh described market makers as financial intermediaries who announce quotation and ask and bid volumes of bonds and are ready to make transactions with listed prices and volumes. They also ensure that there is always a market for investors who want to sell securities before their due maturity. Therefore, they must have capital volume, big enough to buy securities at the request of investors. Market makers must also have a sufficient volume of securities to sell when investors wish to expand their holdings. However, currently, these intermediaries suffer from interest rate and liquidity risk in the bonds they hold. "To minimise risks, market makers need access to self-insurance instruments, including forward, swap and option contracts,” Binh said. As experts have pointed out, in order to raise the role of market makers, it is necessary to increase capital for securities companies, allowing and encouraging commercial banks to act as financial intermediaries and promoting the provision of information and risk prevention instruments.

• M.Huong