The Market for Financial Derivatives: Removing Impediments to Growth

Bacha, Obiyathulla I. (2004): The Market for Financial Derivatives: Removing Impediments to Growth. Published in: Banker's Journal Malaysia No. 127 (December 2004)

Abstract

This paper begins with an evaluation of the performance of the Malaysian market for financial derivatives. Despite a headstart, Malaysia appears to be lagging substantially when compared to the performance of other Asian derivative markets. While the other Asian markets though newer, have seen explosive growth in volume, trading volume in Malaysia appears to have shrunk. We examine why this has been the case and identify several macro and micro level impediments. Among macro level impediments have been the imposition of Capital controls, reduced equity market volatility, falling interest rates and a fragmented regulatory/operational structure. The lack of market makers, regulation and settlement rules were identified as impediments at the market micro structure level.

We propose several measures to develop the local derivatives market. This includes, privatizing and deregulating risk management, facilitating market making, liberalization of unit trust guidelines with regard to their use of derivatives and the initiation of derivative funds. We also recommend the reactivation of securities borrowing and lending, introduction of new derivative products and streamlining of licensing / regulations

• Item Type: MPRA Paper
• Language: English
• Keywords: Market for Financial Derivatives in Malaysia and removing impediments to their growth
• Subjects: G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G29 - Other

References

Reference:

 Alfred Steinherr (1998); Derivatives The Wild Beast of Finance; Publisher; John Wiley & Sons, inc. NY, USA.

 Futures Industry Magazine – various issues.

 Futures Industry Magazine; (2003) Will Acworth; Trading Volume : Record Levels of Trading Activity at the Half-Year Mark.

 Khor Hoe Ee (2001); News Archive – Policy Statements/Speeches: Derivatives and Macroeconomic Management in Post-Crisis Asia, September 25.

 Malaysia Derivatives Exchange (MDEX) – website.

 Obiyathulla I.B.; (2001), Financial Derivatives: Markets and Applications in Malaysia; Penerbit UPM.

 Obiyathulla I.B., & Merican O (2003); Crossroads on Sustainable Capital Market Development; presented at MEA Conference, KL, July 2003.

 Omar M.A.M. (2002): Beyond The Radar Screen, (Unpublished manuscript) 8 November 2003.

 Sheng, Andrew (2003); The Future of Capital Market Development in Asia. SFC, Hong Kong, June 2003.

 The Economist (2003); Eurex Comes to town; September.