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Categories
| Bursa brings new structured products |
| Features | |||
| Written by Kathy Fong | |||
| Monday, 03 August 2009 00:00 | |||
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Pending the formalisation of the framework, Bursa has added more structured products to the bourse. One is “put warrants”, which are part and parcel of the revised framework for listing and fund-raising on Bursa. Put warrants are instruments that allow holders to sell the underlying assets at a fixed price and are useful in bear markets to mitigate downside risk. One of the major initiatives that Bursa and the SC have undertaken under the revised framework is a unified board that takes effect this week. The Main and Second Boards have been merged into a board called the Main Market while the Mesdaq Market has been replaced by the ACE Market. One of the significant changes in the ACE Market is that it is not restricted to IT companies. Bursa Malaysia’s CEO Yusli Mohamed Yusoff stresses that the revised framework is a market-based approach that streamlines the administration process for listing. He says the revised regulatory framework of the Main Market permits the issuance and listing of put warrants, effective this week. The introduction of the put warrants comes hot on the heels of the launch of structured call warrants based on exchange-traded funds (ETFs) as the underlying assets. The first ETF-backed call warrant was issued by OSK Investment Bank last month. The ETFs were United States Oil Fund and SPDR Gold Trust. On over-the-counter SBL, Yusli says the structure allows direct negotiations between lenders and borrowers without them having to go through the stock exchange. Currently, Bursa plays the role of central clearing house for share-lending activities. Investors who want to do regulated short selling, will have to borrow the shares from Bursa. “The [share lending] structure is already in place, but the framework we’ve introduced is not very popular in the market because investors want the ability to negotiate directly,” Yusli tells The Edge. Certain quarters are said to be uncomfortable with the existing share-lending structure due to the fact that investors can only borrow shares from Bursa, whose supply is believed to be from less than a handful of large institutional funds. The current structure is considered to be a stumbling block to spurring regulated short selling on Bursa, even in a bear market. “Considering that share lenders could call back their script any time, it makes investors feel that they are at the mercy of the lenders who are not that many in the local market anyway. Investors who short sell will have to cover their positions at a loss when the borrowed shares are recalled and when they have nowhere to borrow the stocks from,” says a stockbroker. On the flip side, short selling is usually something that is not well received by conservative investors in the financial market since people generally prefer bull to bear markets. To this extent, having Bursa as the centre for share lending may make the monitoring of short-selling activity easier for the authorities. Yusli targets OTC share lending to be ready in the “next few months”. “We hope OTC will help boost activity... people will come up with put warrant issues,” he says. Regulated short selling is currently allowed for 100 stocks on Bursa but it is hardly used. Except for proprietary day traders (PDTs), naked short selling (short selling without borrowing shares) is prohibited on the local market. The number of licences issued to PDTs increased from 30 to 46 late last year. PDTs can short sell individual stocks without borrowing shares but they need to cover their short positions at the end of the trading day. Yusli says the increase in the number of PDT licences issued by the SC indicates the rising demand for such activity by brokers. “We want to see different types of investors and traders to come into the market. They will create the diversity that any market needs to have,” he says. “Currently, derivatives account for about 10% to 15% of Bursa’s revenue. We hope to have derivative products to contribute 30% of the exchange’s revenue in three to five years time,” he adds. The debut of put warrants on Bursa is one step forward in developing the local derivatives market. The lack of investment products, especially derivatives, is something that is blamed for the less-than-vibrant trading on the local market compared to the regional bourses. Investment bankers, however, say the timing may not be right for the introduction of put warrants at the present time because market sentiment has turned bullish. Nonetheless, they say it is an instrument that is good for the market. “It seems Bursa missed the best timing to introduce put warrants. But it is still good to have them on the local market,” says OSK Investment Bank Bhd’s head of derivatives and structured products, Foo Keah Keat. He says the derivatives would have come in handy for investors when the market crashed in October last year. The mechanism of put warrants is opposite that of call warrants, which are currently listed on Bursa. These derivatives are generally a hedging tool in a bear market when share prices as well as indices are heading south. A put warrant will grant you the right to sell the underlying asset, which could be local or foreign stocks or indices, at an agreed upon strike price. Put warrant holders will gain by exercising their rights to sell shares when the underlying share price drops below the strike price. Under Bursa’s guidelines, issuers can issue put warrants based on individual stocks and ETFs that are listed on Bursa or foreign bourses. They will be settled via cash payments. For a start, say investment bankers, they will probably issue put warrants based on foreign stocks because SBL is easier in markets other than Bursa at the present time. Until over-the-counter SBL is firmed up, investment banks will probably be able to issue put warrants based only on local indices, such as the FBM KLCI. This is because the issuers will be able to hedge their risk against the futures contracts of the indices. “The issue of put warrants based on local stocks will put Bursa’s current share lending structure to the test,” says an industry observer. This article appeared in Corporate page of The Edge Malaysia, Issue 766, Aug 3-9, 2009.
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