Bursa Malaysia, the country's stock exchange, is currently the world's biggest derivatives market in the burgeoning field of crude palm oil futures. Bursa hopes to draw on Malaysia's natural strengths in resource-based commodities to consolidate its grip on the global derivatives arena.
According to Barclays Capital, Bursa's global commodities assets under management were $175bn for 2007, a rise of $41bn from the previous year. With a weakening US dollar, many investors have diversified away from dollar-denominated financial assets towards goods-based derivatives, causing global prices for items such as oil, metals and foodsuffs to reach record highs in 2007. With no sign of the dollar strengthening and the price of oil expected to continue its ascent, these record highs are likely to persist into 2008.
Ong Leong Huat, the group managing director and CEO of Malaysia's OSK Investment Bank, told OBG, "At present, palm oil, oil and gas and other commodity-related companies collectively constitute more than 30% of the total market capitalisation of Bursa Malaysia. In order to enhance the dynamism of our capital market, commodities should be strategically promoted and developed as the niche of Bursa Malaysia. This repositioning will differentiate the local bourse from other regional exchanges."
With the help of several new measures, Malaysia is hoping to emulate the success of the Singapore Exchange (SGX), which reported that revenues from derivatives trading for the three months leading to the new year climbed to $27mn, 40% over the previous three months.
Following a strong performance last year, when 2.8m Ringgit-denominated crude palm futures (FCPO) were traded, Bursa will be launching its first US dollar-denominated crude palm oil futures (FUPO) within the first quarter of 2008. Bursa's CEO Yusli Mohd Yusof said in a statement that the move would "provide the exchange with the opportunity to globalise its futures market and position Bursa as an internationally competitive market".
Last June, Singapore launched a US dollar-denominated crude palm oil contract on the Joint Asian Derivatives Exchange (JADE) as a venture with the US's Chicago Board of Trade. While the JADE contract is based on Indonesia's crude palm oil (CPO) price, FUPO will be based on the FCPO's settlement price. Through its new dollar-denominated scheme, Bursa hopes to capture a significant share of JADE's current international investor base.
Bursa is also looking to follow Singapore's aggressiveness in expanding its derivatives business overseas after the SGX's recent 5% purchase in the Bombay Stock Exchange.
Earlier this month, Bursa signed an agreement with the Dubai Gold and Commodities Exchange (DGCX) to jointly develop derivatives for commodities such as palm oil, crude oil and gold.
The government-controlled DGCX opened in 2005 with the launch of gold contracts and has become by far the largest derivatives market in the Middle East. It has since expanded into silver, fuel oil, currency, steel and plastic contracts. Through the alliance, Malaysia hopes to benefit from the DGCX's strength in these areas, while the DGCX will profit from Malaysia's leadership in crude palm oil futures.
In other news, a local paper recently reported that Bursa has commenced talks with NYSE Euronext, the parent company of the New York Stock Exchange (NYSE), regarding a strategic tie up. The paper stated that the NYSE is interested in acquiring a 10% stake in Bursa as part of strategy to eventually set up its own Asean exchange.
Bursa neither denied nor confirmed the report, saying in a statement only that it was "continuously seeking to explore and initiate viable business opportunities which will benefit and create value for the company".
Bursa already has a relationship with ATOS Euronext Market Solutions Limited, NYSE Euronext's technology subsidiary on a project to launch a new electronic trading platform. Targeted to go online in the first quarter of this year, the platform will allow for the execution of up to 1300 trades per second, compared to the current allowance of 200 manually.
Adding to the speculation, after a local paper reported that foreign exchanges wishing to hold more than 5% in the Bursa required government approval, Second Finance Minister Nor Mohamed Yakcop stated last week that that the treasury was aware of "some tentative discussions" and that there was no such restriction. He said, "We have many companies with up to 30% foreign stake, so there is no issue."
Bursa is also currently in talks with the Chicago Mercantile Exchange (CME) on a possible collaboration, but has publicly stated that the venture would not involve the CME purchasing any stake in Malaysia's operator.
OSK's Ong told OBG, "News of these alliances has sparked optimism in the growth of the Malaysian market. They will create the opportunity for Malaysian commodities to be introduced or traded in other foreign exchanges and vice versa, and also provide aid in the transfer of knowledge, enhancing our technical skills in terms of commodity trading and sustaining our comparative advantage in the commodity sector in this region."