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Malaysia Derivatives:
Stepping onto the World Stage


            Presented by:

      Matt Simon, Senior Analyst


          TABB Group Webinar
Some background information on Malaysia can help to
  set the stage:
Characteristic                Description
                              Southeast Asia. Geographically, the nation is split between East and West
Market Location               Malaysia. Bursa Malaysia is located in Kuala Lumpur on the Malay Peninsula
                              north of Singapore and south of Thailand.

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

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

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

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

                              Securities Commission Malaysia (SC). SC oversees all capital markets
Regulatory                    authority. Published “Capital Market Masterplan 2”.
                              Bank Negara Malaysia. Produces statistics on economic activity and market
Central Bank                  growth trends.
Primary Equity Index          FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI)                    2
The derivatives market is expected to grow larger as
  overall economics of the country improve

                                                                 Future
Market Factor                  2010            2011
                                                                Estimate

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

                                                             ~ 8-11% per year
GDP (growth rate)               7.2%           5.2%
                                                            between 2012-2020

                             $171 billion   $213 billion    $1.4 trillion (RM 4.2
Derivatives Notional Value
                              (RM 512        (RM 652          trillion) by 2020
Traded2
                               billion)       billion

                             $12 million    $16.7 million
                                                              $49 million (RM
Trading Revenue               (RM 37.6       (RM 51.2
                                                            150.0 million) in 2012
                               million)       million)

                             17 million     18 million      20-25 million metric
Palm Oil Exports3
                             metric tons    metric tons        tons in 2012
                                                                                    3
Meanwhile equity investors remain interested in an
emerging market like Malaysia for performance
         Sri Lanka                                                        147.4%
        Indonesia                                                127.2%
          Thailand                                         109.5%
         Colombia                                         105.3%
         Malaysia                                   78.3%
               Chile                               76.4%
             Korea                               70.3%
               Peru                            64.8%
       Philippines                            62.3%
      South Africa                          56.5%
          Sweden                           54.6%
        Singapore
            Taiwan
                                          50.6%
                                          50.3%      Index returns
               India                     48.3%
       Hong Kong
             China
                                         48.1%
                                       42.3%
                                                     9/30/2008 to
         Australia
    New Zealand
                                    34.2%
                                    33.6%             12/31/2011
           Mexico                  32.3%
             Brazil                31.0%
        Argentina                 29.6%
            Russia               26.0%                    Developed Markets
      Switzerland               23.6%
         Denmark                23.5%                     Emerging Markets
            Turkey             20.8%
           Canada             19.1%
           Norway            17.7%
                 US        11.7%
         Germany          9.0%
  United Kingdom          9.0%
              Israel     7.6%
             Japan      4.9%
      Netherlands       4.1%
          Pakistan     2.5%                                      Source: TABB Group
There have been major milestones that have made it
 easier for international (US) investors to access Malaysia



    Global Traders              Hubs             Clearing Broker




     Asia Based         CME iLink Hub
                          CME Globex
                           (Chicago)
                                                      Malaysian
                                                       Broker
      US Based
                         Matching Engine




      UK Based




Source: TABB Group                                                 5
Since the CME partnership, BMD activity has been
    increasing; growth should continue in 2012/2013
                      BMD Futures Total Contracts versus Open Interest
             14,000
                                                                                        12,400
             12,000                                                    +47%
                                                                               10,400
                                   Sept’2010: All Products
             10,000
                                  Migrated onto CME Globex
 Thousands




                                                                       8,463
              8,000                                        +37%
                                       6,203   6,120   6,138   6,155
              6,000
                               4,161
              4,000
                      2,460
              2,000
                          85      159     125     156     123     132     152     190      248
                 -
                       2005 2006 2007 2008 2009 2010 2011 2012e 2013e
                                 Number of Contracts                   Open Interest
Source: TABB Group, BMD                                                                          6
Again, one of the most noticeable changes has been
 the increased activity by “foreign institutions”

         % Turnover by Market Participant Crude Palm Oil (FCPO)
  2%        1%        1%
                      14%   17%      15%      13%
  25%       22%

                                              25%     Foreign Retail
                            28%      27%
                      38%
  24%                                                 Domestic Institutions
            34%

                                              28%     Domestic Retail
                            19%      24%
  16%
                      20%                             Foreign Institutions
            19%
                                                      Locals
  33%                       36%      34%      34%
            24%       27%



 2006      2007      2008   2009    2010     2011
Source: TABB Group, BMD                                                      7
Trading participants (TPs) list of execution and clearing
brokers for BMD is fairly limited
#    Company                      #    Company

1    AmFutures                    11   JPMorgan Securities (Malaysia)

2    CIMB Futures                 12   Kenanga Deutsche Futures

3    ECM Libra Investment Bank    13   LT International Futures (M)

4    Fedrums                      14   Okachi (M)

5    HDM Futures                  15   Oriental Pacific Futures

6    Hong Leong Investment Bank   16   OSK Investment Bank

7    IF Derivatives               17   Phillip Futures

8    Innosabah Options Futures    18   RHB Investment Bank

9    Inter-Pacific Securities     19   Sunny Futures

10   JF Apex Securities           20   TA Futures                       8
Other reasons to keep Malaysia on the radar screen
  include major initiatives to grow investor participation
Topic                                 Initiative
                                      Options on Crude Palm Oil Futures (OCPO), Rubber Futures,
New Derivatives Product Launches      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)

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

                                      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
Growth of HFT / automated market-     equity market by end of 2012.
making
                                      According to interviews, HFT accounts for about 6% of
                                      derivatives trades on the Bursa’s derivatives platform.



Conversion of OTC Swap Positions      Facility in development to bridge the OTC market with the
into Futures Contracts                exchange
Q&A with Azila Abdul Aziz

    Executive Director of Dealing
     Kenanga Deutsche Futures




         TABB Group Webinar

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Malaysia webinar 06.19.2012

  • 1. Malaysia Derivatives: Stepping onto the World Stage Presented by: Matt Simon, Senior Analyst TABB Group Webinar
  • 2. Some background information on Malaysia can help to set the stage: Characteristic Description Southeast Asia. Geographically, the nation is split between East and West Market Location Malaysia. Bursa Malaysia is located in Kuala Lumpur on the Malay Peninsula north of Singapore and south of Thailand. Emerging. Member of ASEAN (Association of Southeast Asian Nations) countries along with 9 other Asian nations: MSCI Country Classification Brunei, Cambodia, Indonesia, Laos, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. July 2012 est. = 29.1 million. 50% ethnic Malay, 25% Chinese descent, 7% Population Indian descent, and 18% foreign workers. Many workers are fluent in English and other local languages. Ringgit, usually referred by MYR. Other abbreviation is RM. As of April 10, 1 Currency MYR=.32 USD or .25 EUR Bursa Malaysia. Bursa Malaysia Derivatives (BMD) is a subsidiary of Bursa Exchange(s) Malaysia . This is the only equity/derivative exchange in Malaysia. Chicago Mercantile Exchange (CME) owns a 25% stake. Securities Commission Malaysia (SC). SC oversees all capital markets Regulatory authority. Published “Capital Market Masterplan 2”. Bank Negara Malaysia. Produces statistics on economic activity and market Central Bank growth trends. Primary Equity Index FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI) 2
  • 3. The derivatives market is expected to grow larger as overall economics of the country improve Future Market Factor 2010 2011 Estimate Expected to reach GDP (PPP)1 $424.8 $447.0 $1,500.0 by 2020 ~ 8-11% per year GDP (growth rate) 7.2% 5.2% between 2012-2020 $171 billion $213 billion $1.4 trillion (RM 4.2 Derivatives Notional Value (RM 512 (RM 652 trillion) by 2020 Traded2 billion) billion $12 million $16.7 million $49 million (RM Trading Revenue (RM 37.6 (RM 51.2 150.0 million) in 2012 million) million) 17 million 18 million 20-25 million metric Palm Oil Exports3 metric tons metric tons tons in 2012 3
  • 4. Meanwhile equity investors remain interested in an emerging market like Malaysia for performance Sri Lanka 147.4% Indonesia 127.2% Thailand 109.5% Colombia 105.3% Malaysia 78.3% Chile 76.4% Korea 70.3% Peru 64.8% Philippines 62.3% South Africa 56.5% Sweden 54.6% Singapore Taiwan 50.6% 50.3% Index returns India 48.3% Hong Kong China 48.1% 42.3% 9/30/2008 to Australia New Zealand 34.2% 33.6% 12/31/2011 Mexico 32.3% Brazil 31.0% Argentina 29.6% Russia 26.0% Developed Markets Switzerland 23.6% Denmark 23.5% Emerging Markets Turkey 20.8% Canada 19.1% Norway 17.7% US 11.7% Germany 9.0% United Kingdom 9.0% Israel 7.6% Japan 4.9% Netherlands 4.1% Pakistan 2.5% Source: TABB Group
  • 5. There have been major milestones that have made it easier for international (US) investors to access Malaysia Global Traders Hubs Clearing Broker Asia Based CME iLink Hub CME Globex (Chicago) Malaysian Broker US Based Matching Engine UK Based Source: TABB Group 5
  • 6. Since the CME partnership, BMD activity has been increasing; growth should continue in 2012/2013 BMD Futures Total Contracts versus Open Interest 14,000 12,400 12,000 +47% 10,400 Sept’2010: All Products 10,000 Migrated onto CME Globex Thousands 8,463 8,000 +37% 6,203 6,120 6,138 6,155 6,000 4,161 4,000 2,460 2,000 85 159 125 156 123 132 152 190 248 - 2005 2006 2007 2008 2009 2010 2011 2012e 2013e Number of Contracts Open Interest Source: TABB Group, BMD 6
  • 7. Again, one of the most noticeable changes has been the increased activity by “foreign institutions” % Turnover by Market Participant Crude Palm Oil (FCPO) 2% 1% 1% 14% 17% 15% 13% 25% 22% 25% Foreign Retail 28% 27% 38% 24% Domestic Institutions 34% 28% Domestic Retail 19% 24% 16% 20% Foreign Institutions 19% Locals 33% 36% 34% 34% 24% 27% 2006 2007 2008 2009 2010 2011 Source: TABB Group, BMD 7
  • 8. Trading participants (TPs) list of execution and clearing brokers for BMD is fairly limited # Company # Company 1 AmFutures 11 JPMorgan Securities (Malaysia) 2 CIMB Futures 12 Kenanga Deutsche Futures 3 ECM Libra Investment Bank 13 LT International Futures (M) 4 Fedrums 14 Okachi (M) 5 HDM Futures 15 Oriental Pacific Futures 6 Hong Leong Investment Bank 16 OSK Investment Bank 7 IF Derivatives 17 Phillip Futures 8 Innosabah Options Futures 18 RHB Investment Bank 9 Inter-Pacific Securities 19 Sunny Futures 10 JF Apex Securities 20 TA Futures 8
  • 9. Other reasons to keep Malaysia on the radar screen include major initiatives to grow investor participation Topic Initiative Options on Crude Palm Oil Futures (OCPO), Rubber Futures, New Derivatives Product Launches 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) Single Stock Futures, Miniature contract types, Exchange Derivatives Innovation Traded Funds (ETFs) 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 Growth of HFT / automated market- equity market by end of 2012. making According to interviews, HFT accounts for about 6% of derivatives trades on the Bursa’s derivatives platform. Conversion of OTC Swap Positions Facility in development to bridge the OTC market with the into Futures Contracts exchange
  • 10. Q&A with Azila Abdul Aziz Executive Director of Dealing Kenanga Deutsche Futures TABB Group Webinar