Cambodia’s derivative trade ban evokes partial response

http://www.commodityonline.com/

via CAAI

Published on: March 07 2011

PHNOM PENH (Commodity Online) : Cambodia’s decision to stop five companies from trading in derivatives markets evoked positive responses.

The Southeast Asian nation is yet to launch its first commodity exchange.

Five domestic firms trading in derivatives have been ordered to suspend their operations by the Securities and Exchange Commission of Cambodia.

The SECC ordered five companies to halt operations. They were named as Gold Financial Global, First State Gold Investment Company, Global Gold and Forex Investment Consultant Company, CMDK Gold Company, and International Gold Market Company.

In a statement, SECC said Cambodian firms offering derivatives trading had operated without the necessary regulatory framework being in place.

The SECC was cooperating with the firms to prepare the necessary regulations, but the emphasis for the regulatory body was currently on launching the Cambodia Securities Exchange, which is slated for July, the statement said.

Some analysts said to allow some companies the opportunity to start trading in derivatives in commodities including gold, metals and oil would have been the financial equivalent of sprinting before learning to walk in Cambodia’s case.

One of the main challenges Cambodia faces with the forthcoming stock exchange is educating the general public to avoid stock trading turning into a sophisticated version of gambling.

The problem with derivatives trading is that it is infinitely more complex than stock trading. By its very nature, you trade in a value derived from an asset and not in an asset itself.

As instruments that allow hedging and speculation, derivatives offer security for companies against foreign exchange volatility and fluctuating commodity prices as well as a lucrative source of revenue for investment banks.

Indeed, big banks were considered the driving force behind deregulation of derivatives markets dating back to the late 1990s in the United States, a move many financial experts consider to be the root cause of the financial crisis.

Financial products that led to the high leverage that sparked the crisis in the US, including subprime mortgage-backed securities and credit default swaps, are all derivatives.

No-one is suggesting these five Cambodian companies could cause a similar financial meltdown but recent lessons the world has learned from derivatives trading should be clear.

If regulated appropriately, companies in Cambodia will in the future be able to hedge on insurance, oil prices and foreign exchange, all of which represent considerable and often unpredictable costs here.