Securities and Exchange Regulator of Cambodia (SERC) head Sou Socheat on March 3 issued an invitation for technical support from development partners to build a firm regulatory framework as well as the human capital needed to bring a broader offering of derivatives that effectively attracts more investors and capital into the securities market and fuels economic growth.
Derivatives are financial contracts between two or more parties whose value is generally 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.
Cambodia legally introduced derivatives trading in 2016.
Speaking on the second day of a March 2-3 workshop on “Developing Derivatives Market in Cambodia: A Tool for Managing Risks”, Socheat underscored the importance of the financial sector to economic development and general market confidence, and suggested stakeholders develop and launch attractive derivatives that can be used to hedge against currency and market risks.
“I believe that having such products … will help to boost the [securities] market, and especially the capital [invested in it]. To support the de-dollarisation policy, the stocks and bonds issued on the market have to be denominated in Cambodian riel, which makes them rather unattractive for some of our key local and international institutional investors.
“Developing the [derivatives] market will first require human resources ... there are two stages to this project: the first is to develop the regulator’s capacities, and the second is to develop those of the industry.
“To effectively and efficiently develop the market, we’ll need the active participation and contribution of all key stakeholders,” he said.
However, National Bank of Cambodia (NBC) first deputy director-general of central banking Kimty Kormoly noted that derivatives are “often associated with risk and risky financial activities”.
“If used with the wrong intention and without proper regulation and supervision, this product can indeed be a tool for taking financial bet and a source of financial instability,” he said in his opening remarks at the workshop on March 2.
The instruments are “widely used by modern financial institutions and corporation[s] to shift and manage risk”, and enable “each economic agent to more effectively tailor risk according to their own needs and tolerance level, improving capital allocation efficiency in the process”, he added.
Cambodia Securities Exchange (CSX) CEO Hong Sok Hour told The Post on March 6 that derivatives have become “very popular” among general investors, but echoed Kormoly’s sentiment that the financial instruments can carry high risk under the current mechanisms.
“In recent years, there have been plenty of issues over scams, eroding trust in the product. Hence, there’s a need for sound regulation to inspire confidence and trust among investors,” he said.