December 4, 2021

Shares Needed as Cambodia Gets a Stock Exchange

PHNOM PENH — Having experienced more than a decade of economic growth after years of civil unrest and political disorder, Cambodia is set to open its stock market Monday, a move the government hopes will attract more investors to this country’s small and developing economy.

But there is a stumbling block: Cambodia has no companies that are ready to go public.

And the lack of preparedness among local businesses reflects a broader uncertainty about the country’s capacity to adapt to the challenges of operating financial markets.

The introduction of an exchange would add sophistication to the Cambodian economy and potentially help to wean it off its dependence on the dollar. But in a society where claims of corruption are common and laws often weakly implemented, critics say there are concerns over whether market regulators are capable of enforcing rules on issues like corporate governance and accounting and trading standards.

“Cambodia’s market regulator will have all the necessary laws to tackle crime, ensure good governance and create a decent, law-abiding exchange,” said Lee In-pyo, senior manager of the derivatives market division at the Korea Exchange, which has a 45 percent stake in the Cambodia Securities Exchange, with the government owning the remaining 55 percent. “But given Cambodia’s common practices, culture, and experience, full implementation of the law will be very difficult.”

Korea Exchange signed a venture agreement with the Cambodian government in March 2009 as part of wider plans to expand throughout the region. Keat Chhon, the country’s finance minister, will be the chairman of the Securities and Exchange Commission of Cambodia.

So far only three state-owned enterprises have announced their intention to list on the Cambodia Securities Exchange: Telecom Cambodia, Phnom Penh Water Supply Authority and Sihanoukville Autonomous Port.

Han Kyung-tae, managing director for Tong Yang Securities, which is preparing the initial public offerings for Telecom Cambodia and Phnom Penh Water, said the two companies still needed work to make sure they were compliant with market regulations. Mr. Han said the two were hoping to be ready to list by the end of the year at the earliest.

SBI Phnom Penh Securities, which is preparing the initial public offering for Sihanoukville Autonomous Port, did not respond to requests for comment.

Still, with the Cambodian economy having rebounded from a 2 percent contraction in 2009 during the global financial crisis to experience growth in gross domestic product of 6.7 percent in 2010, according to the World Bank, economists say the exchange could help bring more capital into the economy.

In a country where the total number of loans in the banking system accounts for 30 percent of gross domestic product, compared with nearly 100 percent in Thailand and Vietnam, there is plenty of room for an influx of funds.

“It’s a very good time for Cambodia to introduce a stock market,” said Hiroshi Suzuki, chief economist for the Business Research Institute of Cambodia.

Cambodia has its own currency, the riel, but the economy essentially functions on the dollar, with 90 percent of deposits and credit in the banking system denominated in dollars. This restricts the tools available to the central bank for cooling or stimulating the economy and inflation.

While all stock quotations on the Cambodian exchange are to be in riel, the dollar can be used to buy shares for the first three years of the bourse.

After that, the central bank, which issues the riel, will have more influence on the money circulating in the domestic financial system, making the Cambodian economy less dependent on the dollar.

Morten Kvammen, founding partner at Cambodia Capital, a corporate advisory and investment firm and one of seven licensed underwriters in Cambodia, said the attractiveness of the market in Cambodia went far beyond that of the Lao Securities Exchange, which after six months of trading has just two state-owned companies trading stock.

“We think volume will build very quickly, and we could have up to or maybe more than 10 companies listed in the first year of trading,” he said.

Mr. Kvammen noted that while Laos had licensed two companies capable of underwriting and brokering, Cambodia had 13 doing the same thing.

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Foreign Exchange Swaps to Be Exempt From Rule

WASHINGTON (Reuters) — In what was characterized as a victory for business, the Treasury Department proposed on Friday that commonly used foreign exchange swaps and forwards should be exempted from rules intended to tighten oversight of other derivatives.

The Treasury said that forcing these derivatives through clearinghouses and onto exchanges was not necessary because existing procedures in the foreign exchange market mitigate risk and ensure stability.

Any disruptions to the market “could have serious negative economic consequences,” the department said.

Foreign exchange swaps and forwards, which represent about 5 percent of the $600 trillion over-the-counter derivatives market, are used to lock in prices as protection against exchange rate fluctuations.

Businesses, big banks and the securities industry lobbied the administration to exempt the financial instruments from the rules. They argued that clearing requirements were unnecessary given that most contracts expired after one week.

The Treasury agreed.

“You would be putting more steps into the settlement process for trades that are largely short term in nature,” Mary J. Miller, the assistant secretary for financial markets, said.

Under the Dodd-Frank financial reform legislation enacted last year, the Treasury secretary was given the power to determine whether the narrow subset of foreign exchange derivatives should be tightly regulated.

The rest of the over-the-counter derivatives market will be forced through clearinghouses, which will stand between two parties and assume the risk if one party defaults.

The country’s biggest labor federation, the A.F.L.-C.I.O., criticized the Treasury’s decision. “We’re afraid it is going to open up an opportunity for arbitrage” in which derivatives users look to employ the least-regulated products, said Heather Slavkin, the federation’s senior legal and policy adviser.

The legislation was aimed, in part, at trying to ensure derivatives no longer pose the type of threat they did during the 2007-2009 credit crisis. Credit derivatives were implicated in the downfall of troubled financial giants Lehman Brothers and the American International GroupAIG. (NYSE:AIG).

Ms. Miller said the foreign exchange swaps market was different from other derivatives markets and that under Dodd-Frank it would be illegal to use the instruments to evade tougher scrutiny that applies to other derivatives.

The proposal is open for comment for 30 days. The Treasury’s final decision will be issued after that period.

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DealBook: Europe Investigating Banks Over Credit Swaps

11:05 a.m. | Updated European Union antitrust regulators announced on Friday two sweeping antitrust investigations into the world’s largest banks and their roles in a market for derivatives where a small number of companies control trillions of dollars of financial instruments.

The European officials are looking at whether banks, including Barclays and Goldman Sachs, have harmed rival organizations that could compete in markets for providing information and clearing a form of transaction that had become critical to the smooth functioning of the entire economy.

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” the European Union antitrust commissioner, Joaquin Almunia, said in a statement. “I hope our investigation will contribute to a better functioning of financial markets and, therefore, to more sustainable recovery.”

The inquiry follows an examination of that market last year by The New York Times that highlighted efforts by banks like JPMorgan Chase, Deutsche Bank, Goldman Sachs and others to control access to the derivatives market, even as global regulators try to bring transparency and safety to a murky corner of the financial world.

Derivatives — instruments that shift risk from one party to another — added to the panic during the financial crisis, because banks and regulators did not know all the parties involved in trillions of dollars of interweaving contracts.

The roughly $600 trillion market is controlled by a small number of players, concentration that has raised competition concerns in recent years. Those banks have recently taken many steps to try to hold on to their advantages in the market, even as regulators have tried to exert greater control over the market.

The European Commission inquiry is focused on one type of derivative known as a credit default swap, which is essentially an insurance contract. They are widely used in stock investing and mortgage investing, when an investor wants to bet against a company’s bond or a mortgage bond. They are frequently used as a measure of the credit worthiness of companies and governments and have become a crucial component in gauging borrowing costs.

The commission has previously estimated the value of all the positions on the market for credit default swaps to be $21.5 trillion, with about $3.27 trillion of that amount representing position on the market for credit default swaps in sovereign debt.

The banks are involved in two crucial components of the market for credit default swaps.

Sixteen of the banks are shareholders in Markit, a London-based organization that is the leading provider information on the market for credit default swaps. European Union officials suspect that the banks’ arrangements with Markit could effectively lock out other data providers.

Nine of the banks involved also have a financial relationship with the IntercontinentalExchange, a public company that owns ICE Clear Europe and ICE Clear U.S. That company is involved in a new business area known as clearing — which regulators are promoting as a way to bring more safety to the derivatives market. The banks had been creating their own effort to clear derivatives through a company they owned called the Clearing Corporation. In 2008, they sold that company to ICE, which was developing its own business. In exchange, ICE allowed the banks to influence the way the clearing business was set up and also granted them multiyear price breaks on clearing fees.

Critics say the banks worked with ICE to create rules and practices that were anticompetitive, like membership rules that for a while blocked other brokers from signing up to do business there.

Amelia Torres, a spokeswoman for Mr. Almunia, said that officials began the investigation without receiving formal complaints from competitors but said wrongdoing would be “obviously harming other players in the market.”

ThomsonReuters, Standard Poor’s and Bloomberg are among companies that could compete with Markit provide information on trading credit default swaps. Eurex and L.C.H. Clearnet are among the companies that also provide clearing services for credit default swaps.

The derivatives market has exploded in size since the 1990s as more companies and investors looked for ways to take positions in commodities, corporate defaults, mortgages and other assets without having to purchase actual goods.

Derivatives allow one party — usually a bank — to give customers exposure to price changes in goods through a written agreement to pay based on changing prices.

The Justice Department has also been investigating this market and told The Times in December that its inquiry was focused on “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries.”

The Justice Department began its investigation of Markit in the summer of 2009, and by last fall it had expanded into looking at clearing practices between companies like ICE and the banks. The Chicago Mercantile Exchange also has a clearing house business and has partnered with the banks to develop it.

The European Commission was in frequent contact with the Department of Justice and the Federal Trade Commission about the investigations announced on Friday, but it had received no indications that their United States counterparts were still actively pursuing similar investigations, said European Union officials who spoke on condition of anonymity because they were not allowed to speak publicly. The European Commission’s investigation may increase the pressure on the Department of Justice to take action.

European regulators could fine the banks involved in the case up to 10 percent of their global annual sales for the kinds of antitrust and cartel violations that officials are investigating in Europe.

Even so, the commission may find other ways to inject greater competition into the market. The commission has increasingly favored settling major investigations to win quicker results, and it could waive fines if the banks agreed to adjust their contracts with Markit and ICE Europe.

The banks named in the investigation are JPMorgan, Bank of America, Barclays, BNP Paribas, Citigroup, Commerzbank, Crédit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo, Crédit Agricole and Société Générale. All of these banks declined to comment or did not return an inquiry. The IntercontinentalExchange did not reply to a request to comment.

Markit issued a statement defending its actions.

The company said it “has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants.” It said it was “unaware of any collusion by other market participants as described by the commission.”

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