Since he became CEO of Bursa Malaysia Derivatives Berhad in December 2009, Chong Kim Seng has overseen a lot of changes at the exchange. The crude palm oil futures contract has grown as a global benchmark, a new clearing and settlement system was launched and their partnership with CME Group has expanded. We spoke with Chong recently to ask him about the reasons behind each of these developments, and what he sees in the future for one of Asia’s fastest growing financial markets.
Bursa Malaysia Derivatives has seen a number of volume records in the last few months. What factors would you say have contributed most to the growth?
The record derivatives volumes over the past few months have primarily been due to the volatility in global financial markets from the European sovereign debt crisis. However, there have also been new entrants to the Malaysian derivatives market, particularly from Asia and Europe. These new traders are mainly foreign institutions, including hedge funds, commodity funds and high frequency traders. BMD’s very liquid crude palm oil futures contract or FCPO, which is the global pricing benchmark for crude palm oil, is the star attraction for global traders to participate in our market. These factors have combined to help us achieve a 32-year daily volume high of more than 77,000 total contracts traded and more than 63,000 contracts for FCPO on 16 May this year.
Our growth has been possible through the Globex connectivity from our collaboration and cooperation with CME Group.
Your Crude Palm Oil contract is acknowledged as the global benchmark. What is the importance of CPO to Malaysia’s economy, and outside your borders?
The palm oil industry is the fourth largest component of Malaysia’s economy and accounts for RM65 billion of earnings in 2011 or a little more than 8 percent of the country’s GDP. As most of the palm oil is exported, the industry is an important foreign exchange earner for Malaysia. The palm oil industry is also a major source of employment for the people of the country. As the planted area grew from 1.2 million hectares in 1980 to 4.8 million hectares in 2010, a four-fold increase, the number of people dependent upon the palm oil industry was estimated to be about three million in 2011.
More widely, palm oil is the world’s largest exported edible oil, accounting for about 40 percent of all edible oil exports, and is expected to remain so as the yield per ton per hectare per year for palm oil outstrips that of other edible oils. Palm oil yields about 3.6 ton per hectare per year as compared to 0.3 or 0.4 ton/ha/year for soyoil, the next largest exported edible oil.
Palm oil is widely acknowledged as an important food source to feed the growing world population. The advent of bio-diesel provides another important economic use for palm oil.
BMD’s product slate is not limited to commodities. What other derivatives products do you see as having potential for future growth?
With the deepening and growing sophistication of the Malaysian capital market, financial derivatives products will have the potential for future growth. For example, our stock index futures and options contracts have a distinctly high room for growth given Malaysia’s relatively well developed economy.
Government bond futures and options contracts are also potential areas of high growth for the Exchange as debt markets develop in earnest to become viable alternative capital formation instruments. Government bond futures will provide the yield curve as a benchmark for the markets. Individual stock options and exchange-traded foreign exchange risk management instruments are further areas for future growth.
Our aim is to offer products under broad classes of commodity derivatives, equity index derivatives, debt/interest rates derivatives and currency derivatives.
In February this year, BMD introduced a new clearing and settlement system. What was behind that, and how is the new system performing?
The previous clearing and settlement system had been in use since 1999. Even though the system was stable, with very few issues since its inception, the system could no longer meet current business and operational expectations in view of the advancements in technology as well as clearing and settlement features. The introduction of the new system is in line with the exchange’s strategy to improve the derivatives market ecosystem with global electronic trading distribution and a more straight-through processing functionality and capability.
The benefits of the new clearing system, amongst others, include a higher capacity for the clearing and settlement of high volume trades and higher automation due to its web-based technology. It also offers advanced functionalities such as online real-time electronic request and approval processes and electronic delivery of documents for physically delivered products. It also features multi-market and multi-currency settlements. For clearing members, this means greater efficiency through increased real-time availability of clearing information and a significant reduction in paperwork. The system was implemented smoothly and has performed well.
A lot has changed since you began as CEO of BMD in 2009. What is your vision for BMD going forward?
We have completed the infrastructure development in terms of migrating BMD products onto the Globex trading platform and implemented the new clearing and settlement system in the last two years. My vision for BMD moving forward is to further internationalize the business, increase the participation of domestic institutions and to encourage more direct participation from retail investors and bringing new futures commission merchants (FCMs) into our market.
You’ve had an ongoing partnership with CME Group, and you mentioned Globex earlier. How has that partnership worked for both exchanges? Do you think partnerships like this are the future of globalized trading?
Three aspects of the partnership with CME have contributed to our success. First, the technology partnership: With the migration of BMD products onto Globex, the global connectivity delivered through CME Group’s trading hubs has provided accessibility, visibility, global distribution channels and internationalization of our derivatives market.
Second is equity shareholding: CME Group’s acquisition of a 25 percent stake in BMD has enabled BMD to undertake joint marketing efforts with CME Group. This includes workshops and seminars jointly conducted by BMD and CME Group for market awareness and education purposes.
And third is licensing of FCPO prices. The licensing of FCPO settlement prices to CME Group provided further global branding for Malaysian palm oil as the price benchmark for the crude palm oil market.
Global exchange partnerships will continue to shape the future landscape, bringing players together in a borderless market. The success of any partnership hinges on its relationship. It is the spirit of trust that binds teams together and provides forward-looking vision, and this is evident in our Bursa-CME partnership.
In the recent market environment, commodities have received increased attention, both as strategically-important products for growing economies, but also as a target for the ‘flight to quality’ as financial assets proved risky. How should derivatives exchanges and risk managers view this development?
The financialization of the commodities market in Malaysia has seen tremendous growth in the past few years with the presence of new categories of participants. High-frequency traders are an example. Investing in commodities through the futures market has formed part of investors’ strategy in their portfolio allocation.
This development has made price discovery more efficient and transparent, contributing to the depth of the market. As an exchange operator, the current market sentiment and demand for quality products are opportunities that we want to capitalize on. Our strategy for this year is to focus on introducing more commodities-based derivatives contracts such as the options on crude palm oil futures; and bringing more foreign participants to our market. As we move towards greater internationalization, we will leverage these opportunities to diversify the domestic concentration risk and to expand into international markets.