17/4/06 (The Star)  - CRUDE palm oil (CPO) brokers and dealers are crying foul over Bursa Malaysia Derivatives Bhd's move to sell its CPO futures daily settlement prices, particularly to Singapore-based Joint Asian Derivatives Exchange (JADE).

JADE is a new commodities derivative market slated for operations by the end of the third quarter. 

Joint Asian Derivatives Pte Ltd (JAD), which is a joint-venture company between US-based Chicago Board of Trade (CBOT) and Singapore Exchange Ltd, set up JADE to initially trade in an agricultural suite of Asian commodities derivatives and later other products, including energy and metals.

A cross section of the brokerage industry contacted by StarBiz has expressed dismay and fear over Bursa's action that could lead Malaysia's CPO futures market, currently the largest and only successful palm oil futures exchange in the world, to its own destruction.

The brokerage industry has been the driving force supporting the local CPO futures contract, which was first traded on the Kuala Lumpur Commodity Exchange (KLCE) in October 1980.

They said the achievements of Malaysia's CPO futures would be a thing of the past if Bursa sold its CPO futures daily settlement prices to JADE, which intended to trade CPO futures on a cash settlement basis.

Daily settlement prices are established by the clearing-house of an exchange for two purposes, namely intra-day margin calls and cash settlement of futures contract upon expiration, if it is a cash settlement contract. 

Without the usage of daily settlement prices from a viable futures exchange that trades the same product, any futures exchange that intends to introduce a parallel non-deliverable futures contract will be doomed to fail.

CIMB Futures Sdn Bhd broker G.M. Teoh said JADE's CPO futures were a parallel contract to that of Bursa and would be traded in the same time zone as the local CPO futures contract.

 
Malaysia's CPO futures market is cuurrently the largest and only successful palm oil futures exchange in the world.
He said: “Historically, it has been proven that if two similar futures contracts trade in the same time zone, one will certainly fail. If JADE succeeds, Kuala Lumpur may have to pay the price.”

Teoh said Malaysia's two rubber futures contracts – RSS One and SMR futures – launched on the KLCE in the late 1980s and early 1990s failed “miserably” because the futures contracts could not compete with the already succeeding Rubber Trade of Singapore that offered the same contracts in the same time zone. 

The local cocoa futures introduced in 1988 also failed to see daylight as the market could not attract commercial players who were comfortable with the very fluid London cocoa futures, he added.

The same fate goes to KLCE tin futures launched in the late 1980s. It could not survive as large liquidity on the London Metal Exchange made Malaysia's market unattractive. 

Other commodities futures like refined, bleached and deodorised (RBD) olein, palm kernel oil futures and KLCI options all met with premature deaths.

“It is vital that Bursa Malaysia Derivatives selfishly protect, not only its own interest, but that of national interest and drop the idea of helping a competitor destroy our cherished exchange,” he said.

It is understood that Bursa would make 15 sen for every CPO futures contract traded on JADE. 

“For a small short-term profit of 15 sen per contract on JADE, Malaysia would soon lose its position as the world’s largest pricing and futures market for CPO,” Teoh said. 

He stressed that JADE’s CPO futures contract was initially designed to draw liquidity and would ultimately replace Bursa Malaysia Derivatives as the leading centre for palm oil pricing. 

Bursa must not underestimate JADE's game plan as the exchange had features that provided it with a competitive edge, Teoh said.

“I believe JADE will make its CPO futures contract attractive to international commodity hedgers and traders currently trading in Kuala Lumpur,” he said. 

Firstly, JADE will double its contract size to 50 tonnes compared with Bursa's contract of 25 tonnes. 

“By charging almost the same commission, clearing fee and exchange fee as Kuala Lumpur, JADE will be in a very strong competitive position and make local CPO futures look totally unattractive,” Teoh said.

Instead of trading in ringgit in Kuala Lumpur, Teoh said JADE would trade CPO futures in US dollars. 

“This would help international traders avoid some of the associated currency exchange rate risks.”

Another disgruntled institutional broker who spent 18 years of his career in CPO futures trading said JADE's location itself was a major threat to the local CPO futures.

He said Singapore was well-positioned to be a major CPO supply centre and knowledgeable about needs of large hedgers and commodity funds. “They are also financially strong to finance large hedge and trade accounts at a very low cost.”

The broker said: “Malaysia's CPO futures market is a small exchange and not fully matured with 5,000 to 8,000 lots traded per day. This is a far cry compared with the CBOT soybean oil market, which trades about 50,000 lots per day on average.”

He, however, believes that local CPO futures is set for maturity once its trading volume reaches 10,000 to 20,000 contracts per day.

“This volume is achievable in five years, especially with increasing demand from China and India, as well as the biodiesel rage in Europe and Asia,” he added.

The broker said Bursa Malaysia was taking the easy way out to cash in on its CPO price settlement licence, instead of developing and taking steps to attract more big hedging funds into the local futures market in a big way.

CPO is a strong global product, he said, adding that: “It is a mystery that Bursa Malaysia failed to see the importance of having CBOT as a serious joint-venture partner to set up a stronger CPO futures with a more global presence. 

Why is it that SGX instead has the foresight to tap these synergistic capabilities?”