Negotiable Certificate of Deposits

A securities market in Cambodia is in the early stages of development due to: (i) the lack of tradable instruments, such as government securities, that could pave the way for the development of interbank market; (ii) the absence of market makers and a network of intermediaries; and (iii) the lack of a benchmark rate against which securities could be priced when they are issued.

Due to these reasons, the National Bank of Cambodia has set up an interbank market development project by issuing Prakas B-5-010-183 dated October 15, 2010 on The Issuance of Tradable Securities by the NBC. The goals of the interbank market development project are:

   -To promote the interbank lending on secured basis.
   -To have more effective instruments for pursuing monetary policy and foreign exchange objectives.
   -To reallocate financial resources among financial institutions and boost financial intermediation.
   -To respond to the market needs for:

Investing temporary excess liquidity. Currently there is no alternative ways for banks to manage their excess liquidity.
Lessening the banks’ reliance on depositors’ funds to meet their temporary short and medium liquidity needs.
Mitigating the risk associated with liquidity management and interbank lending. After 3 years of preparation, the NBC officially launched its interbank market project on September 09, 2013.

BACKGROUND

A Negotiable Certificate of Deposit (NCD) is a short-term interest bearing debt issued by the National Bank of Cambodia. It is issued in Khmer riel and U.S. dollar in order to help commercial banks and microfinance institutions invest their short term liquidity. The minimum denomination for investment is KHR 200,000,000 or USD 50,000. The maturity of the KHR-NCD ranges from 2 weeks to one year, whereas the maturity of the USD-NCD ranges from 2 weeks to 6 months. The interest rate of NCDs is determined by the NBC and varies everyday according to market conditions.

The advantages of holding an NCD include:

No Credit Risk: Because NCDs are issued by the NBC (supported by Prakas B-5-010-183 the Issuance of Tradable Securities), there is no credit risk associated with the investment.

Interest Earned: NCDs are an interest bearing instrument, therefore banks who invest their excess reserves in NCDs will earn interest, which will be paid on the maturity date to the current account of the NCD’s owner opened at the NBC. The interest on NCDs is comparably higher than that of term deposits. Interest will be calculated in the following manner:

Interest = Prt
Where:

- P is the principal amount
- r is the annual interest rate expressed as a percentage divided by actual number of days in each year
- t is the NCD’s tenor.

Highly Liquid: NCD is a short term instrument, risk free, and issued by the central bank, therefore it can be traded in a highly liquid secondary market.

In the interim period, the NBC can repurchase NCDs at a discount price if the NCD’s owner is facing difficulties in finding counterpart.

The repurchased formula which will be used to buy the NCD back is:

Transferrable: The NCD’s owner can transfer it to any party at any time in the interbank market. The NBC will transfer the ownership once it receives the notification from the buyer and seller.

Collateralized: NCDs can be used as collateral for the credit facility from NBC and in the interbank market.

Though there are many benefits of investing in NCDs, potential investors should also be aware that:

• Maturity of an NCD is determined by the NBC as such, investors may not be able to invest funds in a required maturity as they would like.

• The interest rate is determined by the NBC and fixed for the whole term of the NCD; therefore investors are unable to get a higher interest rate if the market rate rises.

• Any request to sell the NCD back to the NBC is subject to the NBC’s discretion. The NBC encourages investors to sell the NCD on the interbank market.

• The price at which NCDs will be purchased back is subject to the holding period and the NBC’s discount rate.

• At the time of investment, the investor may face interest rate risk as a result of market volatility.