In a DerivSource Q&A, Azila A. Aziz, CEO and Head of Listed Derivatives for Kenanga Deutsche Futures Sdn Bhd [[{“type”:”media”,”view_mode”:”media_large”,”fid”:”1635″,”attributes”:{“alt”:””,”class”:”media-image”,”height”:”321″,”style”:”float: right;”,”width”:”200″}}]]and President of the Malaysia Futures Brokers’ Association offers an update on the developments in the Malaysian Listed Derivatives market and explains how local brokers are differentiating their services in line with global standards to take advantage of new opportunities in post-trade and beyond.
Q. What is the role of the local broker?
A. In order to access emerging markets, firms have to go through a local broker and as we have been in the market for over two decades, we continue to evolve with the market changes. One of the most notable changes was earlier this year when the Bursa Malaysia Derivatives (BMD) was granted registration as a Foreign Board of Trade by the U.S. Commodity Futures Trading Commission (CFTC). This allows U.S. firms to trade BMD directly into the exchange’s electronic order entry and the matching system on CME Globex. The products include commodity, equity and financial derivatives.
At Kenanga Deutsche Futures, we service around 65% foreign institutions and 35% domestic and based on our experience we know that consistency is key. In other words, the messages have to be clear and simple. We also need to understand the different requirements between buy and sell-side clients. However, in general, we offer those looking to access Malaysia with an understanding of the dynamics of the market from a trading flow and clearing flow perspective. For example, we need to explain that although all BMDs are executed on CME Globex, clearing is done onshore. We also provide information on market conditions such as the liquidity, market slippage and cost of trading and growth potential of the market as well as the governance and compliance aspectIn a nutshell, brokers that understand the local market structure and have unique insights and having established depth of customers’ relationships will have the significant appeal.
Q. How are local brokers such as Kenanga able to differentiate?
A. In the past, execution and pricing were the differentiating factors but it has become less of differentiator now as the market becomes more electronic. Today, it is the post-trade services era which before 2008 was rarely talked about in Asia. However, now it is a much more important part of our services andcritical to proving an Asian brokerage credentials. We have spent the past three to four years extending as well as enhancing the services that we offer from the context of trade reporting and confirmations. Any delay in the processing of confirmations means that clients in the UK or the U.S, will delay their own start of day processes. Ensuring confirmations are sent out 15-30 minutes at the most after market close is what makes a truly global offering a reality.
Also, banks and clients want to be able to have their trade batches instantaneously and not just at the end of the day so we have worked towards the operating structure that can deliver these post trade services.
Q. Is Malaysia complying with the G20 recommendation?
A. Since we are counterparty and 65% of our institutions come from different foreign jurisdictions we are already in a logical progression of conforming towards a more enhanced reporting standards and declaration that meets the requirements of our clients and that we follow global derivatives best practices particularly with reporting and confirmations. A specific example is the Common Reporting Standards (CRS) which is a new global reporting standard regime endorsed by the G20 two years ago involving exchange of tax information among countries that have committed to implement CRS. And Malaysian government has agreed to join this initiative. It is being implemented and requires reporting financial institutions to implement account due diligence and reporting procedures, much of which builds on the requirements of the US Foreign Account Tax Compliance Act (FATCA). Specifically on the Listed Derivatives business, certainly these requirements would need to be incorporated in our clients on-boarding documentations and processes need to be enhanced alongside.
Q. What are the operational and technological opportunities for growth?
The first aspect is electronification,as Malaysia Listed Derivatives markets currently transitioning towards being more electronic, it is in logical progression towards expansion of electronic markets and systems. Direct market access (DMA) has been enabled and we have achieved this and can tick that box because now Malaysia is on the radar. The big question is where can we go from here? One area is extension of DMA. We already enabled the connectivity for business to business or B-to-B and at some point expanding it to business to client or B-to-C. Although this is not a new service for many parts of the world, it is new to Malaysia and when it happens it will certainly create changes in terms of broker revenues, the cost of doing business and the industry business model.
The other important aspect is straight-through-processing or STP. It is only natural that as the market moves to electronic trading, STP becomes more important. As I already mentioned, execution and pricing have become less of a differentiator and we are continuously working with technology vendors to see what we can automate further and how we can improve the experience of global institutional clients trading in Malaysia STP in its ultimate goal is the ability to conduct an entire trade lifecycle electronically is indeed a tall order but it is not only dependent on the brokers initiatives but also exchanges, regulators and other industry participants operating within the Malaysian Derivatives eco system
In our overseas engagement with clients we have learnt from other countries and their best practices where cross-margining services and ability to produce on-line statements are some of the feedback that we more than often hear. In addition to learning best practices from different jurisdictions, our joint venture with Deutsche Bank has also enabled us to exchange ideas and knowledge in terms of what we can apply in a Malaysian context. It has also improved our understanding and discussions with clients in terms of how we as a local broker can support our global brokers and clients.
Q. You mentioned you are taking on board best practices learnt from global players, but what are the areas of compliance and risk management that you are focused on as a local broker or the country is focused on currently?
A. Technology has made markets more efficient and cost effective but technology can also exacerbate and accelerate risk. This resonates with a few major issues, the first being cyber security issues. There have been a lot of discussions about financial technology (FinTech) and Malaysia is gradually embracing it. Regulators have conducted a series of symposiums for us so that we can better understand the different aspects but this also has to be balanced by the concerns with cyber security.
The second focus is market integrity and market orderliness which has always been a big issue although prior to electronic access, every time there was a big ticket order coming through, the first thing we talked about was trying to understand the order instructions and achieve the aim , i.e. how the trades are to be handled and executed especially so from U.S. and Europe. However, today the focus is on market impact and market orderliness and we not only have to understand the clients order instructions carefully but also for the broker to play the advisory role effectively and having relevant conversations with the clients about liquidity conditions in the Malaysian Derivatives markets and the importance to strike a balance between executing large quantity orders too quickly and managing order to avoid unreasonable market impact. Today there is also a need towards a thought process and transparency.
Thirdly from the clients protection angle, where as a broker our Know-your-client (KYC) processes and on-boarding documentation must be up to date and evolved to reflect the current market dynamics and incorporates the relevant parameters. The same goes on how we would apply the relevant risk matrix when evaluating clients. Establishing depth of clients relationships is certainly a process and a journey and we believe in getting it right at the beginning stage.
Q. What impact has the recent volatility and weakening Ringgit had on the market? In light of the equities market volatile landscape and weakening Ringgit, how can Kenanga Deutsche Futures stay ahead of the curve?
A. I would say the futures market is all about getting certainty of a price and the recent volatility has resulted in clients using the market to lay off risk. And futures contract is the only legitimate market in Malaysia that enables players to enter a short sell trade without having to own or borrow. The weakening currency simply means that there would be an increase in the number of futures contracts to be traded within the value of the hedged portfolio that is in proportionate to the drop in currency value as players adjust exposure in market swings. Such increase in market volatility also attracted directional trades which give rise to futures transactions. The exchange only offers listed derivative contracts but an ideal situation from a broker’s view is to also include a listed currency futures contracts in its offerings which would help, for example, importers to hedge against foreign exchange risk. Various listed currency futures contracts are listed in Singapore but the conversations in Malaysia needs to be taken up by the exchange as well as the regulators alongside with the industry.
How do we stay relevant? We are already embracing a new normal where brokers like ourselves is succeeding under a new system which is more disciplined and cost focus. Staying true to what we do best have enabled us over the years to grow that scale in our business, sustain top market ranking as well as delivering the acceptable levels of ROE to our shareholders. Sustainability of the business is of importance and we will continue to sharpen our focus on customers and respond to emerging opportunities more rapidly for the business to grow more than what is is now.
