While equities tend to be the vehicle of choice among many investors, derivatives have yet to see widespread uptake in Malaysia, with Bursa Malaysia Derivatives (BMD) Bhd estimating that domestic institutions and retail investors comprise just 28% of activity in the FTSE Bursa Malaysia KLCI Futures market.

Foreign institutions make up 58% of transactions in this arena, highlighting its international appeal. But what is drawing these investors to Malaysian derivatives, defined as financial instruments which derive their value from underlying assets?

In laymen’s terms, the prime value derivatives offer is leverage, along with the potential to accrue returns through short positioning. This month, Smart Investor sits down with BMD Deputy Chief Executive Samuel Ho to discuss the benefits derivatives bring to any portfolio.

Smart Investor (SI): Participation of Malaysian traders in derivatives trading is generally low.  Why is this so?
Samuel Ho (SH):
Retail investors in the capital market can be divided into two types: “investors” or “traders”. Most people who invest in equities can be categorised as “investors”.  They participate in the market either for the purpose of value appreciation or they make a one-time purchase and collect annual dividends as their source of income.

A “trader” is someone who actively participates in the market, where they buy and sell multiple times in a day or in a week.  They are short-term position holders and their key strategy is to make as much profit over multiple transactions.

This is the opposite to the strategy of “investors” who are largely long-term position holders and are not very active in buying and selling multiple times in a day. “Traders” are mostly those who are active in the futures market and possibly equity day traders with short-term trading strategies.

The futures instruments or futures contract is an agreement to buy or sell a particular asset at a predetermined price at a designated time in the future. It is for those who are forward thinking and want to protect and hedge their existing investments.

However, this may not work for general retailers who have “long-only” positions and intend to hold on to their equity positions regardless of the market’s performance.

SI: What would be the pulling factor for typical Malaysians to consider futures instruments as opposed to putting their money into other forms of investments?
SH: It is important to help “equity long-only” portfolio holders understand the various trading opportunities that are available for them to hedge and make profits through futures contracts, even in a declining market where their existing holding of shares fail to generate a profit.

With knowledge about futures products and understanding the ability to “sell-first” in declining markets, investors or traders can potentially gain profits from a bearish market whilst their equity holdings are still in their possession awaiting dividend pay-outs.

In other words, futures products are very flexible and can be used in all market trends; both bullish markets (buy first and then sell) and also bearish markets (sell first and then buy back).

SI: What are the product offerings made available by BMD to date? Which are the more popular products and why?
SH: To date, BMD has a total of 13 futures contracts and two options contracts available to trade. Retailers mainly focus on the Crude Palm Oil Futures contract (also known as the FCPO contract), the Index Futures contract (FKLI) and the Mid-70 Stock Index Futures contract (FM70).

SI: How has the Mini FTSE Bursa Malaysia Mid 70 Index Futures Contract (FM70) performed since launch?
SH: Since the 27 Aug launch of FM70, a total of 75,136 contracts have changed hands (as at 16 Nov). This is equivalent to a daily average of 1,366 contracts. We have observed increased retail participation and the number of retail accounts trading FM70 continues to grow.

Mini-contracts such the FM70 are more accessible to the retail market due to the lower entry cost (initial margin) required to trade these contracts (RM900). Initial margins are determined by Bursa Malaysia’s Risk & Compliance department and will be revised from time to time.

BMD will consider launching more mini-contracts if there is sufficient demand from the market.

SI: Kindly elaborate on your range of educational-cum-promotional programmes for the public.
SH: We continuously run programs on futures product knowledge nationwide.  We have various free workshops, webinars and talks conducted nationwide and we work together with our futures brokers to engage as often as possible with the community.

  • Workshop series:
    • The Bursa Malaysia Derivatives Workshop series (BMW): BMW provides a practical and structured syllabus to the public on futures fundamentals. It provides a step-by-step guide from understanding the concept of futures, basics of futures trading as well as fundamental market knowledge with emphasis on applying risk management strategies to fit different market movements. 

Each workshop is divided into two sessions (theory and a hands-on futures trading simulation game). Theory includes topics such as Introduction to Futures Trading, Formulation of a Trading Plan and Risk Management Measures, while the trading simulation provides an interactive learning experience in a group format for participants to make market decisions together.

  • Webinar series:
    • One-hour presentation on selected topics and 30-minute Q&A.
    • All webinars will be recorded and made available to be viewed online on the BursaMKTPLC website or YouTube channel.
  • Other talks/ seminars/ workshops jointly organised with our licensed brokers:
    • Talks by brokers at various branch locations.
  • Online portal:
    • Bursa Marketplace as the go-to online portal for market information for retailers:
      • To get market information and educational materials on futures trading.
      • To practice on a virtual trading platform via Futures Trading Plan (FTP) and My Game platforms.
      • To understand the calculations in futures trading (buy & sell contracts), before entering into the actual market to trade.