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Six Months Fee Waiver for Bursa Malaysia’s Financial Futures

One of the many types of futures products offered by Bursa Malaysia Derivatives is the financial derivatives. A financial derivative, as implied by its name, is an instrument that derives its value from an underlying financial instrument which may be equities, bonds, interest rates etc. These derivatives may exist in the form of a futures contract, an option, or a swap agreement. For this blog, we shall only discuss bond derivatives, specifically the futures on bond securities issued by the Malaysian government, or MGS in short.

So what exactly is a bond securities futures derivative? Let us answer the question by dissecting it into two. First, a bond is a type of debt security issued by a corporation, a municipality, or a government to meet its financial needs. Generally, a purchaser of a bond shall receive coupon payments periodically as a form of interest payment for lending out his or her money to the issuing party, although there are also bonds that do not pay out coupons.

For the second part of the question, a futures derivative is an agreement between two parties to buy or sell an asset in a predetermined price at a specific time. Put together, a bond futures contract is agreement to purchase a certain number of bond securities at a specific price and time.

Locally, bond securities futures products offered by Bursa Malaysia Derivatives Bhd are the 3-year Malaysian government securities futures (FMG3) and the 5-year Malaysian government securities futures (FMG5). Primary market trading, through auction and subscription of MGS is relatively more liquid. In contrast, due to high demand by financial institutions especially insurance companies, secondary trading of MGS is rather thin which as a result appears less attractive to retail investors in comparison to other instruments.

The FMG3 is a cash settled futures contract that sets the benchmark interest rates of the three-year sector. The contract assumes a 6 percent semi-annual coupon and its prices will be derived from the yield-to-maturity of the MGS in the three-year sector. The final settlement value of the contract will be calculated based upon the weighted-average of eligible MGS as stipulated by the contract itself. The FMG5 works in a mechanism identical to the FMG3, with the only difference being the five-year tenor instead of three.

In an effort to promote greater investing activities and participation in Malaysian government-issued debt securities market, Bursa Malaysia Derivatives Clearing Bhd on 19 September 2016 began offering revamped versions of the FMG3 and FMG5, in addition to the inaugural launch of the FMGA, which is a futures contract on 10-year Malaysian government securities.

As part of the effort, trading and clearing fees for these products will be waived for a period of 6 months beginning 19 September 2016 until 18 March 2017. Moreover, Local Participants will get to enjoy the fee waiver for an additional 6 months while the fee waiver shall remain in effect for market makers for the entire duration of their agreement with Bursa Malaysia Derivatives Clearing Bhd.

In conclusion, should you jump in the MGS bandwagon? Well, yes and no.

In addition to taking advantage of the fee waiver, institutional traders should consider the other benefits of investing MGS futures which is to hedge your exposure to interest rates. If you are a corporate treasurer, you can utilize MGS futures to lock in at a rate that is favorable to you when lending or borrowing. MGS futures can also act as a benchmark for financial institutions to price financial instruments off the yield curve. Another advantage of holding an MGS futures is that it can act as a temporary substitute for holding physical bonds which may incur costs of holding or transaction, not to mention the ease of reversing a position when a hedge is no longer needed.

To trade MGS, speak to us at 03-21818848 or use the orange chat button on the bottom right of your screen to ask your questions.

This post is contributed by OPF Staffer, Ethan Mak.

Ethan Mak is a CMSR in training with a strong passion for research and writing on business, finance, economics and politics. Ethan holds a Bachelor’s Degree in Finance.

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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.


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