Azila: It is essential to know the dynamics of the product you trade and follow the markets closely.

DERIVATIVES, unlike equities, is still considered a niche segment among the investing community today.

But to the savvy investor who prefers not to place all the eggs in one basket, derivatives can be a good investment option that provide rewarding returns – with the right approach.

Like any form of investment, Kenanga Futures Sdn Bhd CEO and head of listed derivatives Azila Abdul Aziz says it is imperative for new investors to better understand how derivatives trading works before taking the plunge.

“Investors should equip themselves with sound product and market knowledge as well as develop and back-test a stop-loss protection strategy.

“It is essential to know the dynamics of the product you trade and follow the markets closely.

“Last but not least, know who are the registered brokers or agents that are authorised by Bursa Malaysia Derivatives Bhd (BMD) and the Securities Commission (SC) to operate as a futures broker,” she says.

Essentially, derivatives are products such as futures, options, and warrants, with values derived from underlying assets.

These underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.

Azila notes that there are interesting developments in the derivatives market in Malaysia recently, with the introduction of new products such as the USD RBD Palm Olein Futures (FPOL) and Mini FBM Mid 70 Index Futures, which gives market participants more selections to trade on, as well as appeal to new types of client base.

“In addition to that, BMD is embracing the global push for more environmental and socially responsible products, seeing that the benchmark FCPO contract in February this year has been revamped to include traceability aspects in the contract specifications.

“Clients can now also exchange their positions in gold futures for physical gold via the Exchange For Related Positions (EFRP) mechanism,” she says.

According to FIA, the total number of futures and options traded worldwide for the first half of 2018 (H1’18) amounted to 14.9 billion contracts, marking an increase of 19.7% year-on-year (y-o-y) as compared to the first half last year.

Chicago Mercantile Exchange (CME) Group remains to be the top derivatives exchange, experiencing a 20.7% y-o-y growth in the first half of 2018. Meanwhile, BMD is ranked 38th out of the 54 derivatives exchanges, with a market volume of 6.6 million in H1’18, a decline of 8.4% y-o-y. The global equity index futures and options trading is up 30% amidst the increase in volatility arising from the ongoing US-China trade war.

Interest rate futures and options rose 16.3% to 2.4 billion contracts, continuing the growth trend that emerged in 2017.

There was also a 13.7% increase in the overall level of open interest in interest rate futures and options. This signifies that traders or investors are increasing the size of their positions. In a move to increase the awareness of listed derivatives among Malaysians, Kenanga Futures has since rolled out the “Back 2 The Futures” campaign. Through the KDF TradeActiveᵀᴹ platform, clients are able to trade both US and Malaysian-listed derivatives on the Chicago Mercantile Exchange (CME) Group and BMD.

“While we want to capture a new audience and grow our customer base, this campaign is also part of our efforts to engage, educate, and experience with our new and existing clients.

“Furthermore, we would also like to ensure that clients place their funds with a licensed futures broker and are trading on regulated exchanges,” says Azila. This is the second nationwide campaign run by Kenanga Futures, where clients are able to trade via both desktop and mobile apps and be rewarded.

Encouraging response
The company has received encouraging response since the commencement of the campaign on August 15, especially garnering great interest from those who are new to trading listed derivatives.

However, there is still a need for domestic financial institutions to encourage greater participation in the derivatives market, particularly equity indices.

Azila opines that BMD and the SC should encourage buy-side clients like fund managers to look into using futures to hedge equity portfolios, in view of the uncertainty surrounding domestic and external market conditions.

“This will also lift the level of derivatives knowledge in the entire ecosystem as all parties involved in the process of issuing and managing a fund will also gain greater understanding on dealing with listed derivatives,” she says.

It is noteworthy that the SC has implemented the Marketing Representative framework which allows trading platforms to engage qualified individuals who are not licensed, but trained and registered with the SC to market and solicit its services on behalf of the principal.

This is also part of the regulator’s efforts to widen the network within the capital markets space.

“Kenanga Futures hopes to see greater efforts to promote the less liquid products on BMD such as the Gold Futures, Single Stock Futures, Kuala Lumpur Interbank Offered Rate (KLIBOR), and Malaysian Government Securities (MGS) futures,” adds Azila.

Going forward, Azila believes that there is potential for further growth for the domestic listed derivatives market, especially product selection. “For example, there is no recognised Malaysian ringgit currency futures and option available for traders or institutions to hedge at the moment.

“During tumultuous periods, currency futures has proven to be a desirable avenue for investors to hedge their currency exposure.

“The volume of currency futures and options globally has seen an increase of 28% y-o-y in H1’18,” she says.

At present, Bank Negara does not approve the introduction of Ringgit futures at the Singapore Exchange (SGX) and the Intercontinental Exchange (ICE) Singapore as it is inconsistent with Malaysia’s Foreign Exchange Administration (FEA) policy and rules.

“Hence, this represents an attractive opportunity for Malaysia to introduce a Ringgit Futures or options domestically which can be designed to be in line with the Bank Negara’s FEA policies. We would like to see further liberalisation in the FEA to support this initiative,” says Azila.