MARKET DEVELOPMENT
Palm oil futures competitor emerges close by
Palm oil futures competitor emerges close by
7/6/07 (Business Times) - MALAYSIA is ready to compete, at least according to Bursa Malaysia Bhd chief operations officer Omar Merican.
"We welcome competition. We have to be efficient. It keeps us on our toes as we're in a globalised economy," Omar said.
He said rubber futures in the form of RSS1 and SMR20 used to be traded in Malaysia, but neither took off. "After a while, users did not see the need for futures. They were securing long-term supply of natural rubber via the physical market. Therefore, rubber futures were no longer traded here."
On the palm oil industry, Omar said that although the futures industry employs far fewer people than oil palm estates, the value- add to the economy is significant. Last year, 2.2 million FCPO contracts worth some RM85 billion were traded on the Bursa Malaysia Derivatives market.
Launched yesterday, JADE is a Singapore- based, electronic commodities derivatives market developed by Joint Asian Derivatives Pte Ltd - a joint venture between CBOT Holdings Inc and the Singapore Exchange. At the start of its maiden trading day, five contracts of US$750 (RM2,565) a tonne changed hands. At the close, JADE recorded 79 contracts.
JADE's crude palm oil futures contract, denominated in US dollars, settles with physical delivery at the Sumatran ports of Belawan and Dumai, Indonesia. The contracts trade from 10.30am to 6.00pm (Singapore time), followed by a special one-hour session from 9.30am to 10.30am (Chicago time). This was the first time palm oil futures contract was listed for trading during a US trading day.
Benny Lee, a private commodities trader in Malaysia, said the JADE platform provides access to CBOT which in turn facilitates arbitrage opportunities for traders.
"This means I can buy and sell JADE palm oil futures and CBOT soyabean oil futures concurrently to manage my edible oils price risk," he said.
Lee, who is based in Kuala Lumpur, also said that the Internet trading platform JADE provides is definitely more attractive than Bursa Malaysia's. "But I will only consider switching platforms if there is substantial liquidity in the market, easy funds transfer facilities, better commission rates, and if the liquidity in Bursa Malaysia starts to deteriorate," he said.
The Malaysian Futures Brokers Association (MFBA) sees JADE as a threat to Malaysian brokers' source of income.
"Of course JADE is a threat to our rice bowls. We need to step up efforts to expand this industry and be more market-driven," MFBA president Steven Lai Choon Lim said.
Currently, MFBA members can only buy and sell FCPO contracts for their clients on Bursa Malaysia. If their clients want to trade on JADE, they will have to engage Singapore brokers.
"Some clients may go to JADE at the expense of Bursa Malaysia. But this is also an opportunity for Malaysia to prove its worth to traders, that our market is THE market to make money," Lai said.
"For Malaysia to maintain its No.1 position in FCPO trading, we the brokers are working together with Bursa Malaysia to be more efficient in offering global traders more convenience," he added.
Many FCPO dealers asked themselves "Should I go or should I stay?" when they first heard that the Singapore stock exhange wanted to offer palm oil futures trading.
"If JADE really takes off in a big way, I'll be packing my stuff and heading to Singapore with my family. If it doesn't, we'll stay put. There can only be one tiger on the hill. It's either Bursa Malaysia or JADE," a dealer said.
Another dealer of 33 years experience agreed that palm oil futures trading on JADE was a threat to Malaysia's futures broking community.
"JADE gives a wake-up call to Bursa Malaysia that it needs to do more to convince international traders that they can make good money here," said Jeffary Ivan Rosario, who works for Sunny Futures Sdn Bhd.
Traders want futures brokers whom they can rely on. For now, Rosario is optimistic that global traders will continue to engage Malaysian brokers' services to trade on Bursa Malaysia. "Clients aren't going to ignore Bursa Malaysia's 27 years track record," he said.
"The way I see it, traders will hold on to us, for now. After all, they would prefer to do business with the devil they know than the devil they don't," he added.
Jokes aside, he explained that JADE's settlement system may not be favourable to client in terms of delivery point Dumai and Belawan.
"Traders could be concerned about the ports' infrastructure," Rosario said, adding that after the contract is made, the risk of taking delivery is passed on to the broker and client. In Bursa Malaysia, the clearing house bears the risks.
Bursa Malaysia's Omar said the exchange has executed several initiatives that have resulted in higher trade volume.
"Palm oil is the world's most traded vegetable oil. Malaysia has a history of being the FCPO trading hub with established tendering and delivery systems at our seaports. We can and we will optimise on our strength as a producing country," he said.
Three months ago, FCPO contracts on Bursa Malaysia Derivatives were extended to 24 months, from 12. The exchange and clearing fee for FCPO contracts was reduced to RM3 from RM4. Apart from the spot month, FCPO contracts are now allowed to move by as much as 15 per cent (above or below) from the previous day's close if additional conditions are met.
The stock exchange also raised the open-position limit for any single month to 5,000 contracts from 3,000 before, while the position limit for all months combined will be increased to 8,000 contracts from 5,000. The spot-month position limit is unchanged at 500 contracts.
"So far, the market is receptive to these changes that have made trading more convenient. It shows in the trading volume," Omar said.
From January to May of this year, 1.1 million FCPO contracts were traded, almost double the 561,888 FCPO contracts traded in the first five months of last year.
MFBA's Lai explained that the uptrend in crude palm oil prices since mid-2006 had attracted more traders, hence, more buying and selling. "Basically, traders are looking for liquidity where they can go in and come out fast," said Lai, who is also OSK Futures & Options Sdn Bhd director.
"Despite these changes posing more risks to futures brokers, they have been highly cooperative. We've benefited from this terrific relationship," Omar said.
Kenanga Deutsche Futures Sdn Bhd executive director Ng Chin Leng hopes to see spillover effects from FCPO trading in Singapore.
"Now that JADE is offering palm oil futures trading, we hope Malaysia can benefit from higher awareness and liquidity. This can attract more interest in FCPO trading on the Bursa Malaysia Derivatives market, too," he said.
"The demand for palm oil has been increasing globally. We need to see more new participations in Bursa Malaysia by palm oil users, domestic and foreign.
"We're concerned about competition from JADE, but with 27 years of proven track record, Bursa Malaysia has the strength to remain relevant. We have to be more innovative, efficient and step up publicity for our exchange," Ng said.
"There's a big pool of commodity funds in the US which may be interested in FCPO as a direct substitute for soyabean oil. For them to come into the Malaysian market, Bursa Malaysia needs to be recognised or approved by the US' CFTC (Commodity Futures Trading Commission)," he said.
Sales of exchange futures products in the US are regulated by the Commodity Exchange Act, and administered by the CFTC. The 30.10 rules limit sales activities by those who are not members of the US exchanges, but an exemption is granted if the exchange outside the US demonstrates that its regulatory system provides equal or "comparable" customer safeguards to those in the US. This means that if Bursa Malaysia were to secure exemptions from the CFTC, US-based commodity funds could come into Malaysia in droves.
"We welcome competition. We have to be efficient. It keeps us on our toes as we're in a globalised economy," Omar said.
He said rubber futures in the form of RSS1 and SMR20 used to be traded in Malaysia, but neither took off. "After a while, users did not see the need for futures. They were securing long-term supply of natural rubber via the physical market. Therefore, rubber futures were no longer traded here."
On the palm oil industry, Omar said that although the futures industry employs far fewer people than oil palm estates, the value- add to the economy is significant. Last year, 2.2 million FCPO contracts worth some RM85 billion were traded on the Bursa Malaysia Derivatives market.
Launched yesterday, JADE is a Singapore- based, electronic commodities derivatives market developed by Joint Asian Derivatives Pte Ltd - a joint venture between CBOT Holdings Inc and the Singapore Exchange. At the start of its maiden trading day, five contracts of US$750 (RM2,565) a tonne changed hands. At the close, JADE recorded 79 contracts.
JADE's crude palm oil futures contract, denominated in US dollars, settles with physical delivery at the Sumatran ports of Belawan and Dumai, Indonesia. The contracts trade from 10.30am to 6.00pm (Singapore time), followed by a special one-hour session from 9.30am to 10.30am (Chicago time). This was the first time palm oil futures contract was listed for trading during a US trading day.
Benny Lee, a private commodities trader in Malaysia, said the JADE platform provides access to CBOT which in turn facilitates arbitrage opportunities for traders.
"This means I can buy and sell JADE palm oil futures and CBOT soyabean oil futures concurrently to manage my edible oils price risk," he said.
Lee, who is based in Kuala Lumpur, also said that the Internet trading platform JADE provides is definitely more attractive than Bursa Malaysia's. "But I will only consider switching platforms if there is substantial liquidity in the market, easy funds transfer facilities, better commission rates, and if the liquidity in Bursa Malaysia starts to deteriorate," he said.
The Malaysian Futures Brokers Association (MFBA) sees JADE as a threat to Malaysian brokers' source of income.
"Of course JADE is a threat to our rice bowls. We need to step up efforts to expand this industry and be more market-driven," MFBA president Steven Lai Choon Lim said.
Currently, MFBA members can only buy and sell FCPO contracts for their clients on Bursa Malaysia. If their clients want to trade on JADE, they will have to engage Singapore brokers.
"Some clients may go to JADE at the expense of Bursa Malaysia. But this is also an opportunity for Malaysia to prove its worth to traders, that our market is THE market to make money," Lai said.
"For Malaysia to maintain its No.1 position in FCPO trading, we the brokers are working together with Bursa Malaysia to be more efficient in offering global traders more convenience," he added.
Many FCPO dealers asked themselves "Should I go or should I stay?" when they first heard that the Singapore stock exhange wanted to offer palm oil futures trading.
"If JADE really takes off in a big way, I'll be packing my stuff and heading to Singapore with my family. If it doesn't, we'll stay put. There can only be one tiger on the hill. It's either Bursa Malaysia or JADE," a dealer said.
Another dealer of 33 years experience agreed that palm oil futures trading on JADE was a threat to Malaysia's futures broking community.
"JADE gives a wake-up call to Bursa Malaysia that it needs to do more to convince international traders that they can make good money here," said Jeffary Ivan Rosario, who works for Sunny Futures Sdn Bhd.
Traders want futures brokers whom they can rely on. For now, Rosario is optimistic that global traders will continue to engage Malaysian brokers' services to trade on Bursa Malaysia. "Clients aren't going to ignore Bursa Malaysia's 27 years track record," he said.
"The way I see it, traders will hold on to us, for now. After all, they would prefer to do business with the devil they know than the devil they don't," he added.
Jokes aside, he explained that JADE's settlement system may not be favourable to client in terms of delivery point Dumai and Belawan.
"Traders could be concerned about the ports' infrastructure," Rosario said, adding that after the contract is made, the risk of taking delivery is passed on to the broker and client. In Bursa Malaysia, the clearing house bears the risks.
Bursa Malaysia's Omar said the exchange has executed several initiatives that have resulted in higher trade volume.
"Palm oil is the world's most traded vegetable oil. Malaysia has a history of being the FCPO trading hub with established tendering and delivery systems at our seaports. We can and we will optimise on our strength as a producing country," he said.
Three months ago, FCPO contracts on Bursa Malaysia Derivatives were extended to 24 months, from 12. The exchange and clearing fee for FCPO contracts was reduced to RM3 from RM4. Apart from the spot month, FCPO contracts are now allowed to move by as much as 15 per cent (above or below) from the previous day's close if additional conditions are met.
The stock exchange also raised the open-position limit for any single month to 5,000 contracts from 3,000 before, while the position limit for all months combined will be increased to 8,000 contracts from 5,000. The spot-month position limit is unchanged at 500 contracts.
"So far, the market is receptive to these changes that have made trading more convenient. It shows in the trading volume," Omar said.
From January to May of this year, 1.1 million FCPO contracts were traded, almost double the 561,888 FCPO contracts traded in the first five months of last year.
MFBA's Lai explained that the uptrend in crude palm oil prices since mid-2006 had attracted more traders, hence, more buying and selling. "Basically, traders are looking for liquidity where they can go in and come out fast," said Lai, who is also OSK Futures & Options Sdn Bhd director.
"Despite these changes posing more risks to futures brokers, they have been highly cooperative. We've benefited from this terrific relationship," Omar said.
Kenanga Deutsche Futures Sdn Bhd executive director Ng Chin Leng hopes to see spillover effects from FCPO trading in Singapore.
"Now that JADE is offering palm oil futures trading, we hope Malaysia can benefit from higher awareness and liquidity. This can attract more interest in FCPO trading on the Bursa Malaysia Derivatives market, too," he said.
"The demand for palm oil has been increasing globally. We need to see more new participations in Bursa Malaysia by palm oil users, domestic and foreign.
"We're concerned about competition from JADE, but with 27 years of proven track record, Bursa Malaysia has the strength to remain relevant. We have to be more innovative, efficient and step up publicity for our exchange," Ng said.
"There's a big pool of commodity funds in the US which may be interested in FCPO as a direct substitute for soyabean oil. For them to come into the Malaysian market, Bursa Malaysia needs to be recognised or approved by the US' CFTC (Commodity Futures Trading Commission)," he said.
Sales of exchange futures products in the US are regulated by the Commodity Exchange Act, and administered by the CFTC. The 30.10 rules limit sales activities by those who are not members of the US exchanges, but an exemption is granted if the exchange outside the US demonstrates that its regulatory system provides equal or "comparable" customer safeguards to those in the US. This means that if Bursa Malaysia were to secure exemptions from the CFTC, US-based commodity funds could come into Malaysia in droves.