Bursa Malaysia pins derivatives hopes on Globex

Bursa Malaysia started distributing its commodity, equity and financial futures contracts on the CME Group’s electronic trading platform in September. Chong Kim Seng, head of the exchange’s derivatives unit, hopes the tie-up will make Malaysia’s crude palm oil futures contract a global benchmark. Georgina Lee reports

The proliferation of alternative trading platforms and dark pools has pushed traditional exchanges in the region to confront new competition through cross-border mergers and international alliances combined with moves to grab more derivatives trading volume. Singapore Exchange has made the most audacious effort to maintain its relevance with its A$8.4 billion ($8.5 billion) bid for Australia's Securities Exchange. Others, such as Bursa Malaysia, are seeking new distribution channels that can help the development of Asian derivatives benchmarks.

Malaysia hopes to spur international investor participation in Bursa Malaysia's derivatives contracts through the licensing of crude palm oil futures contracts to the CME Group. Chong Kim Seng, chief executive of Bursa Malaysia Derivatives, says Bursa's strategic partnership with the CME Group, forged in September last year, is expected to further augment its ringgit-denominated crude palm oil futures contract (FCPO) as the global price benchmark for crude palm oil. FCPOs are the most traded derivatives on Bursa, with volume surpassing futures contracts on the benchmark equity index, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (KLCI). On November 1 this year, a total of 14,307 contracts were traded and 71,293 contracts were open interest.

Bursa has licensed the right for the CME Group to use its settlement prices for ringgit FCPO. It has also enabled the CME Group to develop US dollar-denominated cash-settled crude palm oil futures and related options for listing on Globex, CME Group's electronic trading platform. These are likely to compete head-to-head with soya bean contracts.

The partnership also resulted in CME Group taking a 25% stake in Bursa Malaysia Derivatives, a divestment that yielded 44 million ringgit (14.2 million) to parent Bursa Malaysia. The tie-up will also result in all existing and future derivatives products listed on Bursa Malaysia migrating onto Globex, which traded about 199 million contracts in October with access to more than 80 countries globally. All Malaysia products traded on Globex will still be cleared by Bursa Malaysia Derivatives Clearing.

"Traders who are using soya bean contracts as a proxy hedge [against their palm oil trades] are increasingly asking why they should stay up late to trade in Chicago," says Chong. "Asia is increasingly becoming important in terms of crude oil supply and demand; traders are saying they want an Asian-based commodity benchmark to price and manage their risk."

People close to the two exchanges say they are seeking to resolving "certain regulatory constraints" to further popularise crude palm oil contracts on Globex to all CME's market participants. The exchanges are currently also looking to create a night market for crude palm oil contracts and are talking with market-makers about the best approaches to broaden out into other time zones.

For the first half of this year, Malaysia produced 7.98 million tonnes of crude palm oil, almost flat from a year ago. It exported some 8.25 million tonnes of the food crop that can also be used as biodiesel, up from 7.58 million tonnes a year ago, according to data cited by the Malaysian Palm Oil Council in its report Global Oils and Fats Market Outlook and Updates 2010. Malaysia was the world's second-largest producer of the global aggregate output of 43.1 million tonnes of palm in 2009, producing 17.7 million tonnes last year. It came second to Indonesia, which produced 19.2 million tonnes, and together the pair accounted for 85% of the world's annual output.

CF Wong, head of Asia for the CME Group in Singapore, says soya bean ranks second in terms of annual production after palm oil, with 35.81 million tonnes produced in 2009. Yet the CME traded 17.42 million soya bean futures for the first half of this year, data from the Futures Industry Association shows. "If our soya bean futures can trade so much more than crude palm oil today, that tells you there is a lot of growth potential for crude palm oil financial contracts," says Wong.

"In the tie-up with Bursa Malaysia, we are looking at creating more arbitrage opportunities for [agricultural] oil and oilseed products so that together, we can help to improve the depth of the market."

For the first half of this year, derivatives trading revenue on Bursa Malaysia has dropped 16.9% from a year ago to 17.49 million ringgit from 21.05 million ringgit a year ago. Daily average contracts volume also shrank, to 23,175 from 26,779 a year ago. Futures on the crude palm oil dropped to 1.78 million, from 1.99 million for the six months ended June; while futures on the KLCI dropped to 990,000 million, from 1.19 million a year ago.

Bursa Malaysia also lists other financial derivatives such as futures on three-month Kuala Lumpur interbank offered rates, and futures on three- and five-year Malaysia government bonds. Chong admits that currently, these contracts are not as actively traded as he would like. However, he is also hopeful that the partnership with the CME Group will help the Bursa expand these contracts' distribution. For now, he says, however, the marketing focus will be on the stock index and the FCPO.