Market Innovations

This week Bursa Malaysia Bhd joined with the London-based FTSE group, the global index provider, to launch six new indices as part of the Bursa FTSE series. The new indices are the first product of an agreement inked late last year between the two partners, and are the latest measure taken by the bourse to heighten its appeal internationally.

Bursa officials consider the innovation an important step in the overall modernisation of the Malaysian market. “It brings us one step closer to achieving our national vision of developed market status. It raises the bar by which our market must now perform, by measuring our success using developed market benchmarks,” Bursa Malaysia Bhd CEO Yusli Mohamed Yusoff told attendees at the June 26 launch.

The new indices – the FTSE Bursa Malaysia (FBM) Emas, FBM 100, FBM 30, FBM 70, FBM Small Cap and FBM Fledging – began calculating Monday morning. The partners plan to introduce 14 more new indices to the exchange in stages, either by end-2006 or early 2007. These will replace the existing indices save for the Kuala Lumpur Composite Index (KLCI), which will remain for the time being.

The indices launched fall under two categories – benchmark and tradable. Whereas the KLCI is concerned primarily with capitalisation, the new indices focus on free float and liquidity. This, coupled with a methodology that emphasises ease of investment and transparency, will allow Bursa Malaysia to increase the products on offer, including new derivatives, exchange traded funds (ETF), and over the counter (OTC) products. All offer investors more options, and allow them to better manage their portfolios.

In addition to increasing activity and attracting international investors, officials also hope that the series will create a more versatile fund management industry. New funds can be created and benchmarked against the new indices to cater for investors with different risk profiles. However, according to early press reports, fund managers said that they have no plans to significantly adjust their investment portfolios in response to the new indices, at least in the near future.

There are potential challenges for the success the of the new FTSE BM indices. Some are sceptical that they will not stimulate investment in the market as much as anticipated, since most local investors will continue to pay closer attention to the KLCI. And though the indices will be more accurate in tracking the liquidity of stocks in the index, there are higher costs involved for investment firms adopting the new series.

Nonetheless, it is likely that by adhering to international standards, Malaysia’s market will have more appeal globally – an important consideration for a market that comes increasingly under the scrutiny of foreign investors. “By introducing tools such as the FTSE Bursa Malaysia Index Series, we can show clearly the transparency and investibility in our market,” Yusli said at the launch.

This is only the latest step towards opening up the Malaysian market to foreign capital. More liberal rules governing cross-border listings on Bursa Malaysia were unveiled last week. In a statement, the Securities Commission (SC) announced that foreign firms with operations abroad could now seek primary or secondary listings on the main board of Bursa Malaysia. Likewise main board-listed Malaysian firms can have secondary listings on foreign stock exchanges, raising the profile of domestic companies internationally.

“The liberalisation would enhance the diversity of offerings and promote cross-border linkages with other markets through dual listings. Hence, we welcome large and profitable foreign-owned corporations from jurisdictions having laws comparable to Malaysia’s to list on Bursa Malaysia,” SC Chairman Zarinah Anwar said in the statement.

Anwar also said that he expects the new measures to facilitate the “integration of the Malaysian capital market internationally and to expand the pool of high-quality stocks on the local bourse”. Analysts are optimistic that the measure is a positive step towards making the market more attractive and liquid.

Many hope that attracting large foreign companies to list in Malaysia would compensate for the current lack of comparable Malaysian companies with listing potential. Foreign firms could raise the bourse’s profile, heighten capitalisation and excite investors – a pleasant prospect for a market that has been hampered by bearish conditions and low activity.

Bursa chief Yusli commented last month that though there are over 1000 listings on the Malaysian bourse and around 2.3m CDS account holders, current account activity averages only about 9% monthly. Though the introduction of the FTSE-BM Index series has not significantly impacted share trade in the days since its inception, the full potential of the new series will only be realised in the long term, as greater accuracy and transparency gradually attracts investors.

In the coming months, Bursa Malaysia plans to introduce regulated short selling and borrowing, and lending of securities. In the second phase of the FTSE-BM to be introduced in the second half of the year, the existing Mesdaq, second board, Syariah and the sectors would be replaced by FTSE-Bursa Malaysia Mesdaq, FTSE-Bursa Malaysia 2nd Board, FTSE-Bursa Malaysia Syariah and FTSE-Bursa Malaysia Sectors.