Malaysia Launches Physically Delivered MGS Futures Contract

The revised contract will enhance risk management at FIs and allow them to hedge interest rate risks, while also providing new trading opportunities for other market participants.

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 is now physically delivered. Previously it was cash-settled.

The revised methodology is based on a DVP (delivery-versus-payment) model which closely mirrors the DVP transfer of MGS in the OTC market, whereby Bursa Malaysia Derivatives Clearing will serve as 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 RENTAS (Real-time Electronic Transfer of Funds and Securities System).

The re-launch of the 5-Year MGS and revised settlement methodology follows a series of industry consultations and focus group sessions, aimed at creating the most optimal and efficient physical delivery model for MGS futures, taking into consideration settlement efficiency, risk and transparency to regulators.

“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,” says Bursa Malaysia chief Datuk Umar Swift.

He said the settlement method has attracted market makers, which will ensure FMG5 liquidity with two-way quotes.

The revised FMG5 will assist financial institutions to enhance risk management and hedge interest rate risks, while also providing new trading opportunities for market participants.