Derivatives Exchange hits several impressive historical high milestones in the first quarter of 2020.

By: Bernie Yeo

With five all-time trading highs in January 2020, Bursa Malaysia Derivatives Bhd (BMD) is on a roll. It subsequently bettered some of these highs in February and March as market conditions deteriorated with the spread of the Covid-19 pandemic. 

BMD’s derivative instruments essentially allow market participants to take advantage of both upward and downward trends in the market, and are particularly relevant in light of global economic uncertainties and heightened market volatility.

The derivatives market offers products that serve as an efficient price discovery and hedging instrument, providing market participants an effective avenue to manage risks as well as take advantage of the market position.

“The rising trend, especially in open interest for all products, is a positive development, indicating a rise in confidence and strong appeal of BMD’s products by market participants,” BMD chief executive officer Samuel Ho (pic, below) tells Smart Investor

BMD aims to continue on this growth trajectory, he adds, by broadening its product offerings for investors and traders to manage their price risk exposure. Here are snippets of our interview with Ho.

Smart Investor: BMD achieved five all-time trading highs in January 2020. Have there been new highs since then? Tell us more about this historical milestone.

Samuel Ho: In the first quarter of 2020, BMD saw strong levels of trading activity, hitting several historical highs. We ended March 2020 with three historical highs:

(1) Trading volume for all products combined at 2.13 million contracts surpassing the previous record of 1.72 million contracts registered in February 2020; 

(2) Monthly trading volume for Crude Palm Oil Futures (FCPO) of 1.66 million contracts surpassed the previous high of 1.43 million contracts registered in February 2020; and 

(3) Monthly trading volume of FBM KLCI Futures (FKLI) of 455,535 contracts surpassing the previous high of 388,755 contracts registered in August 2015. 

Additionally, the total daily open interest of 346,403 contracts for all products traded on BMD hit a new high on 26 February 2020, surpassing the previous all-time high of 343,251 contracts registered on 29 January 2020. 

How has the derivatives market performed in light of the COVID-19 pandemic and arising economic uncertainties and market volatility? 

In the derivatives market, the FCPO and FKLI have served as an efficient price discovery and hedging instrument that have provided market participants with an effective avenue to manage their risks as well as the opportunity to express their trading views to take advantage of the market position. 

The depth of the market has provided orderly execution with no significant negative movement. This has been evident by the increase in volumes trade for both FCPO and FKLI futures contract.

With the global economy slipping into recession and equity markets in bear market territory, how can BMD help market participants manage their risks and thrive in such uncertain environment? 

BMD’s derivative instruments allow market participants to take advantage of both upward and downward trends in the market. In a downward market, investors can take advantage by short-selling FKLI futures contract to protect their equity portfolio. 

For example, the short position will gain as the FBM KLCI declines. This gain will allow investors to offset the loss in the underlying cash equity market. There are also traders with a speculative objective who enter a short position with FKLI futures in anticipation of a market downtrend. 

However, speculation can be extremely risky as they are vulnerable to both the downside and upside of the market as it involves leverage risk. It is therefore essential that investors have a clear understanding of the risk and reward before entering into any speculative trades.

What are some of the action plans BMD has put into place to ensure continued sustainability and vibrancy of the capital market? 

The first quarter of 2020 was marred by various unpredicted events that have contributed to higher volatility in global markets. This included the oil price war between Saudi Arabia and Russia, tensions between the US and Iran, and the unprecedented health crisis caused by the COVID-19 pandemic. 

During this period, BMD registered several new highs in trading volume and open interest for our derivatives products. We also recorded the highest quarterly Average Daily Contracts (ADC) ever. 

This is an indication of the continuing confidence of our customers in BMD’s product offerings to manage their price risk exposures. 

Earlier this year, the Exchange launched the world’s first Options on Refined, Bleached & Deodorised Palm Olein Futures Denominated in US dollar (OPOL) contract. 

To encourage further participation in OPOL, the Exchange has waived the exchange and clearing fees until 30 June 2020. The OPOL contract allows for the introduction of more sophisticated strategies to raise the level of derivatives trading and will attract new categories of market participants. 

We also re-launched the Single Stock Futures (SSF) contract offering an expanded list of new underlying stocks. This will provide investors with an additional risk management tool as well as an opportunity to gain exposure to the equity market. You can view the full list of SSF contracts on our website at www.bursamarketplace.com/ssf

Moving forward, we aim to continue this growth trajectory by diversifying our products and service offerings as well as strengthening our derivatives ecosystem to enhance market attractiveness and vibrancy.

What are some major programmes or initiatives that BMD will be rolling out in 2020? 

For our commodity products, BMD is implementing the Malaysian Sustainable Palm Oil (MPSO) Certified Physical Delivery to fortify further our benchmark Crude Palm Oil Futures (FCPO) contract in line with the Malaysian Government’s Malaysian Sustainable Palm Oil (MSPO) mandate. 

The national scheme is for all oil palm plantations, independent and organised smallholdings, and palm oil processing facilities to be certified per the requirements of the MSPO standards. 

We also plan to introduce the Alternative Delivery Procedure (ADP) for FCPO contract. This new facility allows flexibilities for buyers and sellers to negotiate their delivery terms other than one specified by the Exchange. 

We are also re-launching the Crude Palm Kernel Oil Futures (FPKO) contract to cater to the industry need for a palm kernel oil hedging instrument. 

For financial derivatives, we are currently working with Bank Negara Malaysia (BNM) and Securities Commission Malaysia (SC) to revitalise the 5-Year Malaysian Government Securities Futures (FMG5) contract by changing the settlement methodology from cash to physical delivery. 

The first physically delivered contract will be the Dec 2020 FMG5. This initiative is in line with BNM’s efforts to improve market efficiency, accessibility, and liquidity in the domestic financial market. 

Participation by foreign institutions has been growing from strength-to-strength, contributing close to 46% of our ADC. We will continue to build on this by promoting our derivatives products to foreign proprietary trading firms, hedge funds and commercial firms. 

We will also introduce foreign futures brokers to Malaysian futures brokers in our bid to forge new interbroker relationships for potential business opportunities in the future. 

As part of our market entry strategy into Greater China, our initiatives include offering market data fee waivers to new Futures Commission Merchants (FCM) from Greater China who promote BMD products to their clients. 

We have also recently embarked on a partnership with a leading financial media publication, China Futures Daily, as one of the foreign exchanges featured in their annual live trading competition. 

This partnership will help increase the visibility of our products in the region. For domestic institutional participants, BMD plans to work with palm oil industry associations to conduct targeted product awareness and risk management seminars or webinars to encourage local institutions to use futures and options as part of their risk management tool. 

We will continue to conduct a series of webinars to educate retail participants on derivatives trading. In our pipeline, we are developing a mentor-mentee programme, a collaboration with futures brokers and professional traders to help grow the professional trading community. 

However, because of the COVID-19 pandemic, our efforts to educate and promote will be carried out digitally. Finally, we are also looking out for opportunities to collaborate and forge strategic partnerships with other foreign exchanges. 

This is part of our continuous efforts to consolidate and lay the building blocks for our next stage of growth.

BMD is one of the exchange partners in the global trading competition held by China Futures Daily. What benefits are expected from this competition? 

This live trading competition is one of China Futures Daily’s annual highlights. Last year, the competition attracted over 45,000 participants. 

This year, the competition is held from 27 March to 25 September 2020. It is open to all traders both from mainland China and other countries outside of mainland China. 

For the first time, BMD is participating as a Silver Sponsor and one of the Exchange Partners, with the FCPO as our participating product. We are offering two award categories based on the highest return rate and highest trading volume. 

Each category will feature three winners. The Champion for each category will take home a cash prize of RMB10,000 along with a trophy and a certificate! The collaboration with China Futures Daily aims to help increase our brand and product visibility in the Greater China region. 

This is also in line with our internationalisation strategy. For more information on this competition, you can visit the official website at http://special.qhrb. com/200122-1/ or email us at futures@bursamalaysia.com.