BM Y WOBICS, Gr SIDC Capital Market Graduate Training Programme 1=30 October 2003 ‘Moviule 2: Intermesiaries ofthe Malaysian Capital Market 8 SESSION 2 THE DERIVATIVES MARKET Cassered hors [Iphues, cand. gots. e Ong Toon Yeow MDEXMALAYSIA DERIVATIVES EXCHANGE BHD, The Detlvetives Market Presented by: ‘Ong Toon Yeow 6 October 2003 es ~ iting omen cee ata peer No mney be mary semper ef cee oe ea Ps en Tapas we eptenmaeee yen Contents * Malaysian Derivatives Market * Careers in Derivatives Market * Road to SuccessHistorical Note 17th Century:Futures trading were first documented — wan deer 1848: CBOT - 1st organized futures exchange duaetves v established. Aug corrwrady, _,., Commodity futures introduced - grains TORS. iol 1972:). GME introduced 1st Financial Futures ee Rabin, fen wegssitio adrey, ‘contract - Foreign currency futures 1973: oh CBOE introduced 1st equity option contract - Call Option on 16 stocks 1982:\g0%5 KCBT introduced 1st stock index futures - tet Value Line Index Futures contract ‘Swern ee Historical Note 1980 Establishment of the Kuala Lumpur Commodity Exchange (KLCE) with CPO Futures 1995 “The Kuala Lumpur Options and Financial Futures Exchange (KLOFFE) was established and KLSE Cl Futures contract was launched 1996 “Malaysia Monetary Exchange (MME) was established and the 3-Month KLIBOR Futures was launched Velulunfuy Indertonaic (ures ONS Heddy 1998 *KLCE merged with MME to form COMMEX Malaysia OM fl. an) NN meee we adden bypracecl canoesHistorical Note 1999 *KLSE purchased KLOFFE 2000 *KLSE Cl Options contract was launched on KLOFFE June 2001 * Birth of MDEX -Merger of KLOFFE & COMMEX December 2001 ¢ Migration trom open outery floor trading to electronic trading for Crude Palm Oil Futures and 3-Month KLIBOR Futures March 2002 *Launch of 5-Year Malaysian Government Securities (MGS) Futures Historical Note June 2002 Meare YONve, Sun, Wone~ * Approval of the transfer of MDCH from MDEX Securities Clearing Automated Network Services (SCANS), SCANS is a wholly owned subsidiary of Kuala umpur Stock Exchange (KLSE) August 2002 * The sale of MDCH to SCANS was completed ‘September 2003 + Reorganisation of the KLSE Group September 2003 + Launch of 3 and 10-Year MGS Futures + Modification of KLSE Cl Futures gee ary Spek — Gay sial roel yocrans the SNSOwnership of the Exchange over the Years 41980 - Kuala Lumpur Commodity Exchange (KLCE) (Owned by members) 1996 - The Kuala Lumpur Options and Financial Futures Exchange (KLOFFE) (Owned by Renong Bhd, Rashid Hussain Bhd, Hong Leong Bhd and Now Strate Times Bhd) 1996 - Malaysian Monetary Exchange (MME) - uss y Kug, (Owned by Ku.cE) 1998 - Commodity and Monetary Exchange of Malaysia (COMMEX Malaysia) (Owned by members) 1995 - KLOFFE becomes a subsidiary ofthe KLSE Group of ‘Companies 2001 - Malaysia Derivatives Exchange (MDEX) (Owned by KLSE) 2002 - Demutualisation exorcise _—_— ese KLSE Group of Companies — & Matayia Dervativos Exchange Bhd (MDEX) 1 @B_ Labuan international Financial Exchange (LFX) |_[&] Securities clearing Automated Network Services Sdn Bhid(SCANS) Malaysian Central Depository Sdn Bhd (MCD) ; KLSE Infomation Services Sn Bhd (KLSE IS) | <=. Malaysian share Registration Services Sen Bhd (uss) SOC & Kuala Lumpur |-— (J KLSE Property Management San Bhl (KPA) ‘Stock L. an Sh eeete [Kg Yevssan BSKL (veskL (KLSE) | _ jy Research institute Of investment Analyst Malaysia (RILAM) ‘Malaysian Derivatives Clearing House (MDCH)WO Ofer Wires elder jo Wek wcrc _ weedy D Global and Regional Comparison oes Sereno tee ee ‘Toky Stock Excharge $2305, 268 ogg “Nas lock Maret 62076 7244 London Sock Exchange 81,900 ‘Euronent- $1,567 139 115 oi SHong KongiAustralia Taiwan Korea Malays 31 at + ASE 9! hiya carte an Se Ma ane Sent we edt ae 02 PeE31 muse r se See: WE, SE ects commend © BAA Marre orale 16 ATP Aneed Ane, geode ware OMME 1 WO spaahere Overview: Global Derivatives _ |Stmvarrve PWANCIAL INSTRUMENTS THADED ON ORGANGED EXCHANGES [Senlntveseona Amour) Deo-20 e095 see! Mare Jeuues Swe? fSios © Gams ame © Seas whites, ‘ations zo 74568 = S004 © reece? © asta? Turnover evens! Amount) vos _ya000 —_ye001.-— a ate eutures ayeree wonene seam? ramms timed eeees ‘Optione eso aain1 © tater froima ‘anon ‘aa-7748 | [DERIVATIVE FINANCIAL INSTRUMENTS TRADED ON ORGANIBED EXCHANGES [Sumter af contracts in lions) |Open Interest (Number of Contracts) Dee.05 Deed eo. Mane |eptore 50 me bre mae eee “Tumover (Number of (Sooracwy yes va000-ya001 at 2008 Fens os meses tous en ‘aoe | options tse 1800351 ‘sont Yaa 50 | common ‘Fanos 5 soo ora? tenes ros ere ve sas. 308428 382 ha comKUE- Shatehoy TmmAsoy d pro wel Regulatory Framework MINISTRY OF FINANCE x TS Ra ~ MBDEX = MBCH a ae The Regulatory Structure inistry of Finance jecurities Commission || | Labuan Offshore Financial (SC) | |[Services Authority(LOFSA) eee LSE] MDE: Le Main Board Equity Derivatives + Financial instruments + Second Board Financial Derivatives (Foreign Curroncy) + MESDAG Market » Commodity Derivatives a cc ie ae co irae 8 Byte i geMarket Structure CORPORATE INDIVIDUAL Trading Member, Associate Local Member ovktngy nyynies Futures Broker Representative (y-ass\SG) YC. Client OSK Sreacarcar or RR Participants in Malaysian Derivatives Market Regulator Earanse “Securities Commission Clearing House es smDcH Malaysian "| | Derivatives Market Users/Glionts sHedgers S “Speculators “Futures brokers _ sArbitrageurs Torna brokers etridzx= grartiere Wega Exchange Functions * To set and enforce rules for operating in the futures and options market * Supervise the day to day activity of the members * Define the trading practices in the exchange * Help prevent any attempt at price manipulation * Specify the products to be traded * Price discovery ation (old, bp ok Www ade. Gud schas J ein and ai coven Mate Functions of Clearing House * Register all contracts traded on the exchange * Act as a buyer to the seller and seller to the buyer * To guarantee the performance of its members, the clearing house neads to act as the countor party to all contracts traded by its members — (it Wyre AVR sd * Margining of clearing mentee! open ae whdevalyn ote “tc awed) yea 1 oes aN gages’ 2 be ted WeUnrs- grey xGsye OsFunctions of Futures Brokers ~ ahurerd Wve dvoee * Represent their clients in placing orders in the market * Collecting margins from the clients * providing basic accounting records and transaction documents to their clients * Advising and making recommendations to clients for their trading programs * Must be a member of the Exchange _—_—— ema err Local Members -ws@d¢- . Gong Awae\y * Local membership is only open to individuals who want to trade on their own behalf. * Local Members have access only to the trading facility of MDEX. They do not have access to the clearing facility. * Local Membership is not governed by the FIA and therefore, Local Members need not be licensed. oe neealy Woops in wsuly repre Gre relGrs Comeypreers Hat OC Cte 7 fond Wired, viet. eu Wake Users of Futures and Options 1. Hedgers 2. Speculators —ayve- 3. Arbitrageurs — 9acdrny) wehmein oe walle cena What are Derivatives? * Financial instruments whose value is derived from an unde’ physical commodity © * Their price is based on the price of the instrument on which they are based * e.g. CPO futures are based on the price of palm oil traded in the commodities market a nas ee p SUL, So edie oh Ae rack - nrTypes of Derivatives 1. Futures 2. Options 3. Swaps — WWOHSrOCAWP>, ‘\ = Warrants - ca\oghoiS | \ 5. Convertibles —_— srt Types of Derivatives 1. Futures Futures are contracts, legally binding agreements, made on the electronic screen dealing system/trading floor, to buy or sell something in the future. The buyer and seller of a futures contract agree on a price today for a product to be delivered and paid for in the future. .._. WIC evanage mer rear ememYgece iy Avalrg Gousha MAR BS ACY Lutte - aguas Wl OF : Types of Derivatives 2. Options — We A yrarsiurd / Wen dagéite bw m4 qui Option is a contract between two parties in which one party (the buyer) has the sight but not the obligation to buy or sell a specified asset at a specified price, at or before a specified date, from the other party (the seller) The seller of the option therefore has an obligation which is activated if the buyer exercises that right NAG GN WW ag econo tne Prenat races ——— x lare pane Users of Futures and Options 1. Hedgers * They deal in the underlying market and use). 5. futures and/or options to manage price risk |SC\2 2. Speculators (MENS DA Lola * “They deal with changes in the expected price levels over time Usually they do not own or use the underlying instrument They are motivated by the wish to profit on the transaction and assume the price risk of hedgers + Give liquidity to the market ‘Sonnet “ern hgh ut 9 Lenred WA Ge agin Qu ulukynve) Genes ad bY, Sud, byUsers of Futures and Options 3. Arbitrageurs * Arbitrage is the simuttaneous purchase and sale of the same instrument in different markets to profit from price discrepancies. + Arbitrageurs are able to profit from temporary distortions or inconsistencies in price. * Provide liquidity to the market and by ensuring the convergence of cash and futures prices towards the expiry date of the contract. cagrases ds he womdeoyer wie Why Derivatives * Reasons > Cost effectiveness ~ damned a Small anwar > Liquidity — hoes ont, vessel 9 ad hater > In declining markets i > Leverage > Market safeguards with guarantee on financial performance Ps wcssleii | £Pre-September 11, 2001 KU wrt oe 701.0 Post-September 11, 2001 era aul MoMidexCone ~ paySeptember 11 Event Profit and Loss Profile Weer 401-0 (et he i Wile PAWL fi ‘ Bek Gace 4 G2co Mdle mro Eoiaeeceecee She aya en tFccnsecascunasee 7 OES a& Glo Margins & ports BR * Margins are not down payments for the contracts. They are a form of ‘good faith’ deposit which is required to be paid to the clearing house for every futures or options trade in the market + The collection of margins on is fundamental to the clearing house in protecting itself against losses arising from a clearing member's default * This sum of money is often referred to as the ‘Initial Margin’ + The margin level is monitored daily and may be adjusted to reflect changes in price volatility, movement in prices of underlying assets and other factors Gi cecstireie seen & Gr ich.ese muster oeNNUNIEINSE EES Trade-off: OTC & Exchange-Traded _|_PoVER-THE-COUNTER | |EXCHANGE-TRADED ExcHANGErcees = Customised product ||» Standardised product and lack of | standardisation + E.g., KLIBOR Futures | + Eg. IRS * Centralised + No central marketplace |! marketplace for for trading trading * More liquid + Less liquid + Less costly * More costly * Financial Performance * Higher credit risk Guaranteed - MDCH MDEX Serves -©44«'S 0 * Equity financial based futures and options contracts © * Non-equity financial based futures contracts US Nude ® © Commodity futures contract — " er0. / ———— seem en ore ive saat, —doyends an vedepss-MDEX Products * KLSE Cl Futures contract (FKLI) » Financial Equity Product » Stock Indox Futures » Launched on December 15, 1995 + KLSE Cl Options contract (OKLI) » Financial Equity Product » Launched on December 1, 2000 * Crude Palm Oil (CPO) Futures contract (FCPO) > Commodity Product Tro easly WA » Launched on October 23, 1980 WS \\ (Ui Geena seme ues cabuck doer age 0 tae slack We Gabgee eet we pooh quelle MDEX Products Wedd * 3-Month Kuala Lumpur Interbank Offered Rate (KLIBOR) Futures contract (FKB3) ” Financial Non-Equity Product > Interest Fate Futures » Launched on May 28, 1996 + 5-Year Malaysian Government Securities (MGS) Futures Contract (FMG5) » Financial Non-Equity Product » Bond Futures » Launched on March 29, 2002 davtevedlMDEX Products Meee, + 3-Year Malaysian Government Securities (MGS) Futures contract (FMG3) > Financial Non-Equity Product » Bond Futures » Launched on September 19, 2003 + 10-Year Malaysian Government Securities (MGS) Futures Contract (FMGA) » Financial Non-Equity Product » Bond Futures » Launched on September 19, 2003 —— err | Derivatives Building Block eae Maine ag a KLSE CI [Bond Interest Rate ‘Currency ‘Commodity options options Options ome ae Equity Reset interest Rate 7 cama ‘swap Liability swap | | swe] 7 = 1 t FAs t RisECr Eyres] [SAN KLIBOR 71 _ Futures Futures Futures Futures | |_Futures fe t t are t zauy—) [Bend] [ Moneywat] [_Fonex “| [commodity Wares Spat [instruments | ““Speraromad Gn, Convertibles ReoolRiay ‘Spot & Forwars ‘swaps Fone TryatckTrading Process TRADING MEMBER snag dyrwclbve, MDEX-KATS po — “ine samp ot ip Quon oY — MGs go Mo O “atading ti ard How to start trading on MDEX? y To open a client account with a licensed Futures Broker @)* To provide a copy of NRIC wy To provide the latest bank statement ey To complete an account opening form 8% To sign a Client Agreement and a Risk Disclosure Statement ©» To provide an initial deposit (subject to minimum set by the futures brokers) 19Trading Performance MGS Dally Volume and Open Interest ities Futures [ ~ Five-Year Malaysian Government Sect ccmaVdine | 9 -OporPoston, wteerV Market Demography fragnedy, ee | Wal Yerdaa’s @ SOTA i aS eri906 1009) vm2002 2009) Huy eer 25Se _frogstary Local Members Domes etal oversea etal Pe a Foreign institutions Market Demography Boeived CROW Suy, Bea! Market Demography “pions | s-atomn RLIBOR Futures VFO 2009 | W Ga WR, any Wal \@nar\ am Gye 26Market Demography [ Market Demography | 5-Year MGS Futures YTD 2003 Changes * Recent past > Migration of CPO and KLIBOR Futures to Electronic Platform on 28 Dec 2001 > Launching of 5-Year MGS Futures Contract on 29 March 2002 (FMGS) > Providing technical advisory service to Indian Derivatives Exchange * Medium Term > Options on CPO Futures > Palm Kernel Oil Futures: > Strategic Alliances & USD Commodity Products * Long Term > Asia Pacific focused Derivatives Products » Islamic based Derivative contracts ~ a soe 21MDEX Future Plans * Implementation of Malaysia’s Capital Market Master Plan 2001-2010 * Single Exchange * Strategic Alliances * Attracting local institutions to participate * Equity ownership ret uirements of futures broking firms will be liberalised to allow foreign majority ownership by 2003 Gn ee | Careers in Derivatives Market 28Careers Opportunities in Derivatives Industry Working with the Securities Commission Working with the Exchange Working with the Clearing House — setharnate VA Working with the Futures Brokers Futures Brokers Representatives * Compliance Officers * Working with Asset Management Companies - Futures Fund Manager - Futures Trading Advisers * Local Members Exchange Set Up - iv. & OS4 Executive Chairman {hiet Operating Orfeer | ————] [_ General Manager ‘Operations Trading || Finance &|| MIs Legal! ‘Admin secretariat] Strategic Planning! Business Development| Es. 29LSE 6A? HIGH LEVEL GROUP ORGANIZATION STRUCTURE [aAye een. Futures Broker Set Up COvepin 4 Trading Department Executive Director Finance & Administration Back Office [cca eel oe Road to SuccessAlways Remember ! * Academic qualification is very important! * To be disciplined, know what you have to do. and what you are doing, enjoy what you are doing and dedicated to your job. * Able to manage your time. * Have target / be focussed. * Believe in yourself. * Be confident. Ge ge St, Question & Answer coma BEThank You http:/Awww.mdex.com.my ee Arty Udlyt Aged SUE ME, HOR & psdeduns Wan CAC wale. 33What you should know before you trade? * Consider your financial experience, goals and financial resources contracts and your obligations in entering into ue those contracts * Understand your exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents your broker is required to give to you * Know who to contact if you have a problem or question (Ge aot en Tg Pe escent seem + Understand commodity futures and options = — ag & GONBKES Biever We, Sup gdar - tose God loses. reumed. Advantages of a Futures Contract * Ability to short a futures contract — Sah segs * Main advantages over forward contracts are flexibility and liquidity + Futures position can be closed at any time before expiration without affecting the other party of the transaction * Liquidity in the futures market ensures that price discovery process is competitive * This led to the establishment of MDEX - COMPLETE THE CAPITAL MARKET! crane 20Derivatives products can also benefit the underlying cash market © The ability to hedge and reduce risk should make investors more willing to trade in the underlying cash market * An underlying cash market where risk can be managed will be more popular, not less * The underlying cash market will be more liquid with the strategies adopted by some professional market participants scemmee eer (Oveneg ON) QAR ave aL vale Trading Performance Exchange Total Daily Volume & Open interest | —~sekangeTout | anno ceavaine a Onn Poin am | | a2 tat | | aio — se | | vce aS =| Son aan S44 oe | aWateysia ‘po-voeuagstana -EEEETEEELEL Derivatives Exchange 0 Pes Ta are LOS Trading Performance “TRRGGECEGER BEES I \\o0— Va ited penis, Thais Mar up Vesas Ke Garo 4. dechns NGHO,” Nh ee anded Ww wating qs HEE Gr Futures 000 ea Vaime —+-OpenPosten. ————— 4500 Trading Performance FELI Contract Daily Volume and Open Interest 100 tL danz waa 22Trading Performance FCPO Daily Volume and Open Interest ‘Grade Palm OH Futures 62000 ream Vota —¢-Onmostin 7 foe. Trading Performance ‘Crude Paim Ol Futures” ‘siden Low Setomont Price ers al = pe i ee ravi Le Sab dual = meets Houctad WleG | Me cd * Aah D No pase Pylori] i yw WS ONO0 1G cesrcusses ee TRO GAVE POURS AD Hoe, eave we Rtn oc GSS bape ve 4 ES Warr ak ac alt Ame Win. 2900 iw matic " 2BTrading Performance aa Fem VO UPOR SpaUw: Wane Cas Bead « — a “CONIC BW GINO & (UVR ME Trading Performance bw ‘-Month KLIBOR Futures aon Voune ge Opens uo aco ae wef oe sini 1H BEI