Derivatives new investment option

  • Business
  • Friday, 19 Mar 2004


PUNTERS – if only those with at least a million ringgit to spare – are now being offered the chance to bet that interest rates will fall. 

That’s essentially what Inverse Floater Notes, a counter-intuitive derivatives product launched yesterday by investment bank CIMB Bhd, are; the lower the Kuala Lumpur interbank offered rate (Klibor) gets over the next three to five years, the higher the returns. 

Alternatively, think short-term interest rates will not fluctuate much till 2007? CIMB promises premium returns if the rates stay within a specified narrow range, but if they stray even one basis point beyond, the investor who buys its Range Accrual Notes will get nothing in return. 

Those that expect the bull run on the MSEB to last a few more years are offered a ride up with Equity Linked Notes, which pay 110% of the KLSE Composite Index’s upside at maturity in five years. 

(From left) KLSE Bhd chief executive officer Yusli Mohamed Yusoff, Securities Commission acting chairman Datin Zarinah Anwar and CIMB Bhd chief executive Datuk Nazir Razak at the CIMB organised Derivatives & Structured Products Conference

These are the first of many structured products that are likely to be available in the coming months with the relaxation of rules on derivatives by Bank Negara that now allows them to be used for yield enhancement. 

Previously, the central bank’s guidelines allowed their use for hedging purposes only, but this was radically changed in May last year. In November 2003, the Securities Commission issued guidelines on the offering of structured products, paving the way for what market players expect will be the most exciting area of growth for the Malaysian capital market. 

CIMB chief executive Datuk Nazir Razak said he expected brisk sales “in the hundreds of millions” at the launch yesterday in Kuala Lumpur of the company's first three off-the-shelf products. 

Their performance will be closely watched as the bank brings derivatives over-the-counter products to the Malaysian investing public for the first time. 

CIMB was the pioneer in taking advantage of the new rules when it underwrote Khazanah Nasional Bhd’s highly successful covered call-warrants which raised some RM730mil in premiums. 

Nazir said that as derivatives products were very new, it would be difficult to estimate the level of demand for them. 

“No one really knows the appetite, but it could be a huge, huge growth area,” he said. 

Nazir said CIMB, which plans to roll out new products every three months, was primarily marketing them to “more sophisticated investors”, like high net-worth individuals as well as local and foreign institutions. 

Among Bank Negara’s requirements are that investment sizes should not be below RM1mil and they should all be “principal protected products”, meaning an investor’s minimum redemption at maturity would be his original capital. 

Nazir said these products cater to investors seeking a different risk-return profile from that offered by standard asset classes of cash, equities and debt securities. 

“They can make portfolios both more or less risky in a more cost and operationally efficient manner,” he said, adding that the regulators’ conservative approach in requiring all products to be principal guaranteed gave added assurance to local investors. 

The failure to understand fully the risks associated with the highly complex hybrid investment vehicles and hedge funds has been the cause of some spectacular corporate collapses such as Barings Bank and Long Term Capital Management. 

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