Thursday, March 12, 2009
Bursa / FUPO & Recommendations
Bursa Malaysia Bhd will step up efforts on market-making, having seen thin trade of the US dollar-denominated crude palm oil futures, known as FUPO, since its launch six months ago. "We will put right the mistakes that led to the FUPO not taking off," Bursa Malaysia chief operating officer Omar Merican said yesterday.He admitted that Bursa Malaysia had underestimated the scale of the global financial crisis when FUPO was launched on September 5 last year. It only saw five lots traded on its first trading day. "It was not such a smart move in the timing of the launch and we had underestimated the scale of meltdown that saw many commodity funds shrinking. "This is our first non-ringgit instrument and we did not do well in marketing it to the global investing world. We will have to work harder on market-making," Omar said. There are currently 18 licensed futures brokerage facilitating palm oil trading on the Bursa Malaysia Derivatives market.Potential traders of FUPO are biofuel producers and users, shipping and freight companies, food manufacturers and restaurant chains, and commercial banks.
Some Recommendations (National Service Duty, No-Datukship Necessary)
a) Allow customers to transact large-sized orders on designated futures listed on the Exchange without price and execution uncertainties or delays. Normally concluded over-the-counter, to be dealt and cleared by the Exchange. For example if Wilmar want to go short on 500 contracts for June delivery, the company can mandate a futures broker to look for the other side. Owing to the size, sometimes large trades may be hindered by the low liquidity in the actual futures market, or that prices may move substantially. By clearing them through the Exchange, it gives the contract validity and transactability, without moving prices. Large trades would be reported as normal but will not have a bearing on actual futures prices. There are plenty of CPO companies wanting to do sizable hedging or forward selling, and many do establish such contracts with counterparties. This will legitimise all contracts instantly with minimal costs.
b) Incentives for more to be come futures brokers, e.g. absolute tax free on profits for market makers and independent traders for 3 years. Losses can be tax deductible for up to 6 years.
c) In exchange all the current 18 futures brokers will need to do a minimum of 200 trades each a month on FUPO in order for their license not to be revoked.
d) Get Bank Negara to allow local individuals, foreign nationals and all companies to be able to open USD in Malaysia without ANY hassle. No reporting on money flowing in and out in local or foreign currency, unless if its more than US$1m, even then it should be minimal paperwork. The restrictive money moving conditions will ensure FUPO never takes off, this is your biggest obstacle.
e) Encourage independent traders to trade directly by giving them special licenses. Tax free, even give them rooms or an area to conduct their direct trading. Halve their trading commissions on all FUPO trades. Each must put up RM200,000 deposit and can have a geared exposure of 10x. Each person must trade at least 50 contracts a month.
f) FUPO already has the structure and acceptability to trade almost 24 hours around the globe. The interest will not be generated at Chicago Mercantile Exchange. It has to be here. You can have the best freeways but if your toll system is not working right, no cars will be on the road.
If all of these fail, then suggest to Chicage Merc that we'd all better off to trade CPO futures in MYR. Its not as debilitating as it looks on paper to get it to be a globally popular futures contract.
g) Finally, the best solution is to stick with the current MYR contract for CPO. It has the liquidity already. JUST MAKE IT SETTABLE IN BOTH USD OR MYR. It is not as difficult as it sounds. You just have to put the day's exchange rate when the contract is closed out. If I went long on March 2 for an April ending contract at RM2,000... and I closed out at RM2,150. On the date of settlement, the contract should print out that I can received the profits in MYR or USD. Its just logistics, its not that difficult. That way you take the USD/MYR argument out of the equation. The Exchange just needs to pay or accept funds in one additional currency... woooo... that can be so dangerous and difficult right, how to manage??!!
p/s photos: Ady Ann Yixuan