9/6/06 (The Star)  -  PETALING JAYA: Futures brokers stepped up their objection to Bursa Malaysia's plan to sell its crude palm oil (CPO) settlement price to Singapore-based Joint Asian Derivatives Exchange (JADE), stressing that the move could undermine the local market as the palm oil pricing centre of the world.

“The world knows and accepts that the palm oil market is made in Malaysia, and prices come from Malaysia. Why does Bursa want to take the risk that may change this status?'' a veteran CPO futures broker, JB Lim, told StarBiz yesterday. 

In a letter to Bursa, the Malaysian Futures Brokers Association (MFBA), which has opposed the plan since Bursa signed a MoU with JADE early this year, said: “MFBA does not understand why Bursa is supporting a competitor which poses a major threat and risk losing its only successful commodity futures contract.'' A copy of the letter dated May 30 was also sent to the Securities Commission.

“The possibility that both contracts can be successful is not a likely scenario as both CPO futures contracts are trading in the same time zone and JADE will be competing for the same clients.

“Bursa should work out strategies to counter the imminent threat, such as tying up with other major exchanges to make Bursa’s CPO futures contract the only successful CPO futures contract accessible to the global market,” the letter said.

Plantation Industries and Commodities Minister Datuk Peter Chin, when contacted by StarBiz yesterday, said the matter had not been brought up to the Cabinet for discussion.

“It is up to Bursa to decide (on the licensing issue). The brokers are their clients ... it is up to them whether they want to please their clients or go ahead with their business decision,'' Chin said.

Bursa needs to decide on the matter soon as JADE is expected to launch its own CPO futures contract in the third quarter.

“If they (JADE) don't get it from us, they might go somewhere else, maybe Indonesia,'' Bursa's head of global markets Raghbir Singh Bhart told StarBiz. “It’s like caught between a rock and a hard place,” he said.

 
To date, Bursa has been approached by at least three exchanges, including JADE, to license its settlement price for CPO futures contracts.

“Any venture with growing and global leaders in commodity markets ... would add depth to Bursa Malaysia's CPO futures markets as well as its underlying market.

“By licensing out the settlement price, it would entrench the Malaysia CPO price as the global benchmark,'' Raghbir said. 

The MFBA seems to be mainly against the possible deal with JADE, and is supportive of licensing deals with other markets like China and India which trade in different time zones. These countries are also big users of palm oil and cater mostly to different clients.

Under the licensing plan, rival exchanges would be able to cash settle their soon-to-be introduced CPO futures contracts based on Bursa's CPO prices.

JADE is planning to introduce US dollar-denominated CPO futures contracts, which brokers said would draw foreigners away from the local market.

“There are numerous examples of liquidity flowing to one market and marginalising the other market trading the same contract during the same time zone,'' MFBA said.

Bursa also acknowledged JADE's strong position, with its considerable resources being the joint venture between the Singapore Stock Exchange (SGX) and the world's largest agricultural commodity market, the Chicago Board of Trade (CBOT).

With some 25,000 terminals worldwide, CBOT's electronic trading platform is one of the most widely used. 

Although difficult to ascertain, Bursa estimated that in the worst-case scenario, about 20% of the existing trade would go elsewhere under the licensing option. 

It is worth noting that CPO futures volume had stagnated at around 5,000 contracts per day for the past two years.

Raghbir said Bursa had negotiated with JADE to make local futures brokers members of JADE. This would enable them to become futures brokers in Malaysia and Singapore.

To this point, another veteran futures broker, G.M. Teoh, argued that Bursa should invite members of JADE to be associate members of Bursa, which has already succeeded in the CPO futures contract.

“Malaysia will lose its position as an international palm oil centre. In the past, Malaya looked to London to price its rubber despite being the largest producer. It was the same for tin.

“Before 1980 and the launching of the CPO contract, we looked to Rotterdam to price palm oil. If this move succeeds, Malaysia and Indonesia would be looking to Singapore, a non-producing country, to price palm oil. To me, that will be a dark day in the history of the exchange and CPO futures market,’’ said Teoh.

The MFBA also highlighted a recent news report which stated that Malaysia and Indonesia had agreed to join forces not to allow CPO prices to be determined by non-producing countries. “Licensing of Bursa’s CPO settlement price to JADE is going against this Malaysia-Indonesia pact,’’ the MFBA added in its letter. 

JADE, however, is willing to allow certain concessions, among which are discounted fees, waiver on certain payment and the right to trade on all contracts on JADE.

The Bursa Malaysia Derivatives market, is the world’s biggest palm oil in terms of volume.