Global money needs to be hedged against the base currency and when it is difficult to do that, BMD’s contract volumes will drop.

Trading activity on Bursa Malaysia Derivatives Bhd (BMD) will mode-rate this year as risk factors prompt foreign traders to move from ringgit-denominated assets to safe-haven assets.

Broker Kenanga Futures Sdn Bhd anticipates total contract traded in 2018 to amount to about 13.6 million to 13.7 million contracts, a decline of between 2% and 3% from the 14 million contracts traded last year as a result.

Its CEO and head of listed derivatives Azila Abdul Aziz said the protracted US-China trade tensions, rising US interest rates coupled with domestic uncertainty following the change in government in May and the lack of avenues for foreign traders to hedge their ringgit exposures will come at the expense of trading on the BMD.

“These are the bigger factors that influence fund flows to and from Malaysia,” she told The Malaysian Reserve.

“The volatility will influence and impact trading. Global money needs to be hedged against the base currency, and when it is difficult to do that, we expect contract volumes to drop on the BMD,” she said, adding that the foreign traders account for almost half the trading volumes on the exchange and provide the growth factor as local money on the exchange is still “old money”.

Bank Negara Malaysia has banned ringgit trading on non-deliverable forward (NDF) market, which has restricted foreign traders’ ability to hedge.

Azila hopes the decision will be reviewed and/or the BMD launches a currency contract that will help traders hedge their exposure.

Offshore trading of the ringgit is currently restricted under Malaysia’s foreign-exchange administration (FEA) as the local note is a non-internationalised currency. This includes NDF and futures trading.

“NDF is a place where investors would go to hedge their currency risk, but its restriction since is among the hindrances facing Malaysia’s derivatives market,” Azila said, adding that Kenanga Futures hopes to see liberalisation of the FEA to attract foreign investors.

The possibility of introducing a capital gains tax in the upcoming Budget 2019 would hinder the derivatives market’s ability to be competitive with other developed markets, she added.

In the first half of 2018, a total of 6.58 million contracts were traded on BMD — down 8.4% year-on-year from the 7.18 million contracts traded over the same period a year ago.

The crude palm oil futures (FCPO) contract continues to account for the bulk of the volume traded at 5.24 million contracts, or 80% of the total contracts traded, followed by FTSE Bursa Malaysia KLCI Futures contract which saw 1.28 million contracts traded.

The exchange has launched the Mini FTSE Bursa Malaysia Mid 70 Index Futures (FM70) contract which recorded 37,461 contracts traded from August up to Oct 16 this year.

Azila said new products such as the FM70 will have trading volumes, but the exchange needs to revisit and improve existing contracts to attract traders.

The move to provide traceability for the FCPO contract will continue to spur trading in the contract, she said.

For the month of September, foreign retail and institutional traders made up 44% of the total 992,906 contracts traded, while domestic traders constituted 42% of trade. Locals made up the remainder 14%.

Azila said domestic investors from the retail, institutional and corporate side need to “step up” their participation in derivatives to help grow the market.

“Engaging institutional investors will be the toughest to do as education is needed, while retail cannot be done over a short period of time and instead has to be consistent in terms of effort,” she said.

“For the corporate side, we see a lot of plantation smallholders not hedging, so this is a base we can look at,” she explained.

Going forward, Azila said she wants to see more liberalisation in the market to encourage people to be curious and understanding of derivatives and futures trading.

Internally, Kenanga Futures is striving to build a smart derivatives trading community via its platform to facilitate product and regulatory proficiency among individuals, she said.

This will be done via increasing its digital engagement and the broker enables trading on CME market contracts via its KDF TradeActive™ platform.