Malaysia's first futures exchange opens for trade

Malaysia's first futures exchange opens for trade

KUALA LUMPUR (Reuter): Malaysia's first futures bourse, the Kuala Lumpur Options and Financial Futures Exchange (KLOFFE), opened for trading yesterday, bringing the nation closer to its dream of becoming a regional financial center.

Its first futures contract, based on the Kuala Lumpur Stock Exchange's Composite Index (KLCI), rolled out at 01:30 GMT, a little over five years after it was first conceived.

"It is a soft launch, insofar as we wanted to go out gently and make sure that all systems are behaving themselves and brokers are comfortable," said KLOFFE's chief operating officer John Duggan.

KLOFFE has survived criticism from even Prime Minister Mahathir Mohamad, who once called it "unnecessary gambling", and the Barings collapse, which almost got it shelved.

The collapse of Barings Bank due to dealings in derivatives by recently convicted trader Nick Leeson triggered a widespread debate in Malaysia over the need for a futures trading institution.

It was finally left to the central Bank Negara and the Securities Commission to decide its fate. They initiated an amendment to the Futures Industry Act and toughened other rules to make trading safer, delaying KLOFFE's launch by nearly a year.

But there were no ecstatic celebrations, not even the once planned opening by Mahathir, for only the third futures exchange in the region after Hong Kong and Singapore.

Only 14 brokers, who have received the Securities Commission's trading license, began operations on the first day and, by noon, each one of them had struck at least one contract.

The first contract done was for spot month (December) at 1,001 points on the KLCI. Under the contract, the buyer agrees to take delivery of the underlying security (in this case the index) at a pre-agreed date and price.

Since there is no physical security that can be delivered in this case, each index point has been valued at 100 ringgit (US$39.37), which means the first contract was at 100,100 ringgit ($39,409.45), KLOFFE officials explained.

At the lunch break, there were 78 contracts done, 77 in spot month and one in next month (January). Four contracts have been launched, spot, next month and following two quarterly calender months (March, June).

"Volume in the morning session indicates that the market has good potential," said James Lau, Chief Executive of CIMB Futures, one of the 14 firms which started trading.

"Nobody expected an explosive start, and there wasn't one, which was good," he said.

He said the trend on KLOFFE was in line with the cash market, the Kuala Lumpur Stock Exchange (KLSE). "This shows we are moving in the right direction," he said.

Contract values dropped with a decline in the index on the KLSE. KLCI dropped 7.61 points 0430 GMT to 988.65 and the spot month contract dropped to 990.00.

Duggan said the number of trading houses will increase to 40 by early next year.

He said a lot of work had gone into making trading on KLOFFE safe and transparent. "The KLOFFE system is one of the most transparent systems in the world."

He said KLOFFE officials had visited broking houses for inspection to ensure that they were ready to start trading.

KLOFFE will continue with the KLCI-based contracts until late next year, when other new products including stock options will be introduced, Duggan said.