The futures market in Malaysia has grown considerably in the past five years and it is something not many people are aware of. This growth is expected to continue, spurred by technology and new product offerings, says Azila Abdul Aziz, CEO and head of listed derivatives at Kenanga Deutsche Futures Sdn Bhd.

The trading volumes of Crude Palm Oil Futures (FCPO) and FBM KLCI Futures (FKLI) on Bursa Malaysia Derivatives have grown at a compound annual growth rate of about 15% over the past five years, according to Azila.

“Last year alone, there were 14 million contracts traded, which translates into RM858 billion in trade value. This compares with six million contracts traded in 2010, valued at RM114 billion,” she says. The FCPO and FKLI are the most traded futures products in the country.

Azila, who is president of Malaysian Futures Brokers Association, says open interest in the futures market shows that it is not a speculative market that can cause high volatility. “Of the 14 million futures contracts traded last year, 2.3 million were open interest. The ratio is six to one, showing that it is a healthy market. This is unlike some overseas exchanges, where the number of open interest is very small but the trading volume is huge,” she adds.

Open interest means the total number of open or outstanding futures contracts on the market. Market participants who establish a trading position (long or short position) and keep the position open over a given period of time are considered to have open interest.

Market participants with open interest are usually those who want to hedge their investments when the markets are volatile or companies that intend to lock in the future buying or selling prices of raw materials. In contrast, speculators make intraday trades to bet on the short-term price movements of futures contracts. They buy and sell contracts within a short period without establishing a trading position overnight or keeping an open interest. Thus, the higher the number of open interest, vis-à-vis the trading volume, the less speculative the market.

Azila is optimistic that the futures market will grow at the current pace over the next five years to reach a trading volume of about 22 million contracts per year. While this is a far cry from the top futures exchanges globally, there is still room for improvement at Bursa Malaysia Derivatives (BMD), she says.

Azila believes the volume will rise when market players, including fund houses and retail investors, are more aware of what the market can offer. “More foreign players are expected to come on board as the trading volume increases,” she says.

Malaysia is ranked 39th among the top 50 futures exchanges globally in terms of trading volume, based on a survey by the Futures Industry Association that was published last year. The association is one of the leading global trade organisations for futures, options and centrally cleared derivatives markets.

The top five futures exchanges are the CME Group, Intercontinental Exchange, Eurex (headquartered in Germany, dealing primarily with European-based derivatives), National Stock Exchange of India and BM&F Bovespa (São Paulo, Brazil).

“In aggregate, the top five exchanges account for 10 billion contracts traded per year. The average trading volume of the 50 exchanges is 500 million contracts. We are now only at 14 million, but we are getting there,” says Azila.

Growth drivers

Technology and new product offerings will be the next growth catalyst for Malaysia’s futures market.

Azila notes that with fintech firms adopting blockchain technology, investors and traders could easily open brokerage accounts with several brokerage firms using a single chip. This compares with the traditional way of filling up futures account opening forms, one after another. These documents are then manually submitted to related parties such as banks (where funds are deposited to settle the variation of margins) and be processed over time.

“Let’s say you are a retail customer and you want to open an account with Kenanga Deutsche Futures and CIMB Futures to trade on both platforms and use two solutions. What you do now is come to Kenanga, provide us all the necessary details and fill up all the documents to open an account with us. Then, you go to CIMB and do that all over again,” says Azila.

“But with the blockchain technology, all the relevant information involved in KYC (know your customer) procedures can now be obtained by all other brokerage firms via a private distributed ledger that is accessible to them. The banks will also refer to the private distributed ledger to verify your information. This is envisioned to boost efficiency in the market and reduce cost and time.”

Blockchain technology has sparked many discussions in global futures markets and it is believed that it will happen in Malaysia sooner or later, says Azila. “On a higher level, we envisage a major shift in the payment and settlement process, brought about by technological advancements.”

Azila, who has been in the futures industry for many years, is a big believer of technology changing the marketplace. She has witnessed how the local futures market has evolved in recent years because of new technology.

The futures trading system transformed from an open outcry system in the 1990s into an electronic trading platform in 2003. Then, market direct access was kick-started, where not only brokers and traders could execute futures trade orders using the automated platform but retail investors were also allowed to open a brokerage account and trade futures contracts on their own.

The average trade volume under the open outcry system was 700 to 1,000 contracts per day. The volume rose 10 times to 7,000 contracts when the trading system was automated. And when the direct market access began, the trading volume went up to 14,000 contracts and open interest reached more than 100,000.

“Technology always brings change. It is unavoidable as more millennials enter the market. They are savvier and tend to get things done virtually,” says Azila.

Regulators, which play a crucial role in protecting the rights and benefits of the public and helping the futures market grow, should understand this and find a balance between regulation and innovation, she says. “Everything is moving so fast today. Fintech advancement must be balanced with the need to comply with regulatory requirements. And the regulators have to find a solution for technology changes and strike a balance between the two.”

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