The Market for Financial Derivatives: Removing Impediments to Growth

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