TABB Group Webinar

Malaysia Derivatives: Stepping onto the World Stage

Presented by:

Matt Simon, Senior Analyst

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Characteristic Description

Market LocationSoutheast Asia. Geographically, the nation is split between East and West Malaysia. Bursa Malaysia is located in Kuala Lumpur on the Malay Peninsula north of Singapore and south of Thailand.

MSCI Country ClassificationEmerging. Member of ASEAN (Association of Southeast Asian Nations) countries along with 9 other Asian nations: Brunei, Cambodia, Indonesia, Laos, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

PopulationJuly 2012 est. = 29.1 million. 50% ethnic Malay, 25% Chinese descent, 7% Indian descent, and 18% foreign workers. Many workers are fluent in English and other local languages.

Currency Ringgit, usually referred by MYR. Other abbreviation is RM. As of April 10, 1 MYR=.32 USD or .25 EUR

Exchange(s)Bursa Malaysia. Bursa Malaysia Derivatives (BMD) is a subsidiary of Bursa Malaysia . This is the only equity/derivative exchange in Malaysia. Chicago Mercantile Exchange (CME) owns a 25% stake.

Regulatory Securities Commission Malaysia (SC). SC oversees all capital markets authority. Published “Capital Market Masterplan 2”.

Central Bank Bank Negara Malaysia. Produces statistics on economic activity and market growth trends.

Primary Equity Index FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI)

Some background information on Malaysia can help to set the stage:

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Market Factor 2010 2011 Future Estimate

GDP (PPP)1 $424.8 $447.0Expected to reach $1,500.0 by 2020

GDP (growth rate) 7.2% 5.2%~ 8-11% per year

between 2012-2020

Derivatives Notional Value Traded2

$171 billion (RM 512 billion)

$213 billion (RM 652

billion

$1.4 trillion (RM 4.2 trillion) by 2020

Trading Revenue$12 million (RM 37.6 million)

$16.7 million (RM 51.2 million)

$49 million (RM 150.0 million) in 2012

Palm Oil Exports3 17 million metric tons

18 million metric tons

20-25 million metric tons in 2012

The derivatives market is expected to grow larger as overall economics of the country improve

Sri Lanka

Thailand

Malaysia

Korea

Philippines

Sweden

Taiwan

Hong Kong

Australia

Mexico

Argentina

Switzerland

Turkey

Norway

Germany

Israel

Netherlands

147.4%127.2%

109.5%105.3%

78.3%76.4%

70.3%64.8%

62.3%56.5%

54.6%50.6%50.3%

48.3%48.1%

42.3%34.2%33.6%

32.3%31.0%

29.6%26.0%

23.6%23.5%

20.8%19.1%

17.7%11.7%

9.0%9.0%

7.6%4.9%4.1%

2.5%

Index returns 9/30/2008 to 12/31/2011

Developed Markets

Emerging Markets

Meanwhile equity investors remain interested in an emerging market like Malaysia for performance

Source: TABB Group

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There have been major milestones that have made it easier for international (US) investors to access Malaysia

CME Globex(Chicago)

Matching Engine

CME iLink HubAsia Based

Global Traders

MalaysianBroker

Hubs Clearing Broker

UK Based

US Based

Source: TABB Group

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2005 2006 2007 2008 2009 2010 2011 2012e 2013e -

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

2,459,745

4,161,024

6,202,6866,120,0426,137,8276,154,745

8,462,770

10,400,000

12,400,000

84,848159,019125,051155,560123,141132,151152,419190,000248,000

Number of Contracts Open Interest

Sept’2010: All Products Migrated onto CME Globex

+37%

+47%

BMD Futures Total Contracts versus Open Interest

Since the CME partnership, BMD activity has been increasing; growth should continue in 2012/2013

Source: TABB Group, BMD

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201120102009200820072006

34%34%36%27%24%

33%

28%24%19%

20%19%

16%

25%27%28%38%34%24%

13%15%17%14%22%25%

1%1%2%

Foreign Retail

Domestic Institutions

Domestic Retail

Foreign Institutions

Locals

% Turnover by Market Participant Crude Palm Oil (FCPO)

Source: TABB Group, BMD

Again, one of the most noticeable changes has been the increased activity by “foreign institutions”

# Company

11 JPMorgan Securities (Malaysia)

12 Kenanga Deutsche Futures

13 LT International Futures (M)

14 Okachi (M)

15 Oriental Pacific Futures

16 OSK Investment Bank

17 Phillip Futures

18 RHB Investment Bank

19 Sunny Futures

20 TA Futures8

# Company

1 AmFutures

2 CIMB Futures

3 ECM Libra Investment Bank

4 Fedrums

5 HDM Futures

6Hong Leong Investment Bank

7 IF Derivatives

8 Innosabah Options Futures

9 Inter-Pacific Securities

10 JF Apex Securities

Trading participants (TPs) list of execution and clearing brokers for BMD is fairly limited

Topic Initiative

New Derivatives Product LaunchesOptions on Crude Palm Oil Futures (OCPO), Rubber Futures, USD Palm Olein Futures, Single Stock Options

Re-Introduction of Past Products Options on KLCI Index Futures (OKLI), 5-year Malaysian Government Bond Futures

Revitalization of Existing Products 3-month short-term interest rate futures (FKB3)

Derivatives Innovation Single Stock Futures, Miniature contract types, Exchange Traded Funds (ETFs)

Growth of HFT / automated market-making

High-frequency traders already exist in the derivatives market but this move should make it easier for hedging and arbitrage opportunities. No official timetable set, but HFT expected in equity market by end of 2012.

According to interviews, HFT accounts for about 6% of derivatives trades on the Bursa’s derivatives platform.

Conversion of OTC Swap Positions into Futures Contracts

Facility in development to bridge the OTC market with the exchange

Other reasons to keep Malaysia on the radar screen include major initiatives to grow investor participation

TABB Group Webinar

Q&A with Azila Abdul Aziz

Executive Director of Dealing Kenanga Deutsche Futures