Growing futures markets

Azila abdul aziz

Derivatives markets worldwide have experienced a boom in the face of the Covid-19 pandemic and the ensuing volatility this year, as traders and investors increasingly turn to futures as a means to hedge against downside pricing risks.

In just the first six months of 2020, global futures and options trading had grown 32% year-on-year (y-o-y) to a record 21.9 billion contracts, with Asia-Pacific registering the largest increase due to strong interest in the derivatives exchanges in India and China, according to the Futures industry Association’s (FIA) data.

From an asset class perspective, the equity markets contributed the most to the global surge in trading activity. This was followed by interest rates, currencies, energy and agriculture.

Back home, contract volumes on Bursa Malaysia Derivatives (BMD) in the first half of 2020 also saw significant growth, rising 60% y-o-y, with the two most popular products, crude palm oil futures (FCPO) and FTSE Bursa Malaysia KLCI Futures (FKLI) volumes growing 62% and 72%, respectively, over the same period. In fact, overall volume for BMD products is expected to hit a new record by the end of this year, and the strong trading momentum will likely carry over into 2021, says Azila Abdul Aziz, chief executive officer/executive director and head of listed derivatives at Kenanga Futures Sdn Bhd.

“Volatility is the name of the game. Uncertainty gives rise to more volatility and that will benefit the derivatives market, ” she tells StarBizWeek.

“If there is volatility in the market, the expectations are that we will see continuous increase in the volume for BMD products, ” she explains.

Azila notes the volume for BMD is poised to exceed 18 million contracts by end-2020, representing a growth of 30% from a year ago.

“If the (market) scenario continues to be volatile, we can expect the uptrend (for derivatives) to continue into the new year, ” she says, adding that futures and options are particularly attractive in times of great global economic uncertainty and financial market turbulence because these products help investors and traders manage risks, obtain price discovery and optimise transaction costs.

Nevertheless, Azila projects huge competition coming from China’s increasing openness of its derivatives market for global clients.

She says while futures traders that are familiar with Malaysia will continue to trade here, it will be a challenge to attract new foreign investors that are less familiar with the Malaysian derivatives market.

She reckons these investors will likely choose to trade in bigger markets that they assume will also likely to generate higher returns.

Azila, who is one of the pioneers within the Malaysian derivatives industry, points out that the local industry will benefit tremendously if foreign exchange (forex) and interest rate futures and options are introduced.

At present, these two categories are not available in the local market.

“Having these new categories will add vibrancy to our derivatives market. Take forex futures. It is one of the most popular derivatives products given the volatility in exchange rates, ” she explains.

Game changer

More importantly, digitalisation will continue to be the progressive game-changer for the derivatives markets globally and domestically both from the standpoint of the exchange and member brokers such as Kenanga Futures, Azila notes.

To put that into perspective, BMD volumes, which averaged at only six million contracts per year about a decade ago, grew at a compounded annual growth rate of around 14% to an average of 14 million contracts per annum over the last few years following the introduction of electronic access in the industry.

Kenanga Futures at present offers electronic access into BMD products as well as international markets such as Chicago Mercantile Exchange (CME) and Hong Kong Exchange (HKEX) for both its global clients’ network in Asia-Pacific, Europe and the United States as well as its domestic clients across 24 branches nationwide.

“Specific to BMD, we have enabled our clients both global and domestic with electronic trading access into Bursa markets for more than 10 years now and we are continuously expanding our digitalisation capabilities, ” Azila says. Today, from a business orientation perspective, Kenanga Futures is about 80% digital and 20% manual. The group has over the years built it digital capacity within four core areas, namely, e-trading; e-on boarding; e-marketing; and e-learning, which offers courses and hosts events to enhance literacy and awareness about futures trading.

The group’s digitalisation efforts, and the resultant ease of access into the markets, have helped attracted new types of clientele base for the company in recent years.

These include global banks; hedge funds; asset management companies; corporate hedgers in the likes of plantation companies, refineries and proprietary trading firms; as well as professional traders and retail/individual investors. The path ahead for Kenanga Futures will be focused on building the resilience of its digital infrastructure capacity, Azila says, as that is important to cope with the current volatile environment and increased volume. In addition, the group is also looking to enhance its digital services to suit its business model and facilitate its clients’ needs to support its growth for the long run.

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