The government is working on legislation that would create a framework for the establishment of a custodian bank in Cambodia, according to securities firms, which claim the absence of this institution could be deterring foreign investors from participating in share offerings on the local stock exchange.

Seng Chan Thoeun, head of corporate finance at SBI Royal Securities, the underwriter for the initial public offering of Sihanoukville Autonomous Port (SAP), said the recent bookbuilding exercise for the seaport operator’s IPO exposed the impact of the missing institution. He noted that while the bookbuilding was successful in that it was 2.4 times oversubscribed, the turnout from foreign institutional investors was weaker than expected.

“For this IPO we went to Singapore, Hong Kong and Thailand for two rounds of road show, but the issue [that dampened response was] the custodian regulation,” he said. “Most of the foreign institutional investors require a custodian bank in Cambodia, but there is none in Cambodia at the moment.”

A custodian bank does not operate like a traditional bank that handles loans and deposits. Instead, it is a specialised financial institution responsible for safeguarding an individual’s or firm’s assets, such as stocks or bonds, and administering actions related to the transfer or management of these assets.

According to Thoeun the compliance rules of investment funds based in Singapore and Hong Kong require that they use a local custodian bank to transfer funds for subscription to securities in a foreign market. However, smaller investors from these countries may still be able to subscribe to shares using the custodian services of the underwriter’s partner brokerage firms.

A representative from Yuanta Securities, which was the underwriter for two listings on the Cambodian Securities Exchange (CSX), affirmed that the absence of a custodian bank likely discouraged some large foreign investment funds from participating in the bookbuilding and subscriptions of these IPOs.

Simon Sungbae Park, head of corporate finance at Yuanta, said the issue was a factor that may have limited subscriptions to the $5.2 million IPO of Phnom Penh Autonomous Port (PPAP) in late 2015.

“Most of the large foreign institutional investors cannot invest unless there is a custodian bank,” he said.

Lamun Soleil, director of market operations at the CSX, said the opening of a custodian bank in Cambodia would benefit foreign institutional investors by facilitating access to the Kingdom’s financial market. However, he said the small size of this market limited the interest of these large investors, and by extension the impetus for the Securities and Exchange Commission of Cambodia (SECC) to formulate regulations for the licensing of a custodian bank.

“Custodian banks are particularly useful for foreign institutional investors, but our stock market may not be big enough [yet] to receive them,” he said. “That may be the reason why the SECC has postponed [work on a] prakas. But the need may arise when Cambodia has bond market, especially a government one.”

Thoeun conceded that while Cambodia’s nascent stock market, which has just four listed companies, may be too small to attract a large custodian bank such as JPMorgan Chase, some regional players have expressed interest.

“We have met some banks in Thailand who want to be a custodian bank for Cambodian securities,” he said, adding that he could not reveal their identity. “They are really keen to apply for a licence with the SECC and they have submitted their applications and are communicating with the SECC already.”

Vin Pheakday, director of the Securities Intermediaries Supervision Department at the SECC, confirmed that the market regulator has plans to establish a licensing mechanism for custodian banks, though a time line has not been set.

“We have plans, but I am not sure when we will provide licenses,” he said. “We are discussing the issue with the relevant parties to get more information, and we are still studying the obstacles in the market.”