MANAGEMENT DISCUSSION & ANALYSIS

Securities market supported by mega IPOs, structured warrants and lower costs

The reduction in cost compensated for the lower trading revenue resulting in 2% increase in profit in the securities market from RM220.9 million to RM225.6 million in 2012. Operating revenue generated by the securities market amounted to RM295.9 million, a 1% reduction from RM298.5 million in 2011.



Trading revenue reduced by RM14.7 million to RM178.3 million in 2012, as investor sentiment was affected by the continued global economic uncertainties. Though retail players and foreign investors were more cautious, this was mitigated by support from domestic institutions.

The highlight of our securities market in 2012 was the listing of the three mega IPOs, which raised an aggregate fund size of RM20.8 billion. These three IPOs contributed to approximately RM10 million in trading and depository revenue.

During the year, we saw an increased appetite for structured warrants. This contributed to a 52% increase in the number of structured warrants issued to 551 and a corresponding increase in the listing fees.

The review of the market data fee structure in 2012 and a greater level of subscription to the direct market access which we introduced in 2011 also helped to mitigate the effects of the drop in trading revenue.

Direct costs in the securities market decreased by 10% from RM92.7 million to RM83.1 million, mainly due to a lower headcount and depreciation.

Derivatives market supported by growing interest in CPO futures contracts

The derivatives market saw a 13% increase in profit from RM37 million in 2011 to RM41.9 million in 2012, mainly due to higher trading volumes. Operating revenue increased by 11% from RM69 million to RM76.6 million.



Trading revenue increased by 9% to RM56 million in 2012 from RM51.2 million in 2011, largely due to increase in interest in our key product, CPO futures contract. Volume of CPO futures contracts grew by 27% on the back of continuous CPO price volatility resulting in a greater use of CPO as a hedging tool, and improved participation from foreign institutions. The global visibility accorded by the Globex trading platform served to improve foreign participation from 31% in 2011 to 36% in 2012.

The review of the market data fee structure in 2012 and a higher subscription for derivatives data also contributed to the increase in revenue to the derivatives market.

Direct costs in the derivatives market increased by 5% from RM35.5 million in 2011 to RM37.2 million in 2012 as a result of higher volume related fees charged for trades conducted on the Globex trading platform.

Exchange holding company

The exchange holding company reported a decline in profit by 23% from RM11.7 million in 2011 to RM9 million in 2012 due to higher one-off consultancy fees.

Losses in other businesses reduced by improving trade on BSAS

Other businesses segment comprises the operations of a Shari'ah compliant commodity trading platform (BSAS), an electronic bond trading platform and an offshore exchange (LFX). Operating loss was halved from RM8.7 million in 2011 to RM4.0 million in 2012 due to lower losses from the business within this segment. BSAS recorded significant growth in operations largely due to growing global acceptance of it being a platform for Murabahah sukuk issuance. This was evidenced by an 89% growth in daily average value traded on BSAS from RM1.2 billion in 2011 to RM2.3 billion in 2012. At the same time, domestic and foreign participation grew by 61% and 193% respectively. The lower losses recorded by the operations of electronic bond trading platform and LFX were due to lower cost incurred and marginal increase in revenue.

OPERATIONAL REVIEW

SECURITIES MARKET

During the year, we focused on creating a more facilitative ecosystem in the securities market by introducing a number of technological improvements, while also launching new products and stimulating interest via an active investor engagement programme. Although there was a drop in new listings, the value of the IPOs made up for their small number. We also recorded increase number of fundraising exercises in the secondary market and more new structured warrants were listed.

Improved Efficiency

Among the technological enhancements we invested in was Central Depository System (CDS)-Straight Through Processing, which was implemented in three phases. The first phase, launched on 18 June 2012, allows participants to receive regular updates of their clients' CDS account balances. The second phase, launched on 13 August 2012, provides intraday updates on clients' shareholding positions. Phase three, implemented on 15 October 2012, allows subscribing participants to automate their daily data entry of transactions into the CDS, minimising manual data entry and facilitating faster data capturing.

We followed up on the enhanced CDS to provide share registrars and listed issuers with greater access to Records of Depositors (RODs) online. Share registrars/listed issuers can now access RODs backdated to seven years, check the status of Corporate Action ROD online, and request for RODs for future dates. Further speeding up corporate actions, the CDS can now send electronic notifications to share registrars or issuing houses on allotment verification results, while share registrars can submit bulk transfer requests via eRapid, as opposed to through magnetic media. Finally, trustees can request for the creation or redemption of exchange traded fund (ETF) units for multiple Participant Dealers currently.

To further enhance straight-through processing, in July 2012, we introduced an enhanced Central Matching Facility (CMF) for the Clearing House, which offers end-to-end electronic matching of trade and settlement details between trading clearing participants and non-trading clearing participants, who are also the clearing participants of the Clearing House. The CMF has a greater capacity to handle pre-matched transactions while minimising settlement risks and errors.

To facilitate the selling of loaned securities by a lender before recalling from the borrower, the Scheduled Delivery Time and Scheduled Settlement Time for recalled securities were modified in connection with the introduction of the Capital Markets and Services (Securities Borrowing and Lending) Regulations 2012. Consequently, the Securities Borrowing and Lending Central Lending Agency (SBL-CLA) and Securities Borrowing and Lending Negotiated Transaction (SBL-NT) were enhanced. These enhancements were completed by March 2012.

Meanwhile, the eCash Payments Framework was extended following the success of the electronic dividend payment system, which now accounts for 81% of total dividend payments, up from 77% in 2011. As of 3 September 2012, electronic payment has been made available for other forms of cash payments to securities holders such as interest or profit rates on debt securities or sukuk, income distribution by Real Estate Investment Trusts (REITs) and Exchange Traded Funds (ETFs), and capital repayments.

New Products and Services

On 8 October 2012, the FTSE Group and Bursa Malaysia launched the "FTSE Bursa Malaysia Small Cap Shariah Index" to serve as a benchmark for Shari'ah-compliant investments in small-cap companies on the Malaysian stock market. The new index forms part of the "FTSE Bursa Malaysia Emas Shariah" universe and will be calculated on an end-of-day basis.

Investor Engagement

During the year, we continued to engage with institutional and retail investors via established as well as new programmes so as to promote a vibrant marketplace.

Central to our institutional investor engagement programme is the annual Invest Malaysia conference, at which we highlight the strengths of our capital market and profile our PLCs. At the 8th Invest Malaysia Kuala Lumpur (IMKL), held on 29–30 May, we drew attention to our aim of being a key driver of the ASEAN capital market. The conference attracted 2,113 delegates, including 110 foreign participants from 85 organisations. IMKL was followed by the third instalment of Invest Malaysia Hong Kong (IMHK), held on 8 November 2012 in collaboration with OSK Investment Bank. It showcased 13 Malaysian corporations. Themed Capitalise on ASEAN's Multinational Marketplace, IMHK was attended by 64 Hong Kong fund managers from 49 organisations.

Targeting retail investors, we took our Market Chat programme to 80 semi-urban locations nationwide with the aim of educating and enticing non-investors or non-active investors to the market. Off the beaten track, we visited towns such as Sitiawan, Perak; Triang, Pahang; and Bahau in Negeri Sembilan. For the first time, 15 PLCs participated in the roadshows, providing retail investors the opportunity to interact directly with their management teams.

Our investor engagement programme also targets the younger generation, who represents future investors. To attract interest of Malaysian youth in the capital market, in 2012 we hosted the annual Young Enterprise Programme organised by the American Malaysian Chamber of Commerce (AMCHAMP) at which we introduced the basics of securities trading to 14 schools.

Combined with visits to Bursa Malaysia, the educational efforts in 2012 benefitted more than 2,000 students who now have a better understanding of the fundamentals of the capital market.

DERIVATIVES MARKET

Following the migration of our derivatives market onto the Globex trading platform in 2010, its reach has expanded internationally along with greater operational efficiency. In 2011, we developed a new derivatives clearing system which went live on 28 February 2012. This was followed by further market development via new services and products in order to lay a solid foundation for future growth.

New Technology

A major technological enhancement was the implementation of a new Derivatives Clearing and Settlement System (DCS) with multi-asset, multi-currency and multi-time functionalities and capabilities with a Standard Portfolio Analysis (SPAN) risk based margining system. The new DCS has the capacity to handle high volume trade and is robust enough to deliver complex products. With straight through and real time processing, Clearing Members' requests are approved in real time through e-forms and e-NSRs for tender processes. Post-trading, we have gone fully paperless.

New Products and Services

The new DCS allow us to launch new products to meet the growing hedging and trading needs, including Options on FKLI (OKLI), Options on Crude Palm Oil futures (OCPO) as well as the 3-Month Kuala Lumpur Interbank Offered Rate Futures (FKB3). The latter was revitalised and relaunched in response to market demand for a risk management tool. Market making schemes were introduced to the OCPO, OKLI and FKB3 contracts to provide liquidity via two way quotes.

In terms of service, we are offering participants greater flexibility with Negotiated Large Traded (NLT) and Exchange For Related Positions (EFRP) facilities. With the EFRP, a futures position may be exchanged for a related product or position such as a corresponding OTC swap position or futures position listed on the Exchange. Due to familiarity, the take up rate of these services is picking up.

In addition to migrating to CME SPAN, an industry standard for portfolio risk assessment, Bursa Malaysia Derivatives Clearing (BMDC) reviewed its default handling process and amended the terms of the standby letter of credit used for margin coverage and security deposit. In December 2012, BMDC conducted an industry wide default drill to familiarise participants with the procedure.

Creating of a More Vibrant Market

The Securities Commission (SC) had liberalised certain requirements for derivatives market participants in 2011. In 2012, these were complemented by a further relaxing of structural requirements for Local Participants and dual licensees. The SC approved a two-day familiarisation programme for new Local Participants (Locals), which incorporates education on trading, systems and regulations. Coupled with nationwide roadshows, 31 new Locals were recruited in 2012, bringing the total to 155 as at end 2012. The recruitment of relatively younger Locals has brought the average age of the group down from 50 to 45, in line with efforts to rejuvenate our trader population.

The SC also liberalised the dual licensing requirements of remisiers to having five years of experience and undergoing a six-day familiarisation programme instead of 10 years of experience and undergoing a four-day familiarisation programme. We believe this will inspire younger brokers to offer securities and derivatives as a bundled service portfolio.

To enable Trading Participants (TPs) to extend their marketing reach, the SC approved the setting up of branches and kiosks for those with a paidup capital of at least RM10 million. This will allow traders to meet their broker representatives more easily and acquire more product information from the TPs.

Finally, referral agent activities have been given the green light, where securities and futures brokers are allowed to refer their clients to one another. This is anticipated to boost the number of participants in both markets.

Branding and Educational Initiatives

To promote our products and services, as well as to garner greater interest in the marketplace, we organised and/or participated in a number of events targeting different segments of our stakeholders.

Our global leadership in the palm oil market is reinforced by the annual Palm and Lauric Oils Conference and Exhibition (POC) held in Kuala Lumpur. In 2012, the exhibition themed Global Shocks, Local Impact took place in March, attracting 2,000 delegates representing various sectors of the edible oils industry from more than 50 countries.

We also partner with the Dalian Commodity Exchange (DCE) in organising the annual China Oils and Oilseeds Conference (CIOC) in Dalian, and use the opportunity to network with the large investor community in China. CIOC 2012 was held in November, drawing 1,000 delegates. Prior to the conference, in April, we conducted a market awareness programme for our derivatives products in Shanghai, Beijing, Hangzhou and Guangzhou, where our representatives met DCE futures brokers, Chinese end-user clients and existing CME clients.

Another marketing and networking opportunity was created when we hosted an FOW Derivatives World – Asia Roundtable with the agenda Malaysian Derivatives: Global Access Through a Global Partner. This saw presentations by key Malaysian futures brokers and Bank Negara Malaysia. The discussions covered accessibility, FCPO benchmark pricing, partnerships, operations, technology, regulation and capital controls.

We also conducted an educational programme for domestic institutions on derivatives via the Breakfast with BMD platform, Bloomberg Commodity Focus sessions and a joint seminar with the Palm Oil Refiners Association of Malaysia. In addition, a joint derivatives retail marketing campaign was conducted with TPs to increase awareness of trading professionally in derivatives.

Targeting youth, we collaborated with the Securities Industry Development Corporation (SIDC) to incorporate the derivatives licensing modules 14 and 16 into the finance and banking degree programmes at six local universities. We also co-sponsored and conducted train-the-trainer sessions to familiarise the university lecturers with the course content, reading materials, trading practices and the application of derivatives tools.

In addition, we supported the Commodity Trading Challenge organised by the CME Group. The challenge offers university students the opportunity to compete in an international derivatives trading game where they trade crude oil, gold and corn futures in a simulated and real time trading environment.

Internationalisation

Bursa Malaysia hopes to further expand its reach and accessibility via direct access by US traders through the Globex trading platform. In December 2011, following implementation of the Dodd Frank Act, the Commodity Futures Trading Commission (CFTC) replaced its no-action relief process with a registration process aiming to increase transparency and improve pricing in the derivatives marketplace. Consequently, in August 2012, we resubmitted our application for direct market access for the CFTC's review.

As a result of conducting product awareness campaigns and seminars in markets such as China, India, the United States and Europe, the number of contracts traded by foreign institutions increased from 31% in 2011 to 36% in 2012.

ISLAMIC MARKETS

Bursa Suq Al-Sila' (BSAS), our Islamic commodities trading platform, recorded an 89% increase in the average daily value to RM2.3 billion in 2012 as compared to RM1.2 billion in 2011, with an increase in trade by foreign participants from 21% in 2011 to 30% in 2012. A multi-commodity and multi-currency platform, BSAS currently offers five commodities, namely Crude Palm Oil (CPO), Plastic Resin, Refined, Bleached and Deodorised Palm Olein (RBD Olein), Hardwood Timber and Softwood Timber, tradable in 22 currencies.

In July 2012, BSAS recorded the highest trade ever in a day of RM7.9 billion. The largest single trade was recorded when BSAS facilitated the issuance of Celcom Transmission Sdn Bhd's sukuk for RM5 billion in August 2012. In December 2012, BSAS recorded the highest monthly trading value when the monthly total trading value hit RM66.3 billion. BSAS also facilitated the issuance of sukuk by foreign companies such as Abu Dhabi National Energy Company PJSC, Gulf Investment Corporation G.S.C., JSC Development Bank of Kazakhstan, Bahrain Mumtalakat Holding Company B.S.C, Noble House Limited and Golden Assets International Finance Ltd. In total, 28 sukuk Murabahah were issued on the BSAS platform in 2012, with a total value of commodities traded at RM24.7 billion.

The number of trading participants on BSAS also increased, from 55 in 2011 to 69 in 2012, of whom 54 were local and 15 were foreign.

On the Islamic capital market front, we retained our leadership position as the premier sukuk listing destination for the fourth consecutive year, with 20 programmes undertaken by 17 issuers, valued at a total of USD33.7 billion. We also hosted three new listings, two of which were non-ringgit issuances. Pulai Capital Limited's USD357.8 million exchangeable sukuk, the first sukuk to be priced at a negative yield, was listed in March 2012. Within the same month, AmIslamic Bank Berhad added a RM2.0 billion sukuk Musharakah programme to the Exempt Regime list. Towards the end of the third quarter, Bursa Malaysia welcomed Axiata Group Berhad's multicurrency sukuk programme, under which the largest RMB denominated sukuk was issued.

THE LABUAN INTERNATIONAL FINANCIAL EXCHANGE

Labuan International Financial Exchange (LFX) recorded six new listings in 2012, which included sukuk and bonds issued by domestic corporate issuers and the Government of Malaysia. A total of USD2.9 billion was raised on the LFX. LFX's market capitalisation as at 31 December 2012 stood at USD19.7 billion, with a total of 32 listed instruments.

TECHNOLOGY AND SYSTEMS

Technology remains a key driver of growth within the exchange industry, and we are committed to investing in the latest innovations in order to sustain a high level of operational efficiency while maintaining our market competitiveness. In 2012, we invested RM25.4 million in various features to facilitate key processes in our securities, derivatives and Islamic markets, as described above in our Management Discussion and Analysis. This amount represented a two-fold increase from 2011.

Commitment to a stable and secure technology environment will result in a 100% system availability for all our core business systems. It also contributed to the Bursa Trade Securities System being ISO 27001 certified. Having outlined our Strategic Intents, all technology resources are now aligned to deliver our targets so as to make headway in achieving our long-term goal.

OUTLOOK

The year 2013 promises to be as challenging as the year we have just witnessed. However, we are confident of being able to build on the many enhancements initiated in 2012, and to leverage on domestic liquidity as well as the ASEAN growth story, to make further progress in the years to come.

Our Business Plan for 2013 includes working on our four Strategic Intents to heighten our competitiveness as a marketplace. Among the changes in the pipeline are further enhancement of our trading system to facilitate greater activity; greater diversification in our product portfolio with exchange traded funds (ETFs), business trusts and new derivatives products; and expanded participation in the derivatives market as a result of further liberalisation of procedures and structures.

As an example, we will be revamping the participantship structure of the derivatives market by decoupling clearing participants from trading participants thus allowing for stand-alone clearing members. This will create a single trading right across all classes of products at a cost of entry comparable to regional futures exchanges.

Our ambition is to be Malaysia's most admired PLC as well as a leading ASEAN marketplace. We realise we will face many challenges as we strive to achieve these aspirations, yet we are firm in the belief that we have established a strong foundation that will serve us well along the next phase of our onward journey.