Cambodia's capital market regulator held a forum yesterday on regulations and safeguards for the derivatives market, laying out the inherent risk and reward of the poorly understood financial instrument that has until recently operated with no oversight.

Speaking at Cambodia’s first forum on the benefits of derivative trading, members of the regulatory board charged with safeguarding the market said that regulations already in place were sufficient to protect investors.

Sou Socheat, director-general of the Securities Exchange Commission of Cambodia (SECC), stressed that it has been an arduous process to come up with rules and regulations to legally allow gold, silver and currency derivative trading – volatile transactions that allow for both huge profits and massive losses.

“We have made a great effort to come up with rules and regulations,” he said. “While derivatives carry more risk than trading on the Cambodia Securities Exchange [CSX], without companies being monitored by the SECC, investors can face bigger losses and fewer returns.”

He added that it was a “critical time” for all unregulated derivative brokers to be brought into the regulatory fold to boost investor confidence. “We need companies to understand and educate more to lessen the risk and confusion of this market,” he said.

Additionally, he added that through a working group chaired by the SECC, the Ministry of Economy and Finance and the Ministry of Interior, the government was committed to punishing and shutting down unlicensed firms, while encouraging those that have yet to apply for licences to do so.

Vin Pheakday, director of the SECC’s securities intermediaries supervision department, said that while this tool was an “evolution” for the Kingdom’s capital markets, the government has put in place the necessary safeguards to handle trading by including a credit support annex (CSA) that documents collateral arrangements for derivative traders.

“Derivatives involve risk and the fear of losing cash,” he said. “Profits from derivatives can only be settled through a CSA.”

Currently, Acleda, Canadia Bank and BIDC are the only financial institutions licensed to pay out earnings. Additionally, he said that investors can trade a maximum of $10,000 per account per day.

Lawrence Kook, director for Golden FX Link (Cambodia) Co Ltd, one of three firms currently licensed to trade derivatives, said investors need to choose reputable derivative traders that understand risk management.

“Without proper risk management, investors can become trapped,” he said. “In unregulated markets we have seen companies that run away with investors’ money or investors that have suffered losses when brokers are trying to only get high commissions,” he said.

He explained that by operating with local banks, “investors have more control over their accounts”.

“We hope to build a healthier, more secure and liquid market, but the work is not yet done,” Kook said, adding that government oversight needs to also be accompanied by ethical trading practices.

Jeff Wilkins, managing director of the US-based risk management firm Think Liquidity, said the SECC needs to understand risk management and make sure that brokerage firms continually report their trade transactions.

“The growth potential in Cambodia and Asia is explosive, but it can’t be sustained without a clear understanding of the risks,” he said. “In the financial sector, we are dealing with risk, but reporting is the key to safety.”