High in a building in central Kuala Lumpur, not far from the twin Petronas Towers that dominate the Malaysian capital’s skyline, staff at Oriental Pacific Futures are busy broking futures for some of the group’s 1,000 or so clients.
Since late last year, when trading volume on Bursa Malaysia’s equities market started to slow, there has been more interest in trading futures in Southeast Asia’s third-largest economy, says Ryan Chua, manager of dealing. “People see there’s more volatility with futures so they are more willing to give it a try,” he says.
Derivatives trading on Bursa hit a record last year, up 17 per cent year on year. The most widely traded contracts were palm oil futures, which allow traders to speculate on prices of the edible oil, of which Malaysia is one of the largest producers. That contract grew 28 per cent in volume during 2014.
Malaysia is not well known for futures trading, and nor is the region, outside Japan, South Korea and Singapore, which have more developed markets.
But that is changing. Exchanges have been upgrading their trading systems and putting on roadshows to promote use of derivatives among an unexpected group: retail investors. Most of them are male and in their 30s — the typical client at Oriental Pacific, which was set up in 2007 by its parent Julong, a palm oil company based in China.
In Thailand retail investors accounted for 55 per cent of volume on the local futures exchange last year. Brokers say the high proportion of retail participation in Asia’s derivatives markets is a result of speculative appetite in many parts of the region.
Bourses are also tapping a growing middle class that is becoming familiar with futures trading, which is riskier than equities but can offer higher returns.
Not everyone thinks this is the best way to ensure sustainable growth for Asia’s futures markets, however. Industry experts say the region should encourage institutional participants. “Derivatives are a hedging tool and not actually created purely for speculation, so for a healthy market you need to see a balance between retail and institutional investors,” says Matthew Png, chief executive of UOB Bullion & Futures, the futures broking unit of Singapore’s United Overseas Bank.
One way to judge the degree of speculation on a futures market is the ratio of open interest to volume. Open interest is the amount of margin collateral left at the clearing house overnight, and indicates intent to trade in the future. Historically the ratio at futures exchanges in China — so far limited to domestic participants — has been low, indicating relatively few positions held for longer than a single trading session.
“People are trading for the sake of trading,” says Bill Herder, president of the US-based Futures Industry Association’s Asia chapter, in Singapore. “Is that always a good thing?”
Tim Massad, chairman of the Commodity Futures Trading Commission, said on a visit to Singapore last week that he thought regulators in Asia — particularly China — were aware of the need to encourage institutional participation in futures. “I think you are going to see developments in [that direction] because as the Asian economies continue to grow and become more sophisticated, they need well-developed derivatives markets,” he said.
Foreign banks are preparing their responses to a consultation paper issued last month by the China Securities Regulatory Commission on its plans to give foreigners access to commodity futures — starting with a crude oil contract launched last year on the Shanghai Futures Exchange.
That is being taken as a sign of China’s interest in institutional involvement, to ensure balanced market participation.
South Korean authorities were among the first to tackle the issue, in 2010, when regulators took measures to curb speculative activity in Kospi options and futures. Until that point they were so popular with retail investors that Seoul ranked as the world’s largest futures market by number of contracts traded.
Mr Png says exchanges in Asia need a broader set of products, such as government bond and interest rate futures — mainstays of western exchanges — to attract institutional participants. But lack of depth in Asian bond markets remains one impediment. “The growth in the underlying [asset class] needs to pick up first,” he says.
Bursa Malaysia has taken steps in this direction. In December it relaunched a five-year government bond future. The exchange is also planning to reform its membership criteria to encourage the creation of groups of traders — known as “arcades” in the west.
“It’s so that we encourage people to trade professionally and continually, including through mentorship and training,” says Chong Kim Seng, chief executive of Bursa Malaysia Derivatives. “Our whole vision is to get up to the level of the US and Europe.”