SGX To Trade New Fuel Oil Contract - Wake Up Bursa!

With Singapore's status as the world's largest bunkering port and the world's third largest oil trading hub, SGX said the new contract will further enhance the country's attraction as an international oil pricing centre. The contract is based on the Residual Marine Grade 380 ISO 8217, primarily bunker fuel oil supplied to ships. Physical delivery will be through free-on-board or inter-tank transfer at exchange-designated Singapore oil installations. The minimum trading contract size is 100 metric tonnes per lot and the minimum deliverable size will be 2,000 metric tonnes or 20 lots.

Market-makers and liquidity providers will be available for this contract, SGX says.

According to Lam Yi Young, chief executive of the Maritime and Port of Authority of Singapore (MPA), the new contract is expected to attract demand from local and international participants. "SGX's fuel oil futures contract will encourage greater participation in Singapore's marine fuel market both from local and international shipping and bunkering communities," he says.

The Simex contract was for fuel oil with a viscosity of 180 centistokes, widely considered the global benchmark.

However, the two previous offerings failed to take off. The Simex contract was later withdrawn; CME Group still lists its fuel oil contract though volumes have failed to ignite.

So despite Singapore being home to the world’s busiest port in terms of shipping tonnage, what went wrong? Elena Sing, SGX’s head of commodities, says it is simply a matter of timing. She told Futures and Options World inthat market participants had approached the exchange asking for the contract, especially firms that could not access the over-the-counter market.

“The Simex contract was in existence nearly 20 years ago,” Sing says. “Back then there was limited storage space, whereas now Singapore has extensive storage capacity. There are also a far greater number of market participants.”

Sing concludes: “The market is ready for this new futures contract.”

SGX’s optimism is shared by others in Singapore. Chong Lit Cheong, chief executive of International Enterprise Singapore, says: “Singapore has been one of the leading physical commodities trading hubs in Asia Pacific, in particular for the oil trading sector. The launch of SGX’s FO 380 contract will undoubtedly further strengthen our value proposition to the global oil trading community.”

The regional head of commodities at a futures commission merchant in Singapore says: “We’ve had quite a lot of interest from our customers. Those clients are mostly already active in the oil market, rather than the hedge funds.”

However, success for the contract is far from guaranteed, say industry insiders. The 180 centistoke standard, rather than 380, is the global benchmark, and that although Singapore is a hub for oil trading, much of that trading is entrenched in New York, particularly the Platts-linked OTC contract.

The settlement process is extremely complicated. SGX says it will match buyers and sellers by volume, before loadings are fixed. For unmatched volumes, parties will settle their trades against the monthly closing price for the contract.

With firms like Shell, BP and Singapore Petroleum Co, as well as traders Vitol, Glencore, Chemoil, Hin Leong, PetroChina, shipper Maersk and bunker supplier Equatorial Marine all involved in forming the contract, such large players may provide the liquidity so sought after by non-physical players in the oil market.

The contract will have two daily trading sessions: 9am to 7pm and 8pm to 10.55pm. The 7pm closing price will be the price for the day’s settlement. The monthly settlement is the average settlement price for the last five days of the month.

Comments: Despite two false starts, SGX kept at it and by bringing in the major players as "consultants" in setting up the contract, it should have a better chance at success. This brings us back to Bursa, where foreign funds have been staying away for the past 16 months. The palm oil futures USD contract has not yet borne fruit. Could we be in danger of losing the palm oil futures stranglehold soon?

Sometimes, just because something is chugging along does not mean we can do nothing. We need to enlarge the pool of palm oil traders and lure more and more big companies to trade the existing RM or USD contracts. Only by being bigger will the contract stay put. If we do nothing, I am very sure SGX will try to launch a USD palm oil contract in the near future.

After selling 25% of our derivatives unit to CME Group, we have yet to see tangible benefits!!??

Yes, we can sit and say that KL is not a financial center and will face a lot of obstacles. We need to be proactive. We should nurture our niche markets, be it in Islamic finance or palm oil, or even rubber and tin. We do not seem to have a roadmap or a cohesive strategy. We do not seem to have a bigger picture appreciation of the evolving needs and demands on these so called "home advantage" products. As in many things in Malaysia, we do not have a proactive mindset, we have a poor strategic mindset about most things, we have a high propensity to churn out brilliant power points but that is usually not complemented by a similar record in proper execution, and we usually do not spend enough time on details and crossing the T's and inking the dots.

p/s photos: Sandra Dewi

On A Clear Day, I Can See Forever

My blog has mostly been about a lot of bashing and flaming, in particular when major institutions do not execute or plan well. A diversion for now, which I hope will be more frequent in the future, are two major developments worth noting:

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KUALA LUMPUR, Aug 11 — CME Group Inc, the world’s largest derivatives exchange, will develop a US dollar crude palm oil (CPO) futures contract using settlement prices of Malaysia’s ringgit contracts for trading on CME Globex. CME will work with stock exchange operator Bursa Malaysia to offer the cash-settled futures contract in the United States aimed at globalising the Malaysian CPO futures market, a statement from the two companies said.

The two parties will also explore trade matching services, product licensing and minor cross-equity investments in a partnership still subject to regulatory approval. The Chicago-based exchange operator said the proposed partnership will increase its presence in Asia and expand its transaction processing business opportunities. Specific terms of the partnership will be announced later, the two exchanges said in a statement. Bursa has introduced a dollar-based palm oil contract. — Reuters

Comments: The FUPO was a start and fizzled just as many had expected (including this blog), but looking further ahead, the instrument was needed as a negotiating point to get CME to launch a similar US-dollar based contract as well. Getting it on CME is no guarantee of success, but will be the best platform for getting things right. Volume and liquidity will need to start on CME side before getting similar activity on FUPO during Malaysian trading time. It has a decent chance for success now as being on CME would at least lure the arbitrageurs. The fact that there is a corresponding ringgit based contract makes for good arb opportunity. Volume begats volume, soon I hope to see FUPO trading just as active as the ringgit based contract. The major local palm oil players have a role to play (which they haven't been doing so far) - all have been sitting back pooh-poohing the FUPO and just putting through contracts through the ringgit side. You as the major CPO players have a big role to play, you have to lead, try funneling 25% of all hedging / selling activity through FUPO because in the end its you fuckers who will benefit. Having a USD contract for futures will negate a lot of currency hedging required as you people still borrow extensively in USD. You cannot just sit back and say to Bursa "let's see what you can do". You know very well you will be the major players in any CPO based contracts - unless you think this is not going to help shore up your business strategy and options (which means you are plainly stupid to think so when there is a government body helping you indirectly to better sell, better hedge and better market your product).

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KUALA LUMPUR, Aug 11 — Malaysia’s central bank has directed a sweeping overhaul in the board of directors of the country’s largest banking group Maybank, in an unprecedented government censure on a board of a financial institution. The little-publicised revamp followed government displeasure at the controversial acquisition of an Indonesian lender by Malayan Banking (Maybank) last year, officials say. Bank Internasional Indonesia (BII) was bought from a consortium led by Singapore’s Temasek Holdings at a price that was deemed too high.

Prime Minister Najib Razak, who directed Bank Negara to review the transaction, has endorsed the central bank’s decision calling for a Maybank board revamp, the government officials say.

“The decision was also made that the board revamp will be carried out in stages and directors who are retiring won’t be re-elected to the board,” said a senior government official who was involved in top-level discussions on Maybank’s Indonesian venture.

Maybank’s main shareholders are national equity fund Permodalan Nasional and pension fund Employees Provident Fund. Bank Negara declined comment for this article, citing its policy of not discussing issues involving individual financial institutions. Maybank executives, including its chief executive officer Abdul Wahid Omar, also declined repeated requests for comment for this article. But the bank did announce the retirement of two directors and the appointment of three new members mid-last month. Between end-October last year, when the acquisition of BII was completed, and this March, three directors have resigned.

“This is part of the reforms that the PM is pushing for and it will raise the sense of greater accountability in the boards of government-linked companies,” said a senior adviser to Najib who is familiar with the central bank’s decision on Maybank.

In March last year, Maybank entered into an agreement to buy a 55 per cent interest in BII from Sorak Financial Holdings, which is majority-owned by Singapore’s Temasek Holdings. The Malaysian bank agreed to pay US$1.5 billion (RM5.3 billion) for the stake and then make a tender offer for the remaining 44 per cent for roughly US$1.2 billion. But the global financial meltdown raised questions over the health of banks in general and reignited criticisms that Maybank was paying too high a price for BII. Maybank’s position was further undermined when Indonesia introduced changes to its corporate takeover rules, which called on the Malaysian financial institution to sell down 20 per cent of its holdings in BII within two years of its takeover.

Bankers close to Maybank had argued that the disposal was surely to lead to massive losses. Faced with the prospect that the deal could adversely hit Maybank and the Malaysian banking system, Bank Negara had revoked its approval for the BII acquisition. The approval was later reinstated. The deal was finalised after the Temasek-led consortium lowered the purchase price for the transaction by US$220.5 million for the 55 per cent interest in BII. In Bank Negara’s review, which was completed in April this year, it concluded that Maybank’s purchase price for BII was too expensive. The central bank also concluded that the Malaysian financial institution did not put in place adequate measures to protect itself in the event that the deal encountered problems, the government officials said. — The Straits Times

Views: The article is so succinct and clear, I don't really have to add anything. Interested readers can search this blog for my previous postings on Maybank and BII.


p/s photos: Lee Ji Ah