Six months since Cambodia’s market regulator officially launched derivatives trading in Cambodia, Phnom Penh Securities Plc is poised to become the first local securities firm to legally trade the complex and little-understood financial instrument.
The company said yesterday that it received two letters of approval from the Securities and Exchange Commission of Cambodia (SECC) last Friday – one aimed at forming a central counterparty licence, which acts as a clearing house for derivative trading, and the other to expand its existing brokerage activities to include derivatives.
The approvals come after the SECC launched derivatives trading in November based on rules defined in a prakas issued last July and aimed at reigning in unregulated and illegal trading of the inherently risky financial instrument.
Ong Sopheak, senior officer for Phnom Penh Securities, said the move will help build investor confidence in trading derivatives under the umbrella of a licensed brokerage firm.
“Derivatives trading is not new to Cambodia – it has been happening for at least five years – but most of the firms operating are unlicensed,” she said. “A lot of companies have built a bad reputation for the derivatives market, and a licensed brokerage firm can mitigate risk.”
Derivatives are financial contracts between two parties based on the future price fluctuations of an underlying asset, such as a commodity, currency or stock. The financial tool offers investors a chance to speculate on the asset’s price movements, or protect their investment against unwanted risk.
Phnom Penh Securities said it initially traded derivatives tied to foreign currencies, as gold and silver prices in overseas commodity markets.
After two months of operations, the company hopes to guide investors into global stock markets by establishing financial derivatives, such as a contract for difference (CFD). The company will also expand into global commodities, such as oil futures.
Regarding plans for foreign currency (forex) derivatives, Sopheak said Phnom Penh Securities will charge $30 per lot, with one lot equalling 100,000 units of currency, while charging a minimum of $10 on smaller quantities. Prices will be based on the respective currency markets for the US and Australian dollar, as well as the euro, Japanese yen and Chinese yuan.
Alex Yong, vice general manager of Phnom Penh Securities, said forex derivatives will give investors a chance to profit from volatile foreign exchange rates.
“With forex trading, investors can make money on a currency when it either goes up or down, and by knowing the right time when to buy and sell,” he said.
As for risk control, he said investors can put in place maximum earnings and loss thresholds that will stop trading once reached, providing safeguards in a volatile fast-paced financial platform.
According to SECC regulations on derivatives trading released last November, the minimum capital requirement for a central counterparty is $5 million, and $250,000 for a brokerage firm. Both entities are required to have a security bond equivalent to 15 per cent of their capital.
While Phnom Penh Securities, which claims to have $15 million in capital, said it was ready to begin derivatives trading immediately, an SECC official said that the securities firm still needs to fulfil its capital requirements.
Sok Dara, deputy director-general at the SECC, said the two letters it sent to the company cleared the way for it to trade derivatives, but it must put up a security bond before receiving the actual licence.
“They have approval in principle, but they must first meet the minimum requirements before they can operate,” he said. “I am not sure when they will begin trading, but we have given them some time before they receive an official licence.”