The launch of equity futures trading on the Hanoi Stock Exchange on August 10 highlights the problems facing Vietnam’s derivatives industry. Regulatory caution had delayed the trading start date several times, and an initial product suite of VN30 and HNX30 equity index futures, as well as five-year bond futures, falls far short of the range of hedging instruments required by a rapidly industrialising Vietnam.
Set against this was the relatively benign macro-landscape over the last 12 months. Interest rates were stable and the Vietnamese dong remained steady against other currencies, despite the State Bank of Vietnam relaxing rules around the currency’s benchmark in early 2016.
But this stability could soon change. Fears of a rise in inflation, and an impending change to the interest rate benchmark composition – talks are in place between the Vietnam Bond Market Association and the central bank over interest rate reforms – gave rise to the spectre of a near-term Vietnamese dong interest rate rise that firms couldn’t hedge, since no banks offered over-the-counter interest rate swaps.
Step in BIDV. On June 13 it completed a $13 million VND interest rate swap with a local financial firm, the first time an over-the-counter deal of this type had been conducted with a non-bank counterparty. It is for making this critical contribution to the development of Vietnam’s derivatives market that BIDV has won the House of the Year award.
Until June corporates with Vietnamese dong liabilities had only been able to choose hedges denominated in euro, yen or US dollar and linked to standardised indexes such as Libor and Euribor, instead of the local benchmark for corporate loans of the trailing 12-month deposit rate. Firms were left with the unpalatable choice of a potentially huge basis risk or just leaving their local currency exposures unhedged.
And these exposures are significant. According to data from BIDV, the total value of dong-denominated deposits and loans in 2017 totalled 11.5 trillion dong ($505 million) – equal to 90% of the country’s total bank deposits. The main interest rate benchmark is linked to the trailing 12-month deposit rate of the four state-owned commercial banks – VCB, BIDV, VietinBank and AgriBank – which has remained stable at between 6–7% over the last two years, but is expected to become more volatile in the near future.
According to Pham Phuong Lan, deputy head of treasury for BIDV, if rates rise this would represent a serious risk to BIDV’s corporate customer base, which has a large amount of medium- or long-term floating Vietnamese dong loans that trail the 12-month deposit rate. The bank’s response has been to launch a suite of over-the-counter Vietnamese dong interest rate swaps, linked to either Vnibor – the local interbank rate – or the 12-month deposit rate, up to a maximum duration of five years.
“There has been a large demand for interest rate products from our client base and the dual benchmark approach enables BIDV to customise further depending on the end-client,” says Pham.
“For example, most credit contracts in Vietnam are linked to Vnibor and the securities firms that mainly trade these products need a hedge linked to the interbank rate, rather than the trailing 12-month rate. Also, offering interest rate swaps with a duration from three months to five years provides a much longer risk management timeframe than is currently being offered.”
As such BIDV has pioneered the creation of a local currency interest rate swap market, one of the fundamental stages in developing the full range of risk management tools needed by firms as economies develop.
Pham gives the example of a recent VND interest rate swap it executed for Thien Viet Securities JSC, a Vietnamese securities firm which had a fixed-rate Vietnamese dong loan. With a view that Vnibor would fall in the near future, the company entered into a three-month dong interest rate swap with BIDV, enabling it to benefit from the lower floating rate. Not only did this provide a much-needed risk management tool for the local securities sector, it also created the basis for further, more sophisticated, tools.
“This has significant knock-on benefits for the creation of a dynamic Vietnamese derivatives market. It will improve the accuracy of the yield curve and provide a building block for the launch of interest rate structured products,” says Pham.
But it’s not just interest rates where BIDV has been innovating. In March this year the Vietnamese bank provided the first ever cotton swap in Vietnam, executed on behalf of Ha Nam Textile Company, one of the three largest textile producers in Vietnam. As with the Thien Viet interest rate swap, the swap was a simple 12-month bullet structure, but it is an important development in supporting the emergence of a full suite of commodity risk management products that is needed by an export-driven economy such as Vietnam.