Bursa Malaysia Derivatives re-launches 5-Year Malaysian Government Securities Futures Contract

Bursa Malaysia Derivatives has re-launched the 5-Year Malaysian Government Securities (“MGS”) Futures contract (FMG5) with a revised settlement methodology. The FMG5 Contract’s settlement, which was previously cash-settled, is now physically delivered.

The revised methodology is based on a delivery-versus-payment (“DVP”) model which closely mirrors the DVP transfer of MGS in the over-the-counter market. The key modification is that Bursa Malaysia Derivatives Clearing Berhad will play the role of the
central counterparty to facilitate the real-time delivery of the MGS.

The DVP transaction is facilitated via the Securities Linked Settlement (“SLS”) functionality of Real-Time Electronic Transfer of Funds and Securities System (RENTAS) provided by Payments Network Malaysia Sdn Bhd (PayNet).

“BMD has been closely working with key market stakeholders to create the optimal and efficient physical delivery model for MGS futures, taking into consideration settlement efficiency risk and transparency to regulators. Several industry consultations and focus
group sessions were conducted before the final model was confirmed and duly approved by the Securities Commission Malaysia (SC),” said Umar Swift, Chairman of BMD and Chief Executive Officer of Bursa Malaysia Berhad.

“For industry players, the change in the settlement method is a crucial modification to enhance the appeal of the FMG5 Contract as an effective hedging instrument for their MGS holdings and has attracted some to be market makers, ensuring liquidity in the product with two-way quotes. This enhanced delivery mechanism is also in line with the Financial Markets Committee’s (FMC) development initiatives aimed at improving market accessibility and liquidity in the domestic financial market, whilst preserving an orderly and transparent onshore financial market,” he added.

The revised FMG5 would be a useful risk management and hedging tool by financial institutions in managing their interest rate risks. It could also provide new trading opportunities for other market participants and adds diversity to existing over-the-counter (OTC) products for hedging of interest rate risks.

“Bursa Malaysia will continue to collaborate with the FMC, SC and Bank Negara Malaysia in market development initiatives to elevate and enhance liquidity and accessibility in the Malaysian financial market,” Umar concluded.

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