Keeping track: New indices are introduced to the local bourse

Bursa Malaysia and the FTSE Group have been working together since 2006 to develop, manage and maintain real-time indices covering the local equity markets, both for the Bursa main board and the ACE secondary board. In 2009, Malaysia's benchmark stock index, which had been up to that point the Kuala Lumpur Composite Index (KLCI), became the FTSE Bursa Malaysia KLCI. A wide range of indices are now offered by FTSE Bursa Malaysia, including tradable indices, such as the FTSE Bursa Malaysia Mid 70 Index, the FTSE Bursa Malaysia Top 100 Index and the FTSE Bursa Malaysia Hijrah Sharia Index, as well as benchmark indices, such as the FTSE Bursa Malaysia EMAS Index, the FTSE Bursa Malaysia Small Cap Index and the FTSE Bursa Malaysia EMAS Sharia Index.

ICB INDICES: Late in 2011, the index partners decided to significantly broaden their product range. On October 3, 2011, they began offering FTSE Bursa Malaysia EMAS Industry indices. The new indices are based on the internationally recognised Industry Classification Benchmark (ICB), a system that was developed by Dow Jones and FTSE, and introduced in 2005, but is now 100% owned by FTSE. ICB sub-divides industries into smaller, more defined categories and organises them in a hierarchical manner. The classification system starts with broad industry groupings, such as utilities, telecommunications and health care. It then further divides those by supersectors, such as food and beverage, retail and banks. Below that level are sectors, such as forestry and paper, beverages and leisure goods. The FTSE Bursa Malaysia EMAS Industry indices divide the market into 10 industries, 19 supersectors and 39 sectors and are calculated at the close of each trading day. According to Bursa Malaysia and FTSE, the adoption of the ICB classification system has allowed investors to create new products and develop new strategies. They can develop a more granular view of the market and are able to better evaluate performance and make comparisons across sectors and with other markets.

FREE FLOAT: In addition to adding the new indices, FTSE and Bursa Malaysia also changed the definition of free float restrictions, so the indices are in line with FTSE’s global standards. Equity not in the free float includes state-owned shares, except those in pensions, shares owned by a sovereign wealth fund if the fund owns more than 10% of the company's equity, and shares held by directors and senior executives. Equities held in portfolios or by exchange-traded funds or shares owned by holding companies are considered part of the free float.

The Bursa’s cooperation with FTSE is an element of the exchange’s globalisation efforts. It wants indices arrived at via an internationally accepted method of calculation and indices that are transparently managed, investable and tradable. By utilising FTSE methodology, the Malaysian market can more easily be integrated into international portfolios. The cooperation also improves the efficiency and speed of measurement. When the changeover was made in 2006, the benchmark constituents were reduced to 30 companies from 100, and the index was calculated every 15 seconds, down from 60 seconds.

MORE LIQUID: According to FTSE, liquidity in the market has improved significantly since the Bursa and the index group established their cooperation. In July 2010 it would have taken 0.16 days to trade a RM35m ($11.3m) index portfolio. A year earlier it would have taken 0.4 days. Before the transition to the FTSE index, it would have taken an entire day.

The development of indices is related to the larger strategy of regional integration. ASEAN members want to become a stand-alone asset class so they can go up against larger countries and regions in the battle for capital. By harmonising with FTSE standards, the ASEAN markets can be more accessible to global investors and portfolio allocations can be made easily and calculated by international institutions.

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The Report: Malaysia 2012

Capital Markets chapter from The Report: Malaysia 2012

The Report

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