The KLSE C1 is the first exchange traded options contract in Malaysia and is based on the benchmark index KLSE C1, which is made up of the 100 largest publicly listed companies on the main board of Kuala Lumpur Stock Exchange (KLSE). Companies on the KLSE include Telecom Malaysia, Tenaga Nasional, Sime Darby and Malayan Banking.
The company expects that the product will provide an additional risk management tool, increasing opportunities for hedging, arbitraging and speculating for a wilting Malaysian equity market affected by selective capital controls.
"There are no direct capital controls on derivatives, but selective capital controls have affected the equity and cash market. If investors don't want to be in these markets, they don't want to be in the derivatives market," says S Loganathan, general manager of KLOFFE.
Affecting the market is the rule that 10% of profits on Malaysian investments must not be remitted overseas for 12 months. Loganathan estimates that, before capital controls were instituted, KLOFFE handled some 10,000 contracts a day, and more than half of those were with foreign investors. The figure has now dramatically decreased due to a vacuum left by these foreign investors affected by the rule.
KLSE C1 comes into a derivatives market devoid of choice and popularity. Institutions do not view the market as a risk management tool, and do not see a need for it, says Loganathan. Institutions and companies often don't hedge at all, he adds. A further factor adding to the lackluster market is the lack of liquidity in the market. "It's a case of the chicken and the egg," Loganathan says. KLOFFE only offers one other product, a futures contract.
In order to lure investors, the Exchange and Malaysian Derivatives Clearing House (MDCH) has granted a fee holiday for the KLSE C1 options for a period of six months starting 1 December, 2000. The trading fee of RM9 per contract and the clearing fee of RM1 per contract will be waived. Investors will still have to pay for the brokerage commission of RM50 per contract.
Investors will be able to trade in a spot month, the next month, and the next two calendar quarterly months.