DerivSource spoke to Azila A. Aziz, CEO and Head of Listed Derivatives for Kenanga Deutsche Futures and President of the Malaysia Futures Brokers’ Association to learn how the Malaysian derivatives industry is evolving now and in line with Vision 2020.
Q. What are the growth opportunities in the derivatives industry in Malaysia?
A. There are three types of listed derivatives traded on the Bursa Malaysia Derivatives (BMD) – commodity, equity and financial futures. The most actively traded product is the crude palm oil futures contract (FCPO) which is the global price benchmark for the palm oil industry. Compared to the other deep futures markets regionally and globally, Malaysian Derivatives market is still at an adolescence stage and has more potential room to catch up given the bullish projection in growth as outlined in the Capital Market Masterplan 2 (CMP2). CMP2 projected that total Malaysian Capital Market size including equities and derivatives industry to grow from USD$667 bn in 2010 to US$1.5 trillion by 2020. Derivatives trading (that includes both OTC and exchange traded derivatives) is expected to account for the majority of this growth, with notional value traded projected to increase from US$171 bn in 2010 to US$1.4 trillion by 2020.
Q. What are the biggest drivers?
A. Vision 2020 which was envisioned by the then Prime Minister Tun Dr. Mahathir Mohamad, set the goal for the country to transform from an emerging market to a developed nation. Progress has been made in that Malaysia’s was promoted to advanced emerging market status from secondary emerging market status in the FTSE Global Equity Index Series about three years ago. We are still classified as an emerging market in the MSCI Global Index.
Another major factor in the development of the derivatives market is Bursa Malaysia Derivatives’, (BMD) which is part of the Bursa Malaysia group, strategic partnership with the CME Group which took a 25% stake in 2009. This has allowed all of our listed derivatives contracts to be traded globally on CME’s Globex electronic platform which covers nine international hubs operated by CME Group. It was a real game changer to the industry because it increased our visibility and improved our accessibility. Gone are the days when derivatives trading were only done via voice. Now electronic volumes have reached over 69% after migration onto Globex platform.
Q. What have been other advantages?
A. We have benefited greatly. Technology is becoming the global common denominator with regard to exchange partnership and the same is to be said about BMD/CME. The CME tie up was well received and of positive direction as reflected in market volumes thereafter.
It has eliminated concerns over protocols and electronic trading has enabled investors to access our market in a simpler way. As a firm we are also able to reach out to international investors and profile ourselves globally. In the past, when foreign investors thought of Malaysia they focused on the Asian financial crisis in 1997 where electronic access was not permissible then. Hence such development has helped to change that perception. We have seen a significant increase with average daily trading volumes at Bursa Malaysia Derivatives doubling after the launch of the partnership with CME Group and between 2010 and 2014. From the perspective of the market activities which reflects the percentage of investors breakdown on the exchange, you will noticed that in the two most actively traded contracts, foreign institutions account for over 50% in the index futures market demography and almost 40% in the well-recognised crude palm oil futures contract.
Q. What other changes have occurred and what do you foresee?
A. Recently, BMD launched a US dollar-denominated futures contract for refined palm olein. The aim is to give investors including refiners, palm olein end users and exporters a complete solution to manage refining margin risk and hedge against price movements in the crude palm oil and palm olein markets. It will complement the crude palm oil futures (FCPO) to provide palm oil futures in one marketplace. And the other aim is to attract Chinese clients who are the main buyers of palm oil.
From the regulatory aspect, post the CME and BMD partnership in September 2009, there has been two major developments where Commodity Futures Trading Commission (CFTC) allow Malaysian Futures Brokers to deal or solicit business with US customers to deal in BMD markets without having to establish offices in the US, and also the US regulatory body has granted approval for no action letter on the BMD index futures contract which enables US domiciled clients to deal in these contracts. We are also waiting for approval from the CFTC to allow US based traders to access BMD markets directly.
At the moment, US investors currently gain access by directing the connectivity via its international offices outside the US that does not prohibit direct market access.
Q. What is your future outlook and what do you see being some of the biggest challenges?
A. While the CME partnership has been a great endorsement for foreign investors, domestic funds have yet to pick up pace in trading derivatives. The domestic funds typically are heavily invested in equities, especially now that markets have reached above pre-crisis levels. In order for the market to grow substantially in years to come there is a need for the domestic investment community to be more engaged in trading derivatives and deploy sophisticated strategies. As a broker we are consistently working on improving domestic interest into our Derivatives markets although it will take time and education to explain the benefits of using these products.
BMD, the country’s exchange operator, is looking to roll out new products to complement the existing range of products along with new product spectrum added onto it. With such development there is a vast potential growth for the Malaysian Derivatives industry in trying to attract liquidity and technology and to bring other tools to grow above and beyond the natural local market situation.