Friday, 4 March 2011

Derivatives a step too far for Cambodian markets

via CAAI

Friday, 04 March 2011 15:01 Steve Finch

GIVEN Cambodia has not even launched its long-awaited stock exchange, the Securities and Exchange Commission of Cambodia made a sensible decision to crack down on five companies trading in derivatives in the Kingdom this week.

To allow companies including Gold Financial First and Forex Investment Consultant Group 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.

“I’m not surprised the SECC shut them down,” ANZ Royal CEO Stephen Higgins told The Post yesterday.

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.

This has been the case in a number of countries in the region at times, particularly Bangladesh.

In the case of GFF, for example, the general public is unlikely to have been exposed to its derivatives trading given that its internet-based system required a minimum deposit of US$500 for new account holders, or the amount the average Cambodian earns in about nine months.

But Cambodia is simply not ready to deal in these complex financial instruments yet, both in terms of the level of expertise in the country and existing legislation.

The government has barely completed a legal code to regulate the stock exchange.

Furthermore, there is no tax structure in place as yet to regulate a derivatives market.

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.

However, that future is still some years away.


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