Futures Brokers' Seminar
6 January 1996 |   By : Dato' Dr. Mohd. Munir Abdul Majid, Chairman, Securities Commission, Malaysia

Good morning ladies and gentlemen.
This is a momentous occasion it is the first time that I have the privilege of addressing the people who will soon hold the key to the success of the exchange-traded derivatives market in Malaysia. The Commission is committed to encouraging the orderly development of innovative and competitive capital markets in Malaysia. The introduction of financial futures with the starting up of KLOFFE and MME will be a significant milestone in achieving that goal.

I appreciate that all of you here are very actively involved in the final stages of preparation before the exchanges go live. With that in mind, I shall keep my remarks this morning short and to the point so that we can move quickly on to the events of the day.

There are two messages which I would like to get across today:
Consultation. In the execution of the Commission's mission, we have consciously adopted an approach which we feel is consultative and receptive to ideas and suggestions. I hope that the working relationship that has been forged between the Commission, the exchanges, the clearing house and the futures brokers -- one characterised by openness and mutual respect -- will be nurtured as we work together to grow and develop the financial derivative markets. The needs and objectives of industry participants have been and will be foremost in our minds. Indeed this seminar today is intended to foster an exchange of information between the Commission, the exchanges, the clearing house and those of you who are actively preparing for the start of the futures market. If there is any issue we can address or query you have either today or at any time in the future which we can answer that will assist your preparations or clarify matters for you, the Commission will be happy to oblige.

We have already begun dialogue sessions with the Pro-tem Management Committee of the soon-to-be-formed Malaysian Futures Broker's Association. I would like once again, as I did at the meeting on November 17 to commend the pro-tem committee for taking the lead in establishing an association to represent futures brokers in promoting professionalism and the well-being of the industry in Malaysia.

Which brings me to my second message:
Professionalism. The test of development of a market is best gauged not just by the volume of trades, not by the level of open interest, not even just its liquidity, but ultimately by the sophistication and professional conduct of its participants. Initially, derivatives may appear to introduce an additional layer of complexity to the analysis of risk; hence futures brokers and their representatives must assume responsibility in highlighting risk and giving advice to less sophisticated investors. But the end result should be a more complete market -- one which allows end users a means of managing their risks.

Our collective goal should therefore be a market environment in which intermediaries and participants act in a professional and responsible manner towards the development of the futures market for the benefit of all who view their presence in the market as a long term one.

The regulatory framework which we will have in place for the futures industry has been designed with the consideration that it is time that the standards of the capital market be advanced. For instance, business rules of the exchanges will require a compliance unit be formed in every broker. We have also introduced a suitability requirement in respect of advice given by an intermediary to its client. The business rules of the exchanges will also crystallise some of the duties, responsibilities, obligations and liabilities that intermediaries have in relation to their clients.

However, let us not stop here. We would like to see industry take the driving seat in directing the growth of professional standards not just in the area of futures but in the provision of financial services generally.

Start date
Now on to the question of exactly when the market will start. Where are we at today? A lot of hard work has been put in the run up to the start up. We have been advised by KLOFFE that it has in place all the necessary facilities, controls and procedures to operate a futures market. We have also been advised by KLOFFE that its facilities, controls and procedures have taken into account the clearing and risk management function that will be performed by the clearing house such that KLOFFE's systems and procedures are sufficiently equipped to operate in an integrated trading and clearing environment. KLOFFE's assessment of its own readiness has also encompassed a review of the readiness of at least half its trading members. KLOFFE has certified to the Commission that 17 trading members will be in a position to start trading in December 1995.

The Commission has made its own assessment of the readiness of KLOFFE's systems, controls and procedures. We have also assessed the readiness of the clearing house to provide clearing facilities to contracts traded on KLOFFE. We have been monitoring the trading and clearing simulations that have been taking place over the last 10 days and reviewed the results of those simulations. MDCH has advised the Commission that, while extended market testing will continue into the next week, there are a number of areas, particularly members' staff training and banking arrangements which need to be completed. There is every reason to believe that KLOFFE and MDCH can be expected to start operations at the end of three working weeks from today.

The Malaysia Monetary Exchange feels that the preparedness of its members and their clients have to be further enhanced and tested before it would recommend to the Commission for the trading of KLIBOR contracts to commence on the MME. Recent market simulations have shown that there are different levels of understanding of the product that can readily be improved and addressed through extended market testing. Brokers will also benefit from additional practice that will allow them greater familiarity with the clearing procedures associated with trading KLIBOR contracts. But brokers will have to be committed to put in resources to improve their back room operation, communications systems and training, before the trading of the KLIBOR contract can begin.

We appreciate and feel gratified with the detailed and careful analysis that the MME has made of all the prospective participants in its market as well as manual procedures involved in the operation of its registration and clearing systems which must interface with the clearing house's risk and asset management systems. We fully support its decision to encourage its members to participate in more extended market testing before they and their clients start trading in a live environment. I believe that day will not be long in coming.

In closing, I hope the proceedings of the day will serve to resolve any problems, address any issue and answer any question that you may have. I am sure that the trading simulations that have been conducted by the exchanges have brought out some problems that you might like to air or share with us so that they can be resolved to our mutual satisfaction.

Finally, I would like to thank all the speakers for making time to prepare and speak at this seminar despite your hectic schedules of the recent past. To the hardworking staff of the SIDC, my congratulation on a job well done, And to all participants, I hope you will make full use of today's sessions not only get your money's worth but also to get answers to all your burning questions that will ease your passage towards the start of financial futures trading in Malaysia.

And with your questions resolved, let us move forward in a spirit of confidence and co-operation.

Thank you.
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