Tuesday August 21, 2012
Trader: Malaysia's planned mercantile exchange should prioritise physical delivery
By JOHN LOH
PETALING JAYA: Malaysia's planned mercantile exchange should give priority to physical delivery as a mode of settlement over cash as genuine investors want to receive the actual product, said a veteran futures trader.
While the majority of futures contracts are cash-settled owing to the logistics costs that accompany physical delivery, Singapore-based commodity expert Dar Wong told StarBiz that goldsmiths, mint companies and bullion firms were among those who needed the commodity tied to their futures contracts.
“Where physical delivery is possible, these investors need only to go to the exchange instead of having to search for buyers and sellers on their own.
“However, if the market is primarily cash-settled, it opens the doors to speculators, which would chase away real investors and result in low volume.
“The Singapore Mercantile Exchange is mostly cash-settled. This is not the best approach,” he said, noting that Malaysia could take a leaf from its closest competitor which began operations in 2010.
“Singapore does not have an exciting mercantile exchange. There are not enough incentives from the government and since it is not under Singapore's stock exchange, they are competing with each other,” he added.
Industry executives have even taken to calling it an inferior exchange due to its underperformance vis-vis regional peers like the Shanghai Mercantile Exchange and Tokyo Commodity Exchange, according to market watchers.
Wong further suggested that Malaysia's mercantile exchange “borrow the strength” of those with the technology and expertise in clearing and settlement of trades, similar to when Bursa Malaysia sold a 25% stake in its derivatives arm to CME Group for RM55mil in 2009.
The Chicago-based firm, which was born of a merger between the Chicago Mercantile Exchange and Chicago Board of Trade, and later an acquisition of the New York Mercantile Exchange and Commodity Exchange, is the world's largest exchange operator and derivatives market place.
Its deal with the local stock exchange four years ago enabled the development of US dollar denominated cash settlement of crude palm oil futures contracts and related options for listing on one of CME Groups' designated exchanges in the United States, besides the use of its electronic trading platform CME Globex Services.
The Securities Commission announced last month it was embarking on the country's first exchange for the trading of gold futures and other precious metals to be launched within a year.
It said this was in response to the robust demand for precious metals, gold in particular, adding the exchange would provide a safe, structured and legal avenue for such trades.
Gold, which touched a peak of US$1,900 last September at the height of the eurozone debt crisis due to its safe haven appeal, is currently sold mainly over the counter at goldsmiths and jewellery chains, as well as gold investments from banks.
Industry players have acknowledged the setting up of a domestic mercantile exchange will help lessen, if not put an end to, the myriad illegal gold scams that have led to well over a RM1bil in losses for gullible investors.
Wong concurred, saying the exchange will create a centralised market and promote “fair trading”.
For it to succeed, he stressed that the Government must lend its support, for example through tax incentives.
Local banks, he added, could relocate their hedging and futures trading activities from the London Metal Exchange, the top destination for options and futures contracts on metals globally, to Malaysia.
“If the big boys stay away, there will be no trading liquidity or velocity in the market to excite traders or retail investors,” he opined.
Poh Kong Holdings Bhd head of corporate affairs, administration and human resources Margaret Hon noted that one issue to consider was whether the commodities would be denominated in ringgit.
“There are two risks we could face when hedging on the local mercantile exchange, which is the fluctuation of the US dollar and the price of gold,” she said.
“The intention to curb gold scams and Ponzi schemes is good and hopefully we can mitigate this problem in the long run.
“What is important is that investors are given the necessary education so the exchange does not become a casino,” he said.