Leveraging On Opportunities With Crude Palm Oil Futures Azila Abdul Aziz Chief Executive Officer & Head of Listed Derivatives KENANGA DEUTSCHE FUTURES SDN BHD A member firm of Bursa Malaysia Derivatives Berhad (BMD) A registered broker with the US CFTC granted part 30.10 exemption 2015 Palm Oil Trade Fair and Seminar (POTS), South Korea 1
Content Overview The Bigger Picture : Profiling Malaysian Listed Derivatives Underlying Asset : Supply & Demand Derivative Overview : A Global Benchmark Fundamentals Risk Management Framework Trading Dynamics How to access the BMD market? Broker Landscape Main Takeaways 2
The Bigger Picture : Profiling Malaysian Listed Derivatives 3
Profiling Malaysian Derivatives Strategic partnership between CME and BMD; today BMD contracts are made available on CME Globex trading platform, which has connectivity points / hubs in various parts of the globe the USA, Europe and Asia Electronic access capability expanded resulting in efficiency in trade execution at an improved latency / speed and creating global visibility for Malaysian Derivatives The advent of electronic access has been the game changer in driving the FCPO volumes and open interests to a new level Increased use of technology facilitate efficient price discovery whilst lowering cost of trading FCPO prices is the global benchmark for crude palm oil market since 1980s FCPO accounts for more than 80% of the total volume traded on BMD 4
Underlying Asset: Supply & Demand 5
Supply & Demand World No.2 supplier after Indonesia Palm Oil Output Ratio 2014 Source: Malaysia Palm Oil Board (MPOB) Top 10 Buyers of Palm Oil By Destinations ( tonnes) in 2014 No Destination Tonnes ( Mil) 1 India 3.25 2 China 2.84 3 Netherlands 1.60 4 Pakistan 0.82 5 United States of America 0.78 6 Vietnam 0.60 7 Japan 0.51 8 Philippines 0.49 9 Singapore 0.48 10 Benin 0.47 ------- ----------------------------------- ------- 12 South Korea 0.37 6
Derivative Overview : A Global Benchmark 7
Derivative Overview : A Global Benchmark Where FCPO trading is centered? BMD FCPO available on CME Globex platform - Crude Palm Oil Futures Dalian Commodities Exchange in China - RBD Palm Olein 8
Derivative Overview : A Global Benchmark Bursa Malaysia Derivatives Annual Volumes (Past and Projected) Contracts ( Mil) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 6.2 2.0 4.1 8.4 2.5 5.9 Est 14.5 million contracts in 2015 Main contribution from the FCPO contract Est. CAGR of 18.5% in 5 years 12.5 9.6 2.1 10.7 2.7 7.5 8.0 2.2 10.2 14.5* 2.9 11.6 0.0 2010 2011 2012 2013 2014 2015* Source: Bursa Malaysia Crude Palm Oil Futures FBMKLCI Futures *KDF estimates 9
Derivative Overview : A Global Benchmark Open interest since Migration to Globex 2010-2014 11/9/14 314,361 29/07/13 251,965 24/02/10 109,449 24/02/12 134,264 28/02/12 176,118 18/01/13 215,080 Source: Bursa Malaysia Crude Palm Oil Futures FBMKLCI Futures 10
Derivative Overview : A Global Benchmark The most actively traded products on the Exchange CPO Futures Investors Breakdown 19% 2014 81% Crude Palm Oil Futures Source: Bursa Malaysia FBMKLCI Futures Foreign Institution Foreign Retail Domestic Retail Domestic Institution Local Participant 11
Derivative Overview : A Global Benchmark Users of FCPO: Foreign banks Hedge funds CTAs High frequency traders Arbitrageurs / Basis trader Speculators - Local participant Domestic corporate users - Plantation companies Futures trades more than 12 times of CPO production 12
Derivative Overview : A Global Benchmark Thousand (V) FCPO Average Daily Volume and Open Interest Thousand (OI) 25 Active 3 rd Month FCPO Volatility 2014 20 15 10 5 30 Day 16.97% 60 Day 16.98% 90 Day 16.86% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bursa Malaysia, *KDF Estimates Vol (30D) Vol (60D) Vol (90D) 13
Fundamentals 14
Advantages of using FCPO : Manage market/price risks Lower transaction cost Allow leveraging Avenue to short sell Immediate exposure into palm oil commodity markets Settlement prices transparent No counterparty risk - guaranteed by BMD Clearing Fundamentals Factors to watch: Positive correlation with CBOT Soy oil Softening/strengthening in crude oil prices bio diesel MPOB data Export data -ITS & SGS Import tariff -buying countries Export tax -producing countries Seasonal production Weather conditions Currency fluctuations - MYR against the US dollar * MPOB data includes : production, export, import and ending stocks 15
Fundamentals 3.60 MYR/USD Exchange Rate 2014 3,000 Active 3 rd Month FCPO Settlement Price 2014 3.50 3.40 2,800 2,600 2,400 3.30 2,200 3.20 3.10 3.00 2,000 1,800 1,600 1,400 2.90 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MYR / USD Source: Bloomberg 1,200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Settlement Price 16
Risk Management Framework 17
Risk Management Framework Risk tolerance and volatility reduction Identify your exposure Objective of hedging 1 Quantify risks Products and grades to be hedged 2 Choosing the hedging instruments 4 Hedging parameters Partial hedging or creating a portfolio of options Choosing the appropriate tenor 3 BMD has 3 year tenors (15 listed months) available to hedge 18
Illustration Actual Hedging Concerns : Sellers (Producer) Fear of price decrease Concerns : Buyers (User) Fear of price increase Solutions Hedging : Selling FCPO contracts Hedging: Buying FCPO contracts 19
Graphical Illustration Sells palm oil (Producer) Buys palm oil (User) Spot / Physical Market Protection from price decrease Protection from price increase Sell FCPO contract on BMD Buy FCPO contract on BMD 20
Trading Dynamics 21
Trading Dynamics Bloomberg ticker : KOA Cmdty Tick Size : RM 25 per tick (USD 7.14) Contract Size : RM 60,000 (USD 17,142) ADV (3rd Month) : 21,250 contracts (USD 364 million) ADV (All listed month) : 42,500 contracts (USD 729 million) Source: Bloomberg 22
Trading Dynamics Intraday Day Volume Distribution Source: Bloomberg 23
How to access the BMD markets? - Overall Trading and Clearing Flow 24
Overall Trading and Clearing Flow Broker s Front Office [CME Certified Order Management System] Broker and Clients CME ilink hubs; Global locations (FIX Protocol) (Execution confirmation) CME GLOBEX (Matching Engine) Location : USA Clients Broker s Back Office Operations (FIX Protocol) CME ilink hubs; Kuala Lumpur Derivatives Clearing System DCS Back office Systems Financial Accounting Systems Bursa Malaysia Derivatives Clearing House (Clearing System) Location : Malaysia Note : Trading flow Clearing flow 25
How to access Bursa Malaysia Derivatives markets? Trading Flow via Voice Execution Client Investor places an order via Telephone, Bloomberg or E- Message to the broker BROKER s Dealing Desk Dealer receives & execute the order onto the Broker Order Management System Dealer confirms and report the trade executed via phone, Bloomberg or E-Message service Latency : less than one minute Exchange Location : Chicago, USA CME GLOBEX (Matching Engine) 26
How to access Bursa Malaysia Derivatives markets? Trading Flow via DMA execution Source: Kenanga Deutsche Futures, TABB group report 27
Broker Landscape 28
Broker Landscape Number of trading participants in Bursa Malaysia Derivatives 2014 Top member firms for all products (exclude locals) Rank Exchange member 1 Kenanga Deutsche Futures Sdn Bhd 2 TA Futures Sdn Bhd 3 RHB Investment Bank Bhd 4 CIMB Futures Sdn Bhd 5 JP Morgan Securities (M) Sdn Bhd 6 Philip Futures Sdn Bhd 7 Okachi (M) Sdn Bhd 8 AM Futures Sdn Bhd 9 Credit Suisse Securities (M) Sdn Bhd 10 UOB Kay Hian Securities (M) Sdn Bhd Source: Bursa Malaysia 29
Main Takeaways 30
Due to increase globalization, palm oil prices are susceptible to price fluctuations Main Takeaways Both producers and users use derivatives to hedge their expected payments and receipts against such unpredictable price swings FCPO a liquid contract that sellers and buyers may leverage upon to mitigate price risks Hedgers may take reference of the parameters outline in the risk management framework The attractiveness of the FCPO market should continue to draw investors attention going forward as products evolved and diversity of the commodity increases Consult member firm of BMD for better product understanding and connectivity solutions 31
Thank you Terima Kasih 감사합니다 32
Contact Us To Know More 33
Azila Abdul Aziz Chief Executive Officer Head of Listed Derivatives Kenanga Deutsche Futures Sdn Bhd Tel: (603) 2713 0066 Email: azila@kenanga.com.my Eunice Choo Head of Futures Broking Listed Derivatives Kenanga Deutsche Futures Sdn Bhd Tel: (603) 2164 2155 Email: eunicechoo@kenanga.com.my Khairulnisah Binti Khidzir Administrator & Business Facilitation Kenanga Deutsche Futures Sdn Bhd Tel: (603) 2713 1375 Email: nisah@kenanga.com.my Tan Choon Wei Head of Dealing Listed Derivatives Kenanga Deutsche Futures Sdn Bhd Tel: (603) 2162 6000 Email: cwtan@kenanga.com.my Sofian Ahmad Senior Manager, Direct Market Access Listed Derivatives Kenanga Deutsche Futures Sdn Bhd Tel: (603) 2164 9764 Email: sofian@kenanga.com.my Ewen Sim Manager, Business Development & Strategy, Listed Derivatives Kenanga Deutsche Futures Sdn Bhd Tel: (603) 2164 9764 Email: ewen@kenanga.com.my Elsie Ooi Senior Manager, Clearing & Settlement Operations Listed Derivatives Kenanga Deutsche Futures Sdn Bhd Tel: (603) 2162 6000 Email: elsie@kenanga.com.my 34