Chapter 02

MALAYSIAN DERIVATIVE MARKETS AND TRADING
CHAPTER 2
Chapter Objectives
• This Chapter intends to discuss the trading of Derivatives in Malaysia
• On completion of this chapter you should have an overview of the Malaysian

exchange and trading mechanism.
• You should also have good knowledge of Malaysian derivative instruments and
their trading methods.
• You should have an understanding of regulatory framework for derivatives and

exchange in Malaysia.
CHAPTER 2: MALAYSIAN DERIVATIVE MARKETS AND TRADING Copyright © 2017 by McGraw-Hill Education (Malaysia) Sdn. Bhd.
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Trading Methods
• There are two trading methods for derivative exchanges.
• Open Outcry Method

• It has been the mainstay of derivative exchanges till recently, but is being challenged by
electronic mechanisms.
• In an open-outcry system, trading is done in a trading hall by means of shouting out orders
and by the use of hand signals.
• Standard hand signals use palm and fingers are.

• A trader wanting to sell would signal his intention by facing his palm outwards and the number of extended
fingers signaling numerical prices. Numbers, one through five, are represented by vertically extended fingers,
whereas the numbers six to nine with the fingers of the same hand extended horizontally. The numerals for
number of contracts and prices are indicated by extended fingers.
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Trading Methods
• Computerized/Screen Based Trading
• Trading is done by means of a distributed computer system.
• Buy and sell orders are entered directly into dedicated terminals at futures broker offices..
• The futures brokers are connected to a mainframe computer which acts as the matchmaker.
• Matchmaking is done via highest bid and lowest offer matching.
• In Malaysia earlier exchange COMMEX used open cry method but the current BMDB employs
computerized trading.
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Order Routing/Trade Execution
• Outcry method
• Client calls the broker and places his order.
• The broker time stamps the order form and passes to trading floor.
• On arrival at company booth, order form is time stamped and passed to the respective
trading pit.
• The company’s floor traders signals the order.
• When there is a match for the order, trade is executed and trade form is sent for clearing.
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Order Routing/Trade Execution
• Computerized Trading
• With computerized trading, the trading can take place at any futures brokers office anywhere.
• Customer Orders when placed with the future broker are time stamped and keyed in the
computer.
• Although in computerized trading, execution takes place almost instantaneously once a match
is found, time stamping is done to prevent broker front loading.
• Front Loading is when a broker takes advantage of customer order to trade for their own
account.
• Example: Suppose a broker receives a big buy order from a customer, the broker knows that in
carrying out this large buy order, prices are likely to be pushed upwards.
• The broker stands to gain if he front loads, that is, enters his own buy position before executing the
customer’s order
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Comparison of Trading Methods
8
History of Malaysian Derivatives & Exchanges
• Kuala Lumpur Commodity Exchange (KLCE) was formed in 1980.
• Timeline of Derivative Products and Exchanges in Malaysia

• 1980 - Crude Palm Oil Futures Contract
• 1983 - Rubber futures contract (RSS1, Rubber Futures);
• 1986 - Rubber futures contract (SMR 20, Rubber Futures);
• 1987 - Tin Futures Contract;
• 1988 - Cocoa Futures Contract;
• 1990 - Palm Oil Futures; and
• 1992 - Crude Palm Kernel Futures.
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• KLCE formed a wholly owned subsidiary Malaysian Monetary Exchange (MME) in
1996
• 1996 - MME introduced 3 month KLIBOR futures contract.
• In 1998 on the backing of Ministry of Finance, KLCE and MME merged to form
COMMEX.
• In 1993 consortium of private companies formed Kuala Lumpur Options and

Financial Futures Exchange (KLOFFE)
• 1995 – Introduced first Stock Index Futures contract based on KLCI
• 2000 – Introduced KLCI Option Contracts
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• Kuala Lumpur Stock Exchange (KLSE) bough KLOFFE in 1999 and operated as
independent subsidiary.
• In December 2000 KLOFFE and COMMEX were merged to form Malaysian

Derivatives Exchange (MDEX), a wholly owned subsidiary of KLSE.
• With demutualizing of KLSE, it was renamed Bursa Malaysia, and MDEX was
renamed as Bursa Malaysia Derivatives Berhad (BMDB)
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Malaysian Derivative Exchange
• BMDB up-till 2009 was a wholly owned subsidiary of Bursa Malaysia.
• September 2009 - Chicago Mercantile Exchange (CME) acquired 25% ownership in

BMDB.
• The tie-up with CME introduced BMDB products to move to GLOBEX – the global
electronic trading platform of CME.
• BMDB currently trades 12 derivative contracts.

• 3 equity derivatives
• 3 Interest rate derivatives
• 6 commodity derivatives
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Derivative Contracts on BMDB
• Equity Derivatives
• FTSE Bursa Malaysia KLCI Futures (FKLI)
• FTSE Bursa Malaysia KLCI Options (OKLI)
• Single Stock Futures (SSFs)
• Interest Rate Derivatives

• 3 month KLIBOR Futures (FKB3)
• 3 year MGS Futures (FMG3)
• 5 year MGS Futures (FMG5)
• Commodity Derivatives
• Crude Palm Oil Futures (FCPO) • USD, RBD Palm Oil Futures (FPOL)
• USD Crude Palm Oil Futures (FUPO) • Options on Crude Palm Oil Futures (OCPO)
• Crude Palm Kernel Oil Futures (FPKO) • Gold Futures (FGLD)
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Clearing House
• A clearinghouse plays two key roles:
• Record keeping
• When a customer does a trade the broker has to clear the trade with clearinghouse via a
clearing member.
• The clearing house records and registers every single trade.
• This allows it to carry out second function.
• Risk management: It has to manage risks at two levels:

• Firstly it acts as intermediary to all parties to mitigate counterparty risk. This mitigation of
counterparty risk is a key facility in enhancing trade.
• Secondly by implementing margin requirements to ensure no party defaults
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Bursa Malaysia Derivatives Clearing Bhd
• It was established in 1995 as Malaysia Derivatives Clearing Berhad (MDCH) to
manage clearing for financial derivatives only.
• MDCH was restructured in 1999 to handle clearing for both financial and
commodity derivatives.
• Post demutualization of Bursa Malaysia it was renamed Bursa Malaysia Derivatives

Clearing BHD (BMDCB).
• BMDCB is the sole clearinghouse for both financial and commodity derivative
transactions.
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Regulation of Derivatives in Malaysia
• Till 1995 only commodity derivatives were in existence.
• Regulatory body was Commodities Trading Commission, an arm of Ministry of Primary
Industries.
• Governed under the Commodities Trading Act 1980/85.
• With the need for financial derivatives became evident, in 1993 two major
developments took place.
• Securities Commission (SC) was established under the Securities Commission under the
Securities Commission Act.
• Futures Industry Act (FIA) was enacted by the government. Although FIA was under
jurisdiction of Ministry of Finance, enforcement and monitoring was the purview of SC.
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Regulation of Derivatives in Malaysia
• In May 2007, Malaysian Parliament consolidated the three relevant acts under
Capital Market and Services Act (CMSA).
• The three acts consolidated under CMSA were,
• Securities Industry Act 1983
• Futures Industry Act 1993
• Part of the Securities Commission Act 1993
• The regulation of derivatives now come under this new act, the CMSA, 2007.
• Under FIA and then CMSA, an exchange is a “self regulatory organization”

responsible for its compliance with CSMA.
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Regulatory Structure
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Trading Performance of BMDB
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• Over the 14 years, total volume has gone from 0.8 million contracts to 12.5 million
contracts, an increase of more than 15 fold or an average annual growth rate of
21.7%
• Over the years 2007 to 2009, growth had plateaued, which coincides with the
subprime crisis of the US.
• From 2010 onwards, volume has increased from about 6 million contracts to
double that in 2014
• The very strong growth from 2010, probably owes to the entry of CME in late 2009 which
resulted in the mutual offset and the availability of the GLOBEX trading platform for BMDB
products.
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• CPO based derivatives are predominant, averaging across years some 60-80% of
trading volume.
• The most traded single product is CPO Futures.
• Equity derivatives, the equity index futures were a distant second.
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• Relative to regional markets, BMDB lags although Malaysia was one of the earlier
markets to introduce derivative contracts, ranking 39th in the world.
• Several Asian exchanges like India, South Korea, China, Taiwan and even Thailand
have outperformed BMDB.
• The largest derivative exchange in Asia is India’s National Stock Exchange. Globally,
it is the world’s 4th most active derivatives exchange.
• Chicago’s CME is the world’s largest derivatives exchange by volume.
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2014 Rank Exchange 2013 Volume 2014 Volume % Change
1 CME Group 3,161,476,638 3,442,766,942 8.90%
2 Intercontinental Exchange 2,558,489,589 2,276,171,019 -11.00%
3 Eurex 2,190,727,275 2,097,974,756 -4.20%
4 National Stock Exchange of India 2,127,151,585 1,880,362,513 -11.60%
5 BM & FBovespa 1,603,706,918 1,417,925,815 -11.60%
6 Moscow Exchange 1,134,477,258 1,413,222,196 24.60%
7 CBOE Holdings 1,187,642,669 1,325,391,523 11.60%
8 Nasdaq OMX 1,142,955,206 1,127,130,071 -1.40%
9 Shanghai Futures Exchange 642,473,980 842,294,223 31.10%
10 Dalian Commodity Exchange 700,500,777 769,637,041 9.90%
11 BSE 254,845,929 725,841,680 184.80%
12 Korea Exchange 820,664,621 677,789,082 -17.40%
13 Zhengzhou Commodity Exchange 525,299,023 676,343,283 28.80%
14 Hong Kong Exchanges & Clearing 301,128,507 319,577,388 6.10%
15 Japan Exchange 366,234,062 309,732,384 -15.40%
18 China Financial Futures Exchange 193,549,311 217,581,145 12.40%
19 Taiwan Futures Exchange 153,225,238 202,227,653 32.00%
26 Singapore Exchange 112,077,267 120,398,368 7.40%
31 London Stock Exchange Group 50,384,211 50,492,691 0.20%
32 Tokyo Financial Exchange 65,527,790 40,900,423 -37.60%
33 Thailand Futures Exchange 16,164,126 36,021,150 122.80%
39 Malaysia Derivatives Exchange 10,621,629 12,313,490 15.90%
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MALAYSIAN DERIVATIVE MARKETS AND TRADING

• On completion of this chapter you should have an overview of the Malaysian

• You should have an understanding of regulatory framework for derivatives and

• Open Outcry Method

• Standard hand signals use palm and fingers are.

• Matchmaking is done via highest bid and lowest offer matching.

• The company’s floor traders signals the order.

• Timeline of Derivative Products and Exchanges in Malaysia

• In 1993 consortium of private companies formed Kuala Lumpur Options and

• 2000 – Introduced KLCI Option Contracts

• In December 2000 KLOFFE and COMMEX were merged to form Malaysian

• September 2009 - Chicago Mercantile Exchange (CME) acquired 25% ownership in

• BMDB currently trades 12 derivative contracts.

• Interest Rate Derivatives

• The clearing house records and registers every single trade.

• This allows it to carry out second function.

• Risk management: It has to manage risks at two levels:

• Secondly by implementing margin requirements to ensure no party defaults

• Post demutualization of Bursa Malaysia it was renamed Bursa Malaysia Derivatives

• Governed under the Commodities Trading Act 1980/85.

• Under FIA and then CMSA, an exchange is a “self regulatory organization”

• Equity derivatives, the equity index futures were a distant second.

• Chicago’s CME is the world’s largest derivatives exchange by volume.

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