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New day for old finance market

The formalisation of Cambodia’s derivatives sector will provide budding investors with more choices for their portfolio – although at a risk, insiders say.

After years of deliberation, the Securities and Exchange Commission of Cambodia (SECC) on July 2 passed a prakas, or regulation, which allows individuals to apply for the Kingdom’s first derivatives licence.

The complex financial instruments – essentially bets made over the future price of either a currency or a commodity – won’t be traded over the nation’s stock exchange but through individual brokerage firms.

Despite the SECC’s recent move, and a mini-crackdown in 2011 that saw five derivatives firms’ activities shut down at once, derivatives have been available – albeit under the radar – in Cambodia for about a decade, and the number of outfits has grown.

Meas Liratnak, a former investment manager at firm FUGI Gold, estimated that about 20 brokerage firms have set up in Cambodia since the mid-2000s.

“I can see a lot of companies, newcomers, coming [in],” said Liratnak.

Targeting rich businessmen, retirees, and others with cash to spare, derivatives firms offer contracts on gold, silver and foreign exchanges, which are high-risk, and high-return.

Liratnak estimates that only 30 per cent of investors even make a profit, but a well-placed bet can bring a 5 to 10 per cent return in a single month, Liratnak said.

Typically, each transaction costs $30. With large accounts in the hundreds of thousands often seeing 500 transactions or more per month, the money adds up quickly, said Liratnak.

“Whether the transaction loses or profits, the commission still comes.”

Liratnak expects the sector to grow even more after the ASEAN Economic Community comes to fruition at the end of the year, since many of the Kingdom’s brokerage firms have outside partners where derivatives sales are legal, such as Indonesia, Hong Kong and Singapore.

Although risky, derivatives certainly offer a more exotic chance of making quick money than the Cambodian Stock Exchange.

After four years of operation, the CSX remains a two-trick pony, with its only listed stocks being Taiwanese garment factory Grand Twins International and state water utility company the Phnom Penh Water Supply Authority.

“The stock market is too quiet here,” said Luke Wang, vice general manager of Phnom Penh Securities’ brokerage department, who said his firm plans to apply for derivative brokerage license from the SECC, thanks to the new prakas

“[The CSX] needs much more different products for investors.”

Although the exchange’s pace has been slow, Soleil Lamun, deputy market director at the CSX, said that legalising the derivatives game would be complementary and not bring in too much competition.

“Moreover, I think there are many potential investors eying the CSX that do not want that betting type [of investment],” he said.

While potential brokers line up at the SECC to be the first Cambodians to officially trade derivatives under the new law, the financial instruments have been blamed for sparking disasters in the past, such as the 2008 financial crisis.

But Cambodia is unlikely to suffer a similar fate bought on by low-level derivative trading; with brokers targeting retail clients and the derivatives not being exchange-traded in the Kingdom.

Nevertheless, the SECC has imposed $5 million capital requirements on prospective brokers and stipulated that investors can only trade with one broker to a maximum of $10,000 without special permission, to ensure that the industry is carefully monitored.

And individual investors should still be wary that such products are inherently risky.

“Derivatives investment, including commodities futures, can be a good component of a balanced investment strategy. At the same time, there is a portion of the investment public whose trade in derivatives is more akin to gambling than investing,” said Joseph Lovell, managing partner at BNG legal

“Anyone considering investing in the relatively sophisticated market of derivatives should best be an experienced investor who has done sufficient due diligence on both the investment and anyone handling trades.”

Knowledge of derivatives among Cambodians is better than in the past, although further steps needed to be made, said Sokethya Chhor, a manager at brokerage training firm Interactive Futures.

“In order to minimise the risk, you need to educate people.”

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