Bourse settlement window is still risky

[PHNOM PENH POST]

Reports this week the new Cambodian stock exchange will likely settle securities transactions in two working days does not represent a major risk in itself – South Korea and Laos, for example both use the T+2 system. But combined with Cambodia’s unusual approach of dual currency listings for the first three years of operation, the draft prakas only adds to questions over how exactly the country’s first bourse will account for listings in riel and US dollars.

Should the prakas be passed, settlements will be completed during a two-day window that would be subject to possible fluctuations in the riel-dollar rate, a process which – even without the currency issue – is considered the highest-risk stage of stock trading.

Questions therefore remain as to how the Government intends to add more detailed policy to address what most analysts consider to be the variable adding the highest degree of risk to Cambodia’s forthcoming exchange – dual currencies – with little more than three months before a scheduled launch.

“The T+2 system itself is not the main issue,” Kyung Tae Han, chief representative of Tong Yang Securities in Phnom Penh, said yesterday. “Investors will be exposed to the currency risk for the two days.”

This week has provided an example of how this risk could work in practice. The local currency buying rate at street money changers strengthened from about 4,030 riels to the dollar at the end of last week to 4,015 riels on Thursday. If the same trend were to take place over a public holiday weekend – and Cambodia has a staggering 26 national holidays this year – a purchase on Thursday, for example, would not be settled until the following Tuesday. Will the Government attempt to add measures to the settlement system to account for this associated currency risk? And exactly which rate would apply? Thus far, these issues remain unresolved.

“No-one seems to know exactly how the exchange rate will be set or who will set it,” said Han, a long-time advisor to the Government on the forthcoming exchange.

Currently, four main currency dealers set the tone for the day’s rates, according to sources in the banking industry – Chhay Vann, Heng Heng, Khay Sakhao and Ly Hour Exchange. In order to reduce currency risk within the settlement period surely rates at the new bourse will have to be as close as possible to those at major dealers – unless the country’s whole currency exchange set-up is to be overhauled – so how will the stock exchange set these rates?

For Cambodia to instill confidence, particularly among foreign investors, these questions will have to be addressed in detail before the exchange launches.

And although the concept of settlement periods has existed since the very beginnings of securities trading, the addition of dual listings in Cambodia’s case offers very little in the way of precedent from which to work.