Thai Trading

For many, Thailand has traditionally been the place to engage in all kinds of activities which you'd never be able to get away with at home. Derivatives trading is no exception.

It's actually relatively easy to start trading derivatives in Thailand; all you'll need is the money, and lots of securities houses will readily offer you great leverage packages, low fees and a plethora of exotic products on everything from housing to shares which barely have any trading volume in the underlying security. Futures and options - on Thai Baht, real estate and securities - were key to creating a liquidity crunch in the country back in 1997, as many emerging market investors who lost their shirt in the July monsoon back then will remember.

In part this is because of relatively lenient regulation: Thailand's financial center is still young by international standards, though old enough to encompass sophisticated trading instruments (unlike, say China). Secondly, it's because Thailand sits right in the middle of the South East Asian region - meaning that almost everyone traveling through SEA, financially or leisurely, stops off there at some point to do business of some kind.

So it's not such a surprise to the regulators getting concerned about the popularity of these spicy dishes:

The Bank of Thailand has cautioned banks to exercise caution in marketing derivative products to clients.

A circular signed by Bandid Nijathaworn, a deputy central bank governor, urged local banks to consider possible reputational risk in selling complicated structured products and derivatives to clients who may not fully understand the terms of the contracts.

Banks should analyse the suitability and need of a client for a given derivative product as well as their understanding for the potential risk and financial exposure from taking a position. Purchases by a corporate client should be approved by the chief financial officer or higher.

What is surprising perhaps is why the regulators would put out such an announcement right now. Of all the emerging markets, Thailand has been plagued with the most lackluster performance over the past year: while the likes of KL, Shanghai and HK have also seen 50 - 100% plus returns, the Thai SET has sat around pretty modestly with roughly 25% growth.

Since Thai derivatives tend to be majority traded in by HK or Japanese hedge funds and sophisticated investors, this seems to imply that growth is ahead. It's a classic example of where derivatives trading can actually be used effectively to gauge a future up-tick in markets.

The nutshell here is that now that sophisticated investors are piling in to derivatives of Thai securities, financial institutions are using those gains to market these products to household retail investors. What this says is that somewhere, with increased liquidity at the derivatives-product end of the market, some big-time investors are forecasting some big time gains in the Thai SET.