Monday, September 27 2004 - BURSA Malaysia Bhd is expected tointroduce new measures to encourage more active trading of its crude palmkernel futures contract and Kuala Lumpur Composite Index (KLCI) options.
The head of clearing settlement and depository and acting head for groupbusiness development, Mohd Ridzal Sheriff, said the proposed measures areexpected to be implemented next year.
For KLCI options, the solution may include halving the contract size andthe introduction of market makers.
Palm kernel futures, the latest derivatives product of the exchange, werelaunched on February 20 this year, bringing the total number ofderivatives products run by the exchange to eight.
Palm kernel oil is extracted from the oil palm seed, while crude palm oil(CPO) is derived from the flesh of the oil palm fruit.
We will be talking to users and palm oil industry players on the lack ofinterest in the palm kernel futures contract.
The lack of interest could be tied to structural issues of the product.For example, there could be a strong correlation between the moreestablished CPO futures and crude palm kernel futures, which might causeinvestors to overlook the latter, he told Business Times.
From its launch in February to July 30 this year, palm kernel futures haveregistered trades of only 449 lots compared to 790,683 lots for CPO in thefirst six months.
There are currently four market makers in palm kernel futures: IOI CorpBhd, Fajar Palmkel Sdn Bhd (a member of the Kuala Lumpur Kepong Bhdgroup), Wilmar Trading Sdn Bhd and Kuok Oil & Grains Pte Ltd.
Several attempts have been made to make palm kernel futures a hedging toolin the Malaysian derivatives market, but the more established crude palmoil (CPO) futures have always stolen the limelight.
Such futures have failed to attract volume as hedgers and speculators havestuck with the CPO futures as a hedging tool.
Both contracts normally share similar price trends. Hence, there has beenlittle need to try something new.
Nevertheless, palm kernel futures contracts hold great potential as thecommodity’s applications in industry have not been widely tapped.
Derivatives are financial instruments used to manage one’s exposure totoday’s volatile markets. A derivative product’s value depends upon, andis derived from, an underlying instrument such as commodity prices,interest rates, indices and share prices.
Derivative instruments can be traded in an organised exchange or over-the-
counter. Futures and options are essentially elementary derivativeproducts mostly traded on exchanges.
Mohd Ridzal said the exchange’s KLCI Futures derivatives product has astrong following from foreign institutions that make up between 40 and 50per cent of total trade.
This is mainly due to a strong risk management culture of foreigninstitutions on the importance of hedging their positions.
However, this cannot be said of domestic institutions players as theirparticipation is negligible at less than 1 per cent of total trades.
As such, our emphasis will be to talk to local institutions to usederivatives as a hedging tool.
Mohd Ridzal said Bursa Malaysia will continue to undertake educationprogrammes for retail investors. It has lined up several talks withstockbrokers since July on various aspects of both the derivatives andequities market.
He added that Bursa Malaysia derivatives, like the CPO futures contracts,have matured and been well-received by investors.
Both foreign and local investors, from institutional users to refiners andretailers, are trading CPO futures, he said.
But the derivatives market has yet to hit a critical mass as in maturedmarkets like Europe and the US.
Mohd Ridzal said Bursa Malaysia is focusing on increasing investorparticipation in derivatives products rather than introducing new ones.
For this year, the focus will be on rebranding, promotion of existingproducts and the smooth implementation of a common trading platform forequities and derivatives.
He said Bursa Malaysia wants to promote the stockbroking industry as agood long-term sector that has strong growth potential.
This will help to attract more people into the industry and propel ittowards better growth, Mohd Ridzal added.
The prospects for both equities and derivatives this year are promising,and the recent weakness in the equities market is due to marketconsolidation, he said.
We are quite encouraged by the growth of the futures market over the lastfew years.
For the first seven months of this year, the derivatives market averageturnover grew 45 per cent compared with 57 per cent last year, 53 per centin 2002 and 14 per cent in 2001.
Mohd Ridzal also said that Bursa Malaysia is actively positioning itselfand the country as an investment destination. This is part of its brandingexercise and to help generate more trade on the exchange.
We are trying to focus a lot on the Islamic markets. We are quite advancedin both banking products and stocks that are deemed Syariah-compliant.