A Practical Guide for Beginners

This article explores the types of derivatives, the structure of the Malaysian derivatives market and its participants, and the derivative products available for those looking to start trading.

A Historical Perspective

The first futures exchange offering exchange-traded derivatives in Malaysia was the Kuala Lumpur Commodity Exchange, KLCE, established in July 1980. KLCE initially started with the Crude Palm Oil Futures Contract and later introduced futures contracts for tin, rubber, and cocoa.

Following KLCE, the Kuala Lumpur Options and Financial Futures Exchange (KLOFFE) was established in 1995 and offered the first stock index futures contract on the Kuala Lumpur Composite Index (KLCI) and, subsequently, in the year 2000, the stock index options contract.

Meanwhile, The Malaysia Monetary Exchange (MME), a subsidiary of KLCE, launched the 3-month KLIBOR interest rate futures contract in May 1996. After a series of mergers and demutualisation exercises, all these exchanges now come under Bursa Malaysia Derivatives Berhad.

Who Are the Participants in the Derivatives Market?

Derivatives market participants are divided into two groups based on their trading objectives: Hedgers and Speculators.

Hedgers are typically corporations, businesses, or individuals who engage in the derivatives market to manage or eliminate price risk. This group often holds underlying assets, such as crude palm oil, gold, equity, or debt portfolios. By entering the derivative market, hedgers seek to protect themselves from adverse price movements.

On the other hand, speculators aim to profit from price fluctuations in derivative contracts. Proprietary traders, hedge funds, arbitrageurs, and individual traders assume the risks hedgers seek to avoid, hoping to make financial gains from market movements.

How Is the Malaysian Derivatives Market Structured?

Bursa Malaysia Derivatives Berhadis the primary derivatives exchange and acts as the central marketplace where all futures and options contracts are bought and sold. The derivatives exchange offers a diverse range of products, including commodity, equity, financial and security derivatives , all of which are globally accessible via the CME GLOBEX® electronic trading platform.

Bursa Malaysia Derivatives Berhad's Crude Palm Oil Futures (FCPO) is the world's most liquid crude palm oil futures contract and has long been recognised and referenced as the global price benchmark for the palm oil industry.

Bursa Malaysia Derivatives Clearing Berhad (BMDC) clears and settles futures and options contracts executed on Bursa Malaysia Derivatives Berhad. BMDC acts as a central counterparty, guaranteeing the performance of all contracts and reducing counterparty risk. The clearinghouse maintains the market's integrity by ensuring all participants meet their contractual obligations.

The regulatory role of the Malaysian derivatives market lies with the Securities Commission Malaysia (SC), which ensures that the market operates fairly and transparently. The regulation covers all aspects of the market, including licensing intermediaries, approving new products, and monitoring the market conduct of participants.

Futures brokers act as intermediaries or "middle persons" to provide clients access to the exchange to buy or sell derivative contracts. In Malaysia, dealing in derivatives is regulated, and only those licensed by the SC can provide services for dealing in derivatives. To do that,futures brokers and their Futures Broker Representatives (FBR) must hold the Capitaland their Futures Broker Representatives (FBR) must hold the Capital Markets Services Licence (CMSL) and Capital Markets Services Representative's Licence(CMSRL), respectively. For their services, futures brokers charge brokerage commissions forthe trades transacted.

Derivatives Contracts Available In Malaysia

Bursa Malaysia Derivatives Berhad offers futures and options contracts in four broad categories: commodity, equity, financial and security derivatives.

FCPO, is the most popular and active commodity contract traded on Bursa Malaysia Derivatives Berhad. The exchange offers a host of palm oil-related futures contracts, including palm olein, palm kernel, US dollar-denominated & East Malaysia crude palm oil, and soybean oil futures. Bursa Malaysia Derivatives Berhad offers the Gold Futures (FGLD) for traders looking to trade gold prices.

The FTSE Bursa Malaysia KLCI Futures (FKLI) is the most active contract for Bursa Malaysia Derivatives Berhad equity derivatives. FKLI is the equity index futures on the top 30 constituent stocks of the FBM Bursa Malaysia KL Composite Index. Other equity index futures offered are theMini FTSE Bursa Malaysia Mid 70 Index Futures (FM70) and FTSE4Good Bursa Malaysia Index Futures (F4GM). Equity derivatives on Bursa Malaysia Derivatives Berhad will eventually include Single Stock Futures (SSF), futures contracts on individual stocks listed on Bursa Malaysia.

The Mini USD/CNH Futures (FCNH) is the first currency futures listed on Bursa Malaysia Derivatives Berhad for those looking to trade the currency futures pair of US Dollar and Chinese Offshore Renminbi (RMB).

Options contracts on the FKLI and FCPO are also available on Bursa Malaysia Derivatives Berhad for traders.

Besides Bursa Malaysia Derivatives Berhad contracts, licensed futures brokers can offer global futures and options contracts listed on foreign exchanges such as the Chicago Mercantile Exchange (CME), Singapore Exchange (SGX), Hong Kong Exchange HKEX and other futures exchanges around the world allowed under the approved specified exchanges by SC.

Other than exchange-traded futures and options contracts, Contract for Differences (CFD) is another derivative product available to Malaysian traders. A CFD is an over-the-counter (OTC) or off-exchange derivative contract that tracks the price movement of an underlying instrument.

Futures brokers in Malaysia can offer CFDs on underlying instruments such as individual equities, equity indices, commodity derivatives, Exchange Traded Fund (ETF) units and Real Estate Investment Trust (REIT) units. CFDs are currently only available to the "Sophisticated Investor" category of clients who are either Accredited Investors, High-Net-Worth Individuals or High-Net-Worth Entities (HWNE).

Getting Started Right

To start trading, you must first open an account with a licensed futures broker. It is vital for clients to only deal with licensed brokers who are authorised to deal with derivatives. A list of the Trading Participants for derivatives in Malaysia is available on Bursa Malaysia's website. Additionally, clients can check the searchable database of licensed futures brokersand futures broker's representatives on the SC's – Public Register of License Holders webpage.

When you start trading futures, discuss with your futures broker to determine your trading needs and your requirements for support such as research, trading ideas, news updates and trading platforms.

Additionally, study as much as possible or get advice from professionals in the business. There are many resources on futures trading that you can use. You should be able to find ample free resources online which provide good information to get you started. Many futures brokers also support new traders through educational webinars, live workshops, one-to-one coaching, and demo or paper trading platforms to test your skills.

With the correct knowledge and a proper trading plan, you are on your way to a fruitful journey in trading derivatives.