BURSA Malaysia Derivatives (BMD) re-launched the five-year Malaysian Government Securities (MGS) Futures contract (FMG5) with a revised settlement methodology, where the FMG5 contract’s settlement is now physically delivered rather than previously cash-settled.
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 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).
“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,” Bursa Malaysia Bhd CEO and BMD chairman Umar Swift said.
“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. – Sept 21, 2020
