Vietnam Non-Prefunding Rule: How Circular 68 Works

For years, one small piece of plumbing kept some of the world’s largest funds parked outside Vietnam’s equity market: a foreign institution had to load the full purchase amount into its account before any buy order could be matched. Circular 68/2024/TT-BTC, issued by the Ministry of Finance on 18 September 2024 and effective 2 November 2024, removed exactly that requirement. This was not a slogan-level reform. It was a precise technical fix.

To see why the clause matters, look at how a global fund actually places a trade. An index fund in London or a pension fund in Tokyo trades across dozens of markets through a chain of intermediaries: the manager decides, the broker executes, the custodian holds the assets and settles the cash. In most developed markets the cash only leaves the account two days after the trade date — the T+2 settlement cycle. A rule demanding full cash up front before the order is even placed breaks that familiar sequence.

This piece deals only with the mechanics of removing the pre-funding requirement: how it works in practice, who carries the settlement risk in the investor’s place, and why a single clause in a circular dislodged a barrier that every prior policy statement had left untouched. The adjacent angles are treated in companion pieces: the FTSE and MSCI upgrade path, the wider market-reform package, and the signalling value of reform.

What pre-funding was, and why it blocked foreign capital

Before Circular 68, a foreign institution wanting to buy Vietnamese shares had to have the entire purchase amount sitting in its account at the moment it placed the order. Regulators called this the pre-funding requirement: a full 100% of the order value deposited before the system would accept the trade. The rule existed to eliminate the risk that an investor buys and then cannot pay, but it imposed a burden no other large market in the region demanded.

The trouble lies in how institutions operate. A global fund does not scatter cash across the markets it trades; money sits centrally and moves only once a trade is certain. Forcing full cash before execution meant the fund had to wire foreign currency into Vietnam, convert it into dong, and leave that capital idle in the account for days before it could buy anything. That cash earned nothing while it sat there, and carried both currency risk and counterparty risk for the whole waiting period.

The new mechanic: brokers absorb the settlement risk

Circular 68 shifts the financing burden from the investor to the securities firm. Under the new mechanic, the broker assesses the standing of its foreign institutional client and then lets that client place a buy order without depositing the cash beforehand. In effect the broker guarantees the settlement obligation: if the client has not wired the money by settlement date, the broker itself must front the shortfall. The arrangement is usually described as partial central-counterparty clearing, or non-prefunding with broker guarantee.

The mechanic runs in a clean sequence. The institutional client places a buy order; the broker checks it against the limit already granted to that client and routes the order to market without demanding cash first. The order fills during the session. On settlement date, following the T+2 cycle, the client transfers the full amount to complete its obligation. If the client is late, the broker uses its own resources to settle on time, then resolves the shortfall with the client under its risk-management terms. Counterparty risk does not vanish; it moves to a party equipped to manage it.

Why handing the burden to brokers is the right design

Placing settlement risk on the securities firm makes sense because the firm holds the tools to control that risk. The broker knows its institutional clients, gauges their size and standing, and can set limits accordingly. It already runs risk-management systems, holds enough capital to absorb the occasional late settlement, and has a commercial incentive to retain large clients. A burden the investor could not accept sits well within an intermediary’s reach.

This allocation mirrors practice in developed markets, where investors never have to fund an order before placing it. By casting the domestic intermediary in the settlement-guarantor role, Circular 68 restores the operational sequence global funds already know. The investor places an order on the strength of an allocation decision, then moves cash on the standard settlement timetable, rather than leaving capital idle and waiting in a distant market.

Roll-out timing and the scope of the clause

Circular 68/2024/TT-BTC amends four existing circulars governing trading, clearing, settlement and disclosure in the securities market. It was issued on 18 September 2024; the clause removing pre-funding for foreign institutional investors took effect on 2 November 2024. Scope was drawn deliberately around foreign institutions, the very group the pre-funding requirement obstructed most heavily, rather than opened across the board.

Narrowing the scope was a cautious design choice. Retail and certain other investors still follow the old process, keeping the settlement-risk buffer in place for segments where brokers cannot readily assess each client’s standing. The circular also sets a path toward a full central-counterparty model in time, once the market’s clearing infrastructure is upgraded to match. The broker-guarantee mechanic is a well-aimed transitional step, not the final destination.

Why this is the decisive technical fix, not cosmetic easing

Pre-funding was among the handful of operational barriers that market classifiers named explicitly as a sticking point. An index fund bound by its mandate cannot leave capital idle for days in a market, still less take on the currency risk created by converting cash before a trade is certain. As long as the requirement stood, a large slice of global passive capital simply was not permitted to participate, however compelling Vietnam’s growth story.

What sets Circular 68 apart is that it touched the operational mechanics rather than merely declaring intent. Earlier policy messages had signalled willingness to open up, but institutional money does not move on willingness — it moves on whether procedural constraints are actually lifted on the ground. By removing the funding-up-front requirement, the circular turns a market that was open in name into one where large funds can actually operate. That is the difference between policy on paper and the ability to deploy capital for real.

Conclusion

Removing pre-funding under Circular 68/2024 is a small change in wording with large consequences. It shifts settlement risk from the investor to the broker, the party equipped to carry it, and in doing so restores the operational sequence global funds require. A single clause achieved what years of declared goodwill could not.

The mechanic does not close the reform programme; it opens the way to a full central-counterparty model later, and it will need to run cleanly across many settlement cycles before its durability is proven. But the heaviest technical bottleneck has been cleared. How it connects to the FTSE and MSCI upgrade path, and where it sits within the wider market-reform package, are the subjects of companion pieces.

Lotus Investment Group advises on cross-border M&A and FDI into Vietnam and Southeast Asia. If you are underwriting Vietnam exposure, get in touch.