Insights of Crude Palm Oil Futures Contracts in Bursa Malaysia

Insights of Crude Palm Oil

Futures Contracts in Bursa Malaysia Deriva<ves

Berhad (BMD) By Nandha Nadeson

HDM FUTURES SDN BHD (A Trading Par<cipant of Bursa Malaysia Deriva<ves Berhad)

PRODUCTS IN BMD

1. Commodity Derivatives Crude Palm Oil Futures (FCPO) Crude Palm Kernel Oil Futures (FPKO) USD Crude Palm Oil Futures (FUPO) Options on Crude Palm Oil Futures (OCPO) 2. Equity Derivatives FTSE Bursa Malaysia KLCI Futures (FKLI) FTSE Bursa Malaysia KLCI Options (OKLI) Single Stock Futures (SSFs) 3. Financial Derivatives 3 Month Kuala Lumpur Interbank Offered Rate Futures (FKB3) 3 – Years Malaysia Government Securities Futures (FMG3) 5 – Years Malaysia Government Securities Futures (FMG5)

WHAT IS FUTURES?

A futures contract is an agreement between two parties to buy or sell the underlying instrument at a specific time in the future for a specific price determined today.

•  Physical Delivery/Cash Settled.

•  A trader who has bought a futures contract can close out by selling the same number and type of futures contract he bought and vice versa.

FUNCTIONS OF FUTURES 1. Price Discovery Provide a means for determining prices in advance for periods of a year or more. The prices are established by interaction of demand and supply, more specifically, by the bids and offers of both buyers and sellers.

2. Risk Shifting Allows the separation of the risk of price change from risk arising from other normal business functions similar to the separation of theft or fire risk from the other business risks. 3. Hedging functions Because of the ease in transferring unwanted risks in the futures market, there is tremendous flexibility in the timing of purchases and sales yet maintaining anonymity. 4. Market Efficiency A futures market acts as a focal point where buyer and sellers can meet readily, thus improving overall market efficiency by reducing search costs. Accessibility is ‘maximized’ through a single marketplace concept, thereby effectively reducing monopoly power and prices become more stable. 5. Information benefits The futures market has an economically efficient mechanism for facilitating the flow of information in the marketplace.

ADVANTAGES OF FUTURES 1.Standardization Specific months for specific quantity 2.Transferability The sale can be offset at anytime between the date of original transaction and the date of delivery by buying that required number of contracts before maturity/expiration 3. Cost Minimal 4. Creditworthiness Clearing house 5. Liquidity It is easy to open and close positions without causing significant change in price

USERS OF FUTURES MARKET

Market participants fall into these 2 categories:

Physical •  Refiners •  Plantations •  Importers •  Exporters •  Merchants

Financial •  Bankers •  Fund Managers •  Investors

CPO FUTURES CONTRACT SPECIFICATIONS

Contract Code FCPO Underlying Instrument Crude Palm Oil

Contract Size

25 metric tons

Minimum Price Fluctuation

RM1 per metric ton

Contract Months Spot month and the next 5 succeeding months, and thereafter, alternate months up

to 24 months ahead

Trading Hours First trading session: Malaysian time: 10:30 a.m. to 12:30 p.m.

Second trading session: Malaysian time: 3:00 p.m. to 6:00 p.m.

Daily Price Limits

With the exception of trades in the spot month, trades for future delivery of Crude Palm Oil in

any month shall not be made, during any one Business Day, at prices varying more than 10%

above or below the settlement prices of the preceding Business Day (“the 10% Limit”) except

as provided below.

When at least 3 non-spot month contracts are trading at the 10% Limit, the Exchange shall

announce a 10-minute cooling off period (“the Cooling Off Period”) for all contract months

(except the spot month) during which trading shall only take place within the 10% Limit.

Following the Cooling Off Period, all contract months shall be specified as interrupted for a

period of 5 minutes, after which the prices traded for all contract months (except the spot

month) shall not vary more than 15% above or below the settlement prices of the preceding

Business Day (“the 15% Limit”).


Daily Price Limits

If the 10% Limit is triggered less than 30 minutes before the end of the first trading session, the

following shall apply:-

a.  the contract months shall not be specified as interrupted;

b.  the 10% Limit shall be applied to all contract months (except the spot month) for the rest of the first

trading session; and

c.  the 15% Limit shall be applied for all contract months (except the spot month) during the second

trading session.

If the 10% Limit is triggered less than 30 minutes before the end of the second trading session, the 10%

Limit shall be applied to all contract months (except the spot month) for the rest of the Business

Day.

S p e c u l a t i v e Position Limits 800 contracts net long or net short for the spot month

10,000 contracts for any one contract month except for the spot month

15,000 contracts for all contract months combined Final Trading Day and Maturity Date Contract expires at noon on the 15th day of the delivery month, or if the 15th is a non-market day, the

preceding Business Day.

Tender Period 1st Business Day to the 20th Business Day of the delivery month, or if the 20th is a non-market day, the

preceding Business Day.


Contract Grade and Delivery Points

Crude Palm Oil of good merchantable quality, in bulk, unbleached, in Port Tank Installations

approved by the Exchange located at the option of the seller at Port Kelang, Penang/

Butterworth and Pasir Gudang (Johor).

Free Fatty Acids (FFA) of palm oil delivered into Port Tank Installations shall not exceed 4%

and from Port Tank Installations shall not exceed 5%.

Moisture and impurities shall not exceed 0.25%.

Deterioration of Bleachability Index (DOBI) value of palm oil delivered into Port Tank

Installations shall be at a minimum of 2.5 and of palm oil delivered from Port Tank

Installations shall be at a minimum of 2.31.


Deliverable Unit 25 metric tons, plus or minus not more than 2%.

Settlement of weight differences shall be based on the simple average of the daily

Settlement Prices of the delivery month from:

a.  the 1st Business Day of the delivery month to the day of tender, if the tender is made

before the last trading day of the delivery month; or

b.  the 1st Business Day of the delivery month to the Business Day immediately preceding

the last day of trading, if the tender is made on the last trading day or thereafter.

Initial Margin (Current) RM 6, 000.00 per contract.

Maintenance Margin (Current)

RM 5, 000.00 per contract.


Internet Orders

This electronic mode of communication via the internet allows the

client to key-in his/her orders directly after taking a position of the direction of the market. Client able to enter his/her own orders, amend, cancel and check the order status.

Voice Orders This is a verbal mode of communication between the client and his/

her broker for trading advice and order execution.

Placing Orders

Negotiated Large Trade (NLT)

•  Negotiated Large Trade (NLT) is an off-market trading facility that allows Trading Participants or their clients to arrange and transact orders of a defined large size away from the trading system.

•  Allows large trades to be done at a single price. Minimises the possible price impact and time delays.

Facilities

Exchange For Related Position (EFRP)

•  EFRP refers to an arrangement between 2 parties whereby a futures position is exchanged for related positions or vice versa. The related position can include cash or physical, swap, OTC derivative or other futures position. •  The related position must involve the commodity or a financial asset underlying of the futures contract, or must be a derivative, by-product or related product that has a reasonable degree of price correlation to the commodity or financial asset underlying the futures contract.

Facilities

SPOT CPO VS SPOT PALM OLEIN

Source: MPOB, BMD

CPO WEEKLY PRICES SINCE 1991

Daily Total Open Interest FCPO Since Year 2010 – May 2013

FCPO Market Demography Since Jan 2013 – May 2013

Source: BMD

Average last five month: Foreign Institutions 40%, Domestic Institutions 10%, Foreign Retails 1%, Domestic Retail 17%, Locals 32%.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jan-13 Feb-13 Mar-13 Apr-13 May-13

Foreign InstitutionsDomestic InstitutionsForeign RetailDomestic RetailLocals

Example of Hedging Strategies (Long Hedge)

A Refiner has to deliver 10,000 metric tons of RBD Palm Olein. He has shortage of 2,000 metric tons CPO and unable to find any seller in a bullish market. As the Refiner is facing the risk of higher prices, He turns to Bursa Malaysia Derivatives and buy 80 CPO futures contracts (2,000 tons) Now he has effectively locked in his prices, (reduce upside price risk) He waits for the tender process to take place to collect the physical delivery of Crude Palm Oil.

Example of Hedging Strategies (Short Hedge) A Palm Oil Merchant who has purchased Palm Olein and in the midst of delivery of the oil, has a risk of falling prices before he could sell his processed oil in the local market. So he sells futures contract to offset any possible decline in oil prices. This is called SHORT HEDGE.

Cash Market Futures Market June

Purchased 1000m/t P Olein at USD 825/t To sell the P Olein in July.

June August FCPO = RM 2450/t Sells 40 contracts August FCPO @ RM 2450/t 40 x RM 25 x RM 2450 = RM 2,450,000

July Prices of P Olein dropped to USD 780 Sold P Olein at USD 780/t Loses = USD 825/t – USD 780/t = USD 45/t Total = USD45/t x 1000t = USD45,000 ≈RM139,500

July August FCPO = RM 2300/t Buys 40 contracts August FCPO @ RM 2300/t 40 x RM 25 x RM 2300 = RM 2,300,000 Profit in Futures: RM 2,450,000- RM 2,300,000 = RM 150,000 ≈USD 48,400

How To Open A Futures Trading Account

Step 2 Applicant are required to submit the documents to the selected

Futures Broker for review process and approval

Step 1 New applicant for individual or corporate futures trading account are required to review and complete the Futures Trading Account Application Form, Risk

Disclosure Statement and any other required documentation by your Futures Broker

Step 4 Deposit the required margins using any of the 9 approved

currencies

Step 5 Start Trading

Step 3 Applicants are notified of status of approval*. For successful applicants, they will

be informed of their new trading account number and funding instructions.

Approved Currencies Deposit (for Initial Margin Only)

Australian Dollar (AUD) British Pound (GBP) Euro (EUR) Hong Kong Dollar (HKD) Japanese Yen (JPY) Malaysian Ringgit (MYR) Renminbi (RMB) Singapore Dollar (SGD) US Dollar (USD) * Variation margin in Malaysian Ringgit (MYR)

Source: BMD

Pass Through Letter of Credit

For margining purposes, corporate/ institutional client may pledge: Pass-Through Letter of Credit -  is a type of letter of credit in the form prescribed by the Clearing House which can be lodged with the clearing house as a form of margin collateral

-  in the event of client’s default the Pass Through Letter of Credit will be liquidated pursuant to a default action that may be taken by the clearing house

- list of approved banks by Bursa Malaysia Derivatives Clearing Berhad can be found in Clearing Circular 15/2012

Source: BMD

Nandha Nadeson Vice President

HDM Futures Sdn Bhd Tel: +603 7724 1088

Email: [email protected]

THANK YOU

Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. HDM Futures Sdn Bhd accepts no liability whatsoever with respect to the use of this document or its contents. Risk Disclaimer: Derivatives trading involves risk. Know the risks before you trade.

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Insights of Crude Palm Oil Futures Contracts in Bursa Malaysia