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SCMP Reporter

At least someone is smiling. The recent downturn in the Malaysian stock market has burnt holes in many people's pockets, but for the country's fledgling futures exchange, it has been a God-send.

 It has taken a good dose of misery and disappointment in the cash market for Malaysia's ever-bullish band of stock investors to discover the merits of hedging.

 Daily turnover has leapt in recent weeks from an average of fewer than 100 contracts a day to more than 1,200. Each contract is worth M$100,000 (about HK$308,000).

 With a core liquidity now established, the privately owned Kuala Lumpur Options & Financial Futures Exchange (KLOFFE) is now gearing up to launch some new products.

 The stock market was raging when KLOFFE was opened with much fanfare 15 months ago.

 The Kuala Lumpur Composite Index rose progressively for 14 consecutive months, gaining more than 30 per cent as it marched into record-breaking ground. The second board for small-capitalisation stocks fared even better, as the whole country went stock-crazy.

 Meanwhile, KLOFFE was being dismissed as a flop.

 When it was so easy to make money in the cash market, investors could see little point in risking their money with complicated and little understood futures contracts, KLOFFE's chief operating officer John Duggan says.

 Since stock prices started to slip in February, investors are being won round to the derivatives way of thinking.

 Retail stock investors have seen the Composite Index drop back to just about where it was in July last year, shattering stock market confidence.

 Mr Duggan said: 'Previously, investors were very comfortable with the cash market, but we have recently had a very volatile underlying market, which is good for us.'  He said that at the outset, about 55 per cent of turnover emanated from foreign institutions. The big disappointment was large domestic institutions stayed out.

 KLOFFE officials have been busy touring the country to educate people on how to use the contracts, and that is starting to pay off.

 'The retail people are now really becoming quite aggressive in the market,' Mr Duggan said.

 However, it would appear more work needs to be done on the big Malaysian institutions. While liquidity was low, there had been a fear that if they bought into the futures market and circumstances turned bad, there might not have been the liquidity to get out.

 Mr Duggan thinks it is only a question of time before the giants such as the Employees Provident Fund and other insurance and pension funds come in.

 'We are being patient and pro-active,' he said. 'If we get the institutions in, then there is no reason why we don't get 2,000 to 3,000 contracts traded a day by the end of the year.'  At present it is possible to trade futures only on a basket of index stocks, but preparations are under way to launch some new products.

 Next in line will be options on the index, followed by individual equity options.

 Meanwhile, the Malaysia Monetary Exchange is branching out. Last week, executive chairman Syed Abdul Jabbar Shahabudin announced plans to launch currency future contracts on the ringgit and other regional currencies.

 This followed an announcement earlier last month that the New York Cotton Exchange would launch futures trading in the baht, ringgit, rupiah and Singapore dollar at the end of this month.

 It will be the first time Southeast Asian currency futures are traded on a formal exchange.

 Mr Jabbar said it was thought odd that ringgit futures would be traded overseas but not anywhere in this region.



Plunge in stocks lifts future of KL options