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

4 comments:

Richard Cranium said...

"JUST MAKE IT SETTLEABLE IN BOTH USD OR MYR", you say?

Not when the brokers we have in Malaysia are still in the dark ages with their archaic back office staff and systems.

And not when the government still has ambivalent feelings about how the convertibility (tradability) of MYR.

It is perhaps telling that before they launched the FUPO contract, they had to pester some traders to do some eye-wash trades so that the bigwig won't be embarrassed to be opening a dead market. :)

rodium_plated_pipe said...

Dali, for your "unreserved" inputs, you still deserve a Datukship. That's my take on this. Maybe also the CEO of the exchange ? come to think of it Why not ? but then again it's like " Pungguk rindukan Bulan" not that you are expecting one.

Jasonred79 said...

Er... If they want FUPO to take off, it's simple... GET RID OF MYR CPO futures.

In fact, the idea of FUPO is stupid.

For Oil, Gold, Soy... you have people processing the stuff all over the world.

For CPO, the only refineries are in Malaysia and Indonesia, IIRC? Or maybe like 90% of all the refineries in existance? I don't remember.

In any case, basically, CPO is a very local product, why would an American be interested in trading CPO? Purely for speculative purposes I guess. They wouldn't want to actually have to deliver or take delivery for 25 tons of CPO.

Malaysia has one of the most illiquid currency markets in the world... and they're trying to be "innovative" in stupid ways.

Do you see OIL being traded in Dinars, in Euros? It's all in USD. You don't have settlement for commodities in 2 different currencies... certainly not by the same exchange.

Bloody stupid to have CPO in MYR and CPO in USD on our exchange. Idiots.

Jasonred79 said...

OMG.

I happened to go to my futures broker today, and I suddenly decided to dip my toes into FUPO.

But... Buy queues. for ALL months... ZERO

Sell queues, for all months... ZERO.

We had 5 trades on the first day, and it only got worse.

...

I tried to make some outlandish bids anyhow, on the hopes someone might decide to take me up on it.

...

My broker made some phone calls... he wasn't certain how the procedure went, since he had never done a FUPO contract before.

10 minutes later, told me it couldn't be done today.

I decided to forget it.

This is a chicken and egg scenario.

There a lot of shares that no one trades/ speculates on (long term investment only) because of low liquidity.

And because no one trades on them, there is no liquidity.

Vicious cycle, chicken and egg.

FUPO is like that now.

Furthermore, FUPO is CASH SETTLED not physically settled. So, it's ONLY useful as a speculative tool, an actual company which deals with palm oil products would not really be interested.


Overall, I was interested in doing a little speculation here, but I have lost interest in it too.

On top of everything else, the fact of the matter is that FUPO is redundant... the FUPO price will be solely determined by FCPO price and USD-MYR.

FUPO is effectively a derivative product, which has price controlled by two other products.

If I wanted to speculate on MYR-USD, I would do so directly. If I wanted to speculate on FCPO, I would do so directly.

Why would I waste my time doing FUPO contracts?