Cambodia has moved to formalise its ill-regulated derivatives sector by launching a key regulation earlier this month.

On July 2, the Securities and Exchange Commission of Cambodia (SECC) approved the prakas on the “Licensing and Supervision of Derivative Trading”.

The prakas regulates the sector by allowing individuals or firms to apply for official broker licences, bringing the practice under the law.

Derivatives will not be exchange-traded on Cambodia’s bourse, but through brokers, who must comply with several regulations if they receive a licence.

Derivatives consist of contracts on the future price fluctuations of goods such as gold or oil, offering investors the chance to either place a bet on a good’s price or to use them as a form of insurance.

The complex financial instruments have been sold by Cambodian firms illegally in the past.

In 2011, five companies – all gold speculators – were ordered to suspend all derivatives activities by the SECC.

Soleil Lamun, deputy director of market operations at the Cambodia Securities Exchange, said the prakas would help control the Kingdom’s derivatives scene.

“Legalising this market will satisfy existing demand and limit excessive risks to protect Cambodian investors.

It will probably attract greater interest than the CSX since it is open to the global market and provides a lot more leverage for its investors,” he explained.

Although only two companies have listed on the CSX since its launch in 2011, Lamun cautioned that derivatives was potentially more perilous than trading on the Kingdom’s fledgling bourse.

“Be noted that it is much more risky than trading stocks on the CSX,” he said.

“It might not be suitable for Cambodian investors who have limited knowledge and experience in understanding and analysing this type of complex market.”

Those applying for a broker licence require a minimum registered capital of 20 billion riel, or almost $5 million.

Parties must also dedicate at least 10 per cent of their registered capital to the derivatives trade, and must make a deposit of 15 per cent of their capital with the SECC’s account at the National Bank of Cambodia.

Investors can open a derivatives trading account with only one broker, while the account may not exceed 40 million riel (or $10,000), and any investor who wants to open a trading account with a higher cash volume must obtain permission from the SECC.

Svay Hay, CEO of Acleda Securities, said the new legal derivatives market could help budding investors in Cambodia diversify their portfolio, saying it would “mobilise funds in the financial sector”.

“It’s supervised and open to trading legally now, while any company [can] get a license or authorisation,” he said