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Malaysian Derivative Contracts

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    D Three crucial features in money market : C] Low default risk C] Short term to maturity 0 High marketability Mortgage Market C] Market that provides finance for real estate

    C] Real estate loan issued by various types of financial institutions banks Savings bank Other financial institution (Cascaras Bertha) Two type of mortgage securities Instrument: Pass-through mortgage securities Mortgage-backed bonds Unit Trust Market Commercial Essentially collective investment schemes structured to allow investors with similar investment objectives and risk tolerance to pool their savings in a common fund 0 The pool can be manage by an investment company and invested in a diversified portfolio D Involves in tripartite relationship between the fund manager, trustee and investor 0 Two types of unit trust:

    C] Open-ended Derivative Market 0 A market to enable participants in the market to offset their price risk in future transaction which involve money security and commodity. 0 Derivatives trading requires two instruments : 0 Derivative instruments 0 Physical instruments 0 Both prices tend to influence each other which is the performance of the derivative market depends on the performance of the physical market CONTENT History of Malaysian Derivative Contracts and Futures Currently, Malaysia has a single derivatives exchange known as Bursa Malaysia Derivative Bertha or BOMB.

    Prior to the demutualization of Bursa Malaysia, BOMB seed to be known as MADE (Malaysia Derivatives Exchange). This new exchange which began on 11 June 2001 was the result of a merger by Malaysia’s two previous derivatives exchanges – COMDEX and CLIFFS. Though COMDEX was the older of the two, CLIFFS was the exchange that introduced Malaysia’s first financial derivative. For the sake of historical perspective, the following two subsections provide a quick overview of Bomb’s predecessors, COMDEX and CLIFFS.

    Commodity and Monetary Exchange of Malaysia: COMDEX COMDEX which was the result of a 1998 merger of two exchanges had its beginnings in the Koala Lump Commodity Exchange (KALE). The KALE which was Malaysia’s first derivative exchange was established in 1990. As the name suggests, the KALE was established to introduce and trade commodity derivatives. The first derivative contract introduced by the exchange was the Crude Palm Oil (COP) futures contract in 1980. Subsequent to the successful launch of COP futures, the KALE introduced several other commodity future contracts, which were: 1 . 983-Rubber futures contract (RSI, Rubber Futures) 2. 1986-Rubber futures contract (SMS 20, Rubber Futures) 3. 1987-Tin Futures Contract 4. 1988-Cocoa Futures Contracts 5. 1990-palm Owlet Futures 6. 1992-Crude Palm Kernel Futures Despite having introduced seven commodity futures contracts by mid-1990, the originally introduced Crude Palm Oils futures contract remained the mainstay COMDEX and of BOMB currently. The COP contract is the most actively traded contract and has been the key to the exchange’s survival.

    This may in large part be due to the fact that unlike cocoa, tin and rubber futures that are also traded in foreign exchanges in London, Tokyo etc, COP futures are only traded in Malaysia. As such, the COP futures settlement prices on BOMB are often used as reference prices in third party trade elsewhere. Though from a logistical viewpoint, the establishment f a new subsidiary to trade financial derivatives made sense, the economics of the with the single contract it had. In early 1998 at the urging of the Ministry of Finance, the two exchanges worked on a ‘merger’. This resulted in the KALE absorbing MME in December 1998.

    The new entity came to be known as COMDEX. The Koala Lump Options and Financial Futures Exchange(CLIFFS) CLIFFS, Malaysia’s first financial derivatives exchange was established in July by a consortium of private companies. Though the conceptualization and planning for CLIFFS had been completed in early 1990, the setting up of the exchange had to be preceded by he resolution of Jurisdictional issues and legislation. Jurisdiction was an issue since the existing derivatives exchange, the KALE was a commodities exchange under the Ministry of Primary Industries. A financial derivative contract would have to come under the Ministry of Finance.

    In addition to working these Jurisdictional issues, new legislation was also needed to trade financial derivatives. With the resolution of these issues, CLIFFS was able to introduce its first product on 15 December 1995. The first product was a Stock Index Future contract based on are vamped CLICK (Koala Lump Composite Index). With the introduction of this index futures contract, CLIFFS became the second derivative exchange in Asia, after Hong Kong, to trade its own equity derivative. Exactly five years later on 1 December 2000 CLIFFS introduced its second product, index options.

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