Bursa Malaysia Derivatives wants more retailer participation amid steady derivatives market growth.

By Lee Min Keong

To strengthen Malaysia’s position as one of the top derivative exchanges in the Asean region, Bursa Malaysia Derivatives Bhd (BMD) is improving its product offerings and promoting greater participation from all investor segments especially the retail segment.

BMD CEO Samuel Ho says there has been “tangible progress” in growing participation from domestic and foreign institutions as well as the retail segment, which has always been one of BMD’s key focuses.

He is also unfazed about potential market volatility and geopolitical uncertainties impacting negatively on the derivatives market. “In the event volatility increases, we may see a positive impact on derivatives market trading activities for the second half of this year,” he adds.

Speaking to Smart Investor, Ho shares candidly about challenges facing the derivatives market and BMD’s plan to bring the exchange to the next level.

Smart Investor: Is Malaysia on track to becoming one of the top two derivative exchanges in Asean? What is the strategy to achieve this?

Samuel Ho: Within a competitive landscape, Bursa Malaysia Derivatives (BMD) operates a well-regulated, most liquid and successful crude palm oil futures (FCPO) contract in the world, positioning Malaysia as the global price benchmark for the Crude Palm Oil Market. We will continue to maintain this competitive strength and market attractiveness within Asean and globally by focusing on our product and investor development strategy.

In February 2018, BMD introduced new enhancements to further strengthen FCPO. These enhancements include: Increase in Position Limits, Revision of Trading Hours, Extension of Trading Tenure and Traceability Document Requirements.

BMD also successfully launched an enhanced US dollar denominated Refined, Bleached and Deodorised (RBD) Palm Olein Futures Contract (FPOL) in May 2018 to promote a more inclusive trading community, in line with the exchange’s aim to enhance product diversity in its trading sphere. The enhanced FPOL incorporates a Free on Board (FOB) delivery mechanism.

We will continue to introduce new products that can further strengthen BMD Palm Oil Complex and elevate Malaysia’s position as the global premier palm oil market, provide greater integration with the securities market and lay the foundation to spur growth in the futures products. One such new product is the Options on Palm Olein Futures (OPOL). The proposed OPOL contract serves to complement the FPOL by expanding the array of possible risk management tools available for palm oil players and broadening the investor base of our derivatives market to include new participants such as commercial banks and option writers/traders.

We also target to introduce fully Certified Sustainable Palm Oil by early 2020. While BMD’s forte has always been commodity derivatives, in recent years we have greatly increased our focus and effort to develop our financial derivatives. Our FTSE Bursa Malaysia KLCI Futures (FKLI) contract provides market participants exposure to the underlying benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI). This contract is an effective tool for trading and risk management.

In August last year, we successfully launched our Mini FTSE Bursa Malaysia Mid 70 Index Futures (FM70) which provides exposure to all the 70 companies of the FTSE Bursa Malaysia Mid 70 Index via a single futures contract. We also plan to introduce additional Single Stock Futures (SSFs) on new underlying shares. Moreover, all BMD products have been tradable on the CME Globex® electronic trading platform since 2010. This ease of access has increased the presence of our derivatives products globally and continues to be a factor attracting foreign participation to our markets.

Last year was challenging for the exchange as total trading volume dropped marginally. Do you anticipate a rebound in trading activities on the derivatives market this year?

Trading activities are driven by investor sentiment and market conditions, and we are cognisant of the impact of external geopolitical uncertainties in this regard. For Palm Oil Futures (FCPO), important factors include physical prices of crude palm oil, stock levels and demand from importing countries. As for FTSE Bursa Malaysia KLCI Futures (FKLI), trading will be influenced by foreign fund flows, developments on the US-China trade war and the outcome of Brexit.

As the derivatives market thrives on volatility, changes in market conditions, commodities landscape, and geopolitical developments may create a knockon effect of increased hedging to manage market risk. In the event volatility increases, we may see a positive impact on derivatives market trading activities for the second half of this year.

Has there been tangible progress in growing the investor base for the derivatives market, especially the retail segment?

There has indeed been encouraging and tangible progress in growing participation from all our investor segments. For the domestic and foreign institutions, we have consistently promoted BMD products as price risk management and hedging tools through education and close engagement with the target base. As a result, annual volume from domestic institutions has seen an 80% increase from 3.1 million lots to 5.6 million lots in the past five years from 2014 to 2018, while volume from foreign institutions has grown 11% from 9.7 million lots to 10.8 million in the same period.

Growing the retail segment has always been one of the key focuses. Our proactive approach in creating awareness in the retail base, as well as our partnerships with brokers to kickstart the derivatives trading journey for beginners and providing continuous training for existing retail traders have resulted in a steady increase in retail segment contribution to total trades from 17% in 2016 to 25% in 2018.

Examples of BMD’s initiatives to generate new retail traders include the “Let’s Learn Futures” series with the aim of educating the retail base on the benefits of diversifying their portfolio with derivatives products, and the “Bursa Malaysia Derivatives Workshop (BMW)” series that equips beginners with the fundamental knowledge and technical skills of derivatives trading. The nationwide classroom series has been well received as we provide an interactive and hands-on learning experience with trading simulation games.

Apart from face-to-face programmes, we have also made training materials readily and easily accessible in form of webinars, infographics and online articles on the Bursa MKTPLC platform. For existing retail traders, the aim is to achieve volume growth and our key strategy is collaboration with our brokers.
Initiatives include trading challenges and campaigns offering attractive prizes as reward, and advanced derivatives strategy training courses to elevate the skills of retail traders and encourage them to become professional traders (Local Participants).

In terms of product strategy to increase retail participation, BMD plans to relaunch its Single Stock Futures (SSF) contracts on new underlying shares, aimed at promoting cross-market trading activities between the securities market and derivatives market. The relaunch of SSF will enhance the current ecosystem and provide a greater range of contracts for market participants to trade, hedge and arbitrage across both markets, while offering benefits that include leverage, ease of short selling and low transaction costs.

How is the response from retail investors to the introduction of the Mini FTSE Bursa Malaysia Mid 70 Index Futures (FM70)?

Response from retail investors has been encouraging since the launch of FM70 on 27 August 2018. In the first half of this year, retail investors contributed 27% of FM70 trades, equivalent to 93,522 lots.

Provide an update on the plan to liberalise the existing market framework for Marketing Representatives (MR) and Dual Licensing Fast Track Programme.

One of the challenges faced by the derivatives market is the small number of active sales representatives acting as promoters of our products, which impacts our market volume. Hence, we have taken action with the Securities Commission Malaysia (SC) to liberalise the existing market framework for Marketing Representatives (MR) and Dual Licensing Fast Track Programme(DLFT).

On 1 August 2018, the framework for Marketing Representatives has been enhanced to allow remisiers to act as MR on behalf of Trading Participants in the derivatives market without having to surrender their Capital Markets Services Representative’s Licence (CMSRL).

As existing CMSRL holders, the remisiers are not required to attend a familiarisation programme or undertake assessment. In addition, Bursa Malaysia has submitted a proposal to the SC to further allow qualified remisiers in the securities market to be licensed to deal in derivatives as well as securities.

The proposed liberalisation move will assist in promoting participation of qualified remisiers in the derivatives market and simultaneously enable them to value-add to to their existing securities market clients in terms of portfolio diversification in derivatives products.