Derivatives market to remain sluggish this year


Contract volumes traded on the Malaysian derivatives market are expected to be muted as regulatory changes, Brexit and elections in developed markets (DMs) limit investor interest to home markets.

In addition, the lack of volatility and price stability will see volumes on Bursa Malaysia Derivative Bhd (BMD) experience marginal growth this year.

“We forecast the total contracts traded on BMD to hit 14.7 million by the end of 2017, based on the monthly average of 1.2 million contracts traded in the first five months of the year,” Kenanga Deutsche Futures Sdn Bhd CEO and head of listed derivatives Azila A Aziz told The Malaysian Reserve in Kuala Lumpur last week.

“If achieved, the target would represent a 3.5% year-on-year (YoY) increase from 2016,” she added.
Last year, volumes traded on BMD rose 0.7% YoY to 14.2 million via 18 trading participants/brokers, as opposed to double-digit growth rates in the years prior. The flattening volumes were not a sign that the market had reached its limit.

“Last year was tricky because the ringgit took a continuous nosedive and did not entice traders to be averaging down, but rather to exit to DMs post the US election,” she said.

The derivative business is a high-margin business for Bursa Malaysia Bhd. The BMD contributed to 18.8%, or RM88.7 million (from 14.4 million contracts), of the total RM472.7 million in operating revenue of Bursa Malaysia last year, while the equity market made RM212.9 million (compared to daily volume over one billion shares).

Meeting with foreign clients suggest allocation for emerging markets (EMs) this year will be low as traders’ base markets become more interesting and any offshore trade is likely going to bigger EMs like China and India.

“European traders are fixated on Brexit and the new 
regulations to come into effect after the finalisation of the Markets in Financial Instruments Directive II,” Azila said.

From a participation basis, domestic participation in the Malaysian derivatives market stood at 60% in 2016, while foreign players made up the remaining 40%.

The crude palm oil futures contract (FCPO) remains the key driver for the market, accounting for 80.3% of all contracts traded for the year with an equal amount of participation by domestic and foreign traders.

Foreign participation accounts for almost 70% of trade on the equity index futures contract now — especially as the local equity market retest historic highs.

The next test for the BMD will be to attract new types of flow.

“In order for FCPO to grow from a contract volume of 11.4 million to 13 million, the market requires a combination of new players and new efforts to attract these players. Without new players, the market will be stale and cannot grow in volume,” she said.

New contracts have to be taken up by domestic players first before becoming successful, she said. However, the Malaysian investing public is not adequately educated of the derivative market.

Presently, only 36% of all Malaysians are financially 
literate on derivatives compared to the 50%-60% global average, Azila said.

“With 18 contracts available on the BMD, the diversity is there but not the activity, and this is largely down to a lack of education.”



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