Vietnam begins trading in covered warrants

2.9 million covered warrants were traded on the Ho Chi Minh City Stock Exchange (HoSE) in the product’s first trading session with total transaction value of VND5.7 billion ($245,000).

According to the State Securities Commission, the new product will help diversify investment products in the stock market, provide tools to prevent risks for investors and boost foreign investment inflows.

A covered warrant is a security that gives the holder the right to buy or sell an underlying asset at a specified price on or before a specified date. Unlike futures, it does not obligate the holder to transact an asset at a predetermined future date and price.

Covered warrants are listed on major Asian exchanges such as Hong Kong, Taiwan and South Korea. They are called "covered" warrants because when an issuer sells a warrant to an investor, it will usually hedge, or "cover" its exposure by buying the underlying asset in the market.

Initially, the Ministry of Finance will only allow listed stocks to be underlying assets for the covered warrants. However, since this is the first time Vietnam is trading these warrants, not all stocks will be selected to trade under this form.

According to HoSE, only 26 stocks meet conditions to be underlying stocks for covered warrants. These are mainly stocks of banks and financial institutions, or large-cap stocks of blue-chip firms.

Stocks in this group must meet stringent criteria, including a minimum market cap of VND5 trillion ($215 million), profits in the current year, no accumulated losses, and no warnings or notices to stop trading.

"It (introduction of covered warrants) is a signal that Vietnam’s policy is changing and becoming more open to new products," Nguyen Duc Thong, director of derivatives at SSI Securities Corp., the country’s largest brokerage, told Bloomberg earlier this month.

Covered warrants are expected to help boost the market’s liquidity, which is still "very small," he said.