Dealing with the difficulties in the Malaysian options market

The Malaysian options market is still relatively new compared to some more established markets. It has seen a great deal of progress in the past few years, but there are still some difficulties in trading on this market.

The Securities Commission Malaysia (SC) initially released guidelines for equity options transactions in 2001. However, it was only until 2005 that the first exchange started operating under these rules. A second exchange opened up in 2011, which allowed trading on index options and non-equity options. Check over here for more information.

There are two stock exchanges currently available to Malaysian investors looking to trade equity options – Bursa Malaysia Derivatives and ACE Market. These have expanded their product offerings so now investors can trade currency futures and index futures on margin.

Listing requirements

The listing requirements imposed by the stock exchanges are also very stringent. A company listed on the Malaysian Stock Exchange is subjected to very high standards in terms of financial reporting, what they can and cannot do with their shareholder funds, how much debt they can carry etc. These high standards help investors feel more secure when investing in companies traded on these stock exchanges.

However, there are still some difficulties involved for international investors when accessing the Malaysian options market. The first is that certain foreign institutions may not trade on this market due to licensing restrictions. Another difficulty originates because margins for currency transactions in Malaysia are pretty high (up to 20%), making hedging costs higher than elsewhere in the world. It makes it difficult for foreign investors to invest in the Malaysian market, especially when it may be cheaper to access other regions’ markets.

Information overload

The internet has also created additional difficulties for traders in Malaysia. With so many easily accessible resources readily available online, information overload is a genuine problem. One minor detail – such as an error on a company’s financial statements – can cause considerable fluctuations in options prices before the responsible party discovers and rectifies the mistake. 

It creates uncertainties with trading on this options market.

However, despite all of these difficulties, there are still plenty of advantages offered to investors who want to trade currencies or equities through derivatives on the Malaysian options market. It may take some time to adjust from other established markets, but it can be a great new opportunity for active options traders.

Use of multiple brokers

The use of multiple brokers is also every day in Malaysia. Since there is no central exchange, the possibility of a broker defaulting on your contract due to bankruptcy is high. Even though Malaysian law mandates that all brokerage firms maintain a reserve fund for customer claims with a designated trustee, it’s still possible for this money to be lost if the trustee goes bankrupt. 

Therefore you must ensure that you’ve done enough research on different brokerage firms before beginning any trades. You’ll have to deposit at least 10% of the total cost of your trade into escrow just in case your broker defaults on his promise to deliver your shares upon the expiry date. Many traders use the Malaysian Forum to find reputable brokers when choosing a new broker.

No standard contracts

The other difficulty in Malaysia is that there are no standard contracts, so each broker will dictate their terms and conditions for different trades. Also, the individual brokers set all of the expiration dates since there’s no central exchange to determine when these contracts expire. 

It means that you may get different expiration dates for each contract even though you’re trading the same underlying asset. Usually, this isn’t an issue, but it can be a nuisance if you’re trying to hedge against your positions with similar assets that have varying expiration times.

Bottom line

With these difficulties in mind, however, many traders use options because they can help them maximise their profits when investing in Malaysian stocks or commodities while minimising their risks at the same time.