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Ethylene Over-The-Counter (OTC) Futures Contract
Ethylene is the primary building block used for a wide variety of petrochemical products such as plastics, polyesters, PVC etc. For instance, it is used in the production of polyethylene, ethylene dichloride (EDC), ethanol, styrene monomer (SM), glycols and many other products. Asia’s demand for ethylene is expected to grow by 10–12 million tonnes in the next ten years, or around 4–5 percent per annum.
What is Ethylene OTC Futures Contract?
The introduction of Ethylene OTC (Over-The-Counter) Futures Contracts offers the opportunity to market players to hedge against the risk of fluctuations in ethylene prices, which in recent times have seen prices hit nine-to-ten year highs due to tight market supply and strong Asian demand. It has hybrid features of Forward OTC and Futures contract.
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Outline of Ethylene OTC Futures Market
This initiative was conceived as a solution to help ethylene producers, traders and consumers in Asia to reduce their price risk exposure and develop a more efficient market. Price risk can be reduced through hedging in derivative market, namely Ethylene OTC Futures market.
The idea of developing Ethylene OTC Futures contract was conceived to overcome the logistic constraints and fragmented olefin’s physical market by introduction of sophisticated cash settlement method, leading to enhancement of market liquidity. The financial settlement of these OTC Futures contracts could be benchmarked against daily ICIS-LOR ethylene index (EIX).
This OTC Futures will in-turn give the producers, traders, consumers and even financial institutions to determine the market and thus create a more reliable or de-facto Asian index in the ethylene market.
Benefits of OTC Futures Contract
New Business Opportunities
As Marketing/Procurement Tool
| * | Lock in - Purchase price - Selling price - Margin |
| * | Hedge Inventory As Trading Tool |
| * | New Opportunity Time spread trade (Contango/Backwardation), Arbitrage trade etc |
Price Discovery
With convergence of all the buyers and sellers, we can create a more transparent environment that is often absent in over-the-counter (OTC) markets. The introduction to different groups of market participants with different views and needs leads to enhancement of market liquidity and the realization of a more efficient price discovery platform.
Key Elements of a Futures Contract
The contract terms of the Ethylene OTC Futures contract will be standardised in terms of the contract size, delivery month and final settlement day.
Ethylene OTC Futures Contract Terms
Contract Code
FEIX
Underlying
ICIS-LOR Ethylene Index (EIX) CFR N.E. Asia
Contract Size
500 metric tons.
The quantity is a predetermined size designed to suit a hedging instrument for most frequent size of cargo, 2,300–3,500 MT for spot trade in Northeast Asia.
Minimum Price Fluctuation
US$0.50 per metric ton.
The minimum price fluctuation indicates the minimum price movement allowed on either side of a contract. If the current bid price is US$833.50, a better bid must be at least US$834.00.
Daily Price Limits
10% above or below the preceding day settlement price for all contract months, except the prompt month.
Position Limit
50 contracts net long or net short in any one contract month or all months combined.
Contract Months
Prompt month and the next two calendar months.
Trading/Clearing Hours
Trading can be conducted 24 hours on an OTC basis. However, market contracts can only be presented to Bursa Malaysia Derivatives Clearing for registration during the following clearing sessions:
| * | First clearing session: Malaysian 10:00 – 11:00 |
| * | Second clearing session: Malaysian 14:30 – 17:30 |
Contract Maturity
The last Business Day of the month preceding the prompt month.
Settlement Type
The Final Settlement Daily Price methodology allows the ethylene market participants to better manage their price risk by using ICIS-LOR EIX prices that are widely used by the physical market.
Final Settlement Price
The Final Settlement Price shall be based on the simple average of the last three daily ICISLOR Ethylene Index (EIX) and rounded to the nearest US$0.50.
Initial/Spread Margins and Settlement-to-Market
Bursa Malaysia Derivatives Clearing’s risk management function is carried out routinely on a daily basis and is inherent in its clearing and settlement procedures. This involves the collection of initial/spread margins, settlement-to-market and payment procedures.
Initial /Spread Margins Initial
Margins are required to be maintained with Bursa Malaysia Derivatives Clearing for each open position. Initial Margins can be lodged in US$ cash and/or letter of credit, or in major foreign currencies. Reduced Initial Margins are levied for spread positions. Prompt Month Spread is defined as a combination of long and short positions in different months where one of the months involved is the prompt month. Back Month Spread comprises a combination of long and short positions in different months where none of the months involved is the prompt month.
Settlement-to-Market
All open contracts are valued daily against the Daily Settlement Price and the resulting profits/losses (known as Variation Margin) are posted to the accounts of the Clearing Participants. Amounts due from Clearing Participants arising from this process are required to be paid in cash before the start of trading on the next business day. This process is an integral risk management practice because losses are not allowed to accumulate.
Daily Settlement
Price Bursa Malaysia Derivatives Clearing will determine the Daily Settlement Price for each open contract with reference to the ICIS-LOR Ethylene Index (EIX), which will be determined by physical/paper spot prices and market fundamentals. The Clearing House reserves the right to exercise absolute discretion in determining the Daily Settlement Price at all times.
Example of the Settlement-to-Market Process
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How it is done
To start trading, a market participant must appoint a registered Trading Broker to execute the Ethylene OTC Futures trades on an OTC basis. Matched trades or “Market Contracts” may then be presented to Bursa Malaysia Derivatives Clearing Bhd, which acts as the Clearing House to be cleared. Market participants have the choice of either clearing their Contracts directly with the Clearing House by becoming a Special Clearing Participant (“SCP”), or through a participating General Clearing Participant (“GCP”) (also known as a Clearing Broker).
Market Contracts presented to the Clearing House are registered, and immediately upon the registration of each Market Contract, two new contracts (“Open Contracts”) are created in place of and on identical terms with each Market Contract. The Clearing House becomes the buyer to the Clearing Participant acting as the seller under one Open Contract and the seller to the Clearing Participant acting as the buyer under the other Open Contract.
As a counterparty to all open contracts, the Clearing House undertakes to its Clearing Participants who are party to those Contracts that it will perform its financial obligations under the Contracts. This undertaking is backed by the Clearing House’s risk management system and procedures as well as funds held for such purpose.
Trade Overview
In case of market participant clearing through a GCP (Clearing Broker).
Criteria for Membership to Bursa Malaysia Derivatives Clearing
Market users wishing to clear their ethylene contracts directly with Bursa Malaysia Derivatives Clearing are required to sign an OTC Clearing Service Agreement (“Clearing Agreement”) for admission as a Special Clearing Participant (“SCP”). Alternatively a user can use the services of a participating General Clearing Participant (“GCP”).
Bursa Malaysia Derivatives Clearing imposes high membership standards to ensure that its prospective clearing participants are operationally and financially sound. SCPs are required to maintain a minimum of US$ 1.5 million Net Tangible Assets and comply with the following:
| * | initial fixed contribution of US$ 0.25 million in cash to the clearing fund. SCPs will need to make variable contribution to the clearing fund in the event Bursa Malaysia Derivatives Clearing requests for additional contribution to the clearing fund; and |
| * | contribution of US$ 0.25 million in stand-by L/C as Security Deposit. |
On becoming a Clearing Participant of Bursa Malaysia Derivatives Clearing, the SCP also undertakes to comply with the Provisions of the Clearing Agreement.
Citibank’s Cash Management Structure
Account Structure
| * | The Clearing House will open a main account with Citibank Berhad in Kuala Lumpur, Malaysia. |
| * | Sub-accounts will be created for respective clearing participants and linked to the Clearing House’s main account with Citibank Berhad, Kuala Lumpur, Malaysia. |
Payment Instruction
| * | On settlement date, the Clearing House will provide electronic payment instructions to Citibank on the settlement-to-market amounts due from clearing participants. |
| * | Citibank will effect transfers between the Clearing House and the respective sub-accounts by debiting or crediting the sub-accounts. |
| * | Citibank will advise the Clearing House on the settlement status on a daily basis. |
Information Delivery
| * | Respective participants will be provided customized access via Citibank Corporate Internet Banking to view all transactions on a real-time basis in relation to the operation of the accounts maintained under the account structure with the Clearing House. |
| * | Access to Citibank Corporate Internet Banking is not restricted to business hours but is accessible 24 hours a day and all days of the week. Clearing Participants are able to acces Citibank Corporate Internet Banking (www.citibank.com/malaysia/corporate) wherever they are as long as there is a PC or laptop and Internet access. |
Guiding Principles for the Ethylene Index (EIX)
ICIS-LOR’s methodology for the Ethylene Index (EIX) is based upon the guiding principles of simplicity and objectivity.
The EIX will be used as the final settlement price and daily “mark-to-market” assessment prices for all ethylene trades cleared by Bursa Malaysia Derivatives Clearing for each trading day. The EIX will be assessed based on:-
| * | Physical spot trades |
| * | Over-the-counter (OTC) futures contracts. |
| * | Bids and Offers/Market fundamentals |
Methodology Summary
| 1 | Calculation of the EIX:- The front-month EIX will primarily be based on an average of physical trades and OTC futures contract trades. In the absence of physical trades, bids/offers and previous day’s trades from OTC futures contracts/physical trades will be used to form the EIX. The EIX front-month (prompt month), for the forward 16–45 day trading period, will be closely aligned with physical markets in order to minimize basis risk. All values in the index will be rounded to the nearest US$0.50/mt. The calculation of the EIX is deemed separate from other ICIS-LOR daily and weekly market price assessments. Physical transactions to be accepted into the EIX are ideally supported by confirmation from buyer and seller, if not, well-supported by extensive market sourcing and in line with market fundamentals and trends. ICIS-LOR retains the right not to include any deal which is believed to be manipulative or has been negotiated in specific circumstances. ICIS-LOR also reserves the right to exclude any deal which is believed to have been negotiated in distressed circumstances. |
| 2 | Publishing and distribution:- The EIX will be published at 1830 Singapore/Malaysia time on each working day for market assessments. |
| 3 | Volumes:- Standard sized lots 2,300–3,500 mt for physical, and 500 mt for OTC futures contracts are used for assessment of the EIX. Larger-sized parcels may also be considered for assessment. |
Contract Specifications
| Contract Code | FEIX |
| Underlying | EIX (ICIS-LOR Ethylene Index) CFR N.E. Asia |
| Contract Size | 500 metric tons |
| Minimum Price Fluctuation | US$0.50 per metric ton |
| Daily Price Limit | 10% above or below the preceding day settlement price for all contract months, except the prompt month |
| Position Limit | 50 contracts net long or net short in any contract month or all months combined. |
| Contract Months | Prompt month and the next two calendar months |
| Clearing Hours | First clearing session: 10:00am to 11:00am Malaysian time. Second clearing session: 2:30pm to 5:30pm Malaysian time. |
| Trading Hours (Last Trading Day) | Trading terminates at the end of clearing hours on the last business day of the month preceding the prompt month |
| Contract Maturity | The last business day of the month preceding the prompt month |
| Settlement Type | Cash settlement based on the Final Settlement Price |
| Final Settlement Price | Final Settlement Price shall be based on the simple average of the last three daily EIX and rounded to the nearest US$0.50 |
Bursa Malaysia Derivatives Clearing Bhd
Bursa Malaysia Derivatives Clearing Bhd (formerly known as the Malaysian Derivatives Clearing House Bhd (“MDCH”) is the Clearing House for the exchange traded derivatives market in Malaysia and is a wholly owned subsidiary of Bursa Malaysia Bhd (formerly known as Kuala Lumpur Stock Exchange). Bursa Malaysia Derivatives Clearing Bhd is regulated by the Ministry of Finance and the Securities Commission under the Futures Industry Act 1993. It was formed in December 1995 to clear stock index futures, and began clearing interest rate futures in May 1996. In November 1997 Bursa Malaysia Derivatives Clearing Bhd merged with the Clearing House for commodities futures, the Malaysian Futures Clearing Corporation Bhd.
The Clearing House currently clears the following products traded on Bursa Malaysia Derivatives Exchange Bhd:
| * | KLSE Composite Index Futures Contract (“FKLI”); |
| * | KLSE Composite Index Options Contract (OKLI); |
| * | Three-month Kuala Lumpur Interbank Offered Rate (KLIBOR) Futures Contract (“FKB3”); |
| * | Crude Palm Oil Futures Contract (“FCPO”); * Palm Kernel Oil Futures Contract (“FPKO”) and |
| * | 3-year, 5-year and 10-year Malaysian Government Securities Futures Contracts (“FMG3”, “FMG5” and “FMGA”). |
Financial Assurance Of Bursa Malaysia Derivatives Clearing Bhd
Bursa Malaysia Derivatives Clearing Bhd eliminates credit risk between clearing participants by becoming a counterparty to each contract which is bought or sold by a clearing participant and undertaking to perform its obligations under such a contract. This undertaking is backed by Bursa Malaysia Derivatives Clearing Bhd's risk management system and procedures as well as funds held for such purpose.
Risk Management
The clearing and risk management structure of Bursa Malaysia Derivatives Clearing Bhd is designed to provide an integrated and comprehensive approach to managing risk. The risk management policy of Bursa Malaysia Derivatives Clearing Bhd is aimed at promoting and preserving financial integrity without unnecessarily impinging on the development and liquidity of the market.
Bursa Malaysia Derivatives Clearing Bhd’s risk management tools ensure that:
| * | the risk of each clearing participant defaulting under a contract is reduced; and |
| * | the default of any one or more clearing participants does not result in the financial collapse of other clearing participants or the settlement system. |
In addressing and managing credit risk and market risk, Bursa Malaysia Derivatives Clearing Bhd has in place the following policies and procedures:
| I | ensuring that the clearing participant has the capability and meets the minimum standards to be a participant of the Bursa Malaysia Derivatives Clearing Bhd under the membership admission process; |
| II | ensuring that each clearing participant has sufficient financial resources to cover its obligations under derivatives contracts; |
| III | a daily settlement routine and margining procedures; |
| IV | maintenance of adequate reserve funds; |
| V | policy with respect to and imposition of position limits; and |
| VI | ensuring that Bursa Malaysia Derivatives Clearing Bhd has sufficient powers under its rules, adequate financial resources and effective liquidity management to handle the unlikely, but possible, event of a default causing loss to Bursa Malaysia Derivatives Clearing Bhd. |
Ginga Petroleum (S) Pte Ltd
Established at the end of 1998, Ginga provides a comprehensive and expanding range of broking services for the energy markets including oil, gas, coal, petrochemicals and tanker freight.
Brokering As it Should Be
Since our inception, we have built ourselves a credible reputation of reliability and integrity by providing our clients timely and transparent information that is augmented by impartial advice and value-add service. And this is why our clients keep coming back to us – they trust us to do the right thing for them.
Continuously Innovating
Our broking teams are made up of former traders and experienced energy brokers with profound product and market knowledge, each focused on providing our clients with leading market insight, anonymity and liquidity access; and each just as committed to creating new products and services. From an initial staff strength of 4 people broking just 2 products, we have grown into a company of more than twenty brokers offering a wide portfolio of products, some of which Ginga pioneered. In just 6 years, we have become the leading Open Spec Naphtha broker in Singapore. We also managed to successfully introduce the first-of-its-kind benzene forward deal for the broking of aromatics in Asia, as well as freight swaps for tanker rates. As such, we like to think of ourselves as revolutionaries in energy brokering – continuously enhancing, continuously innovating and continuously lighting up the skies of Energy Broking.
Fostering Partnerships
We believe that fostering long-lasting partnerships with our customers is the key to long-term growth and success. By establishing a sound understanding of our customers and their needs, we are able to develop the best customised solution to optimise every investment. Together with our clients, we will enhance our risk management services so as to mitigate risk; develop innovative products; and discover new markets that will maximize financial yield.
Why Choose Ginga
Trading in the energy market is often complicated and risky. You need an objective guide to help you exploit the growing benefits of the increasing number of financial instruments. At Ginga, we pride ourselves on our ability to contribute to effective risk management. With a broad and established network of clients, our brokers can offer you the best prices, as well as the best mix of hedging strategies, customised to suit your needs. With leading market insight and expertise, we ensure that your risks are mitigated and your resources maximised, to give you the best returns.
Citigroup in Asia Pacific
Citigroup is the leading financial services company in Asia Pacific. Citigroup serves some 15 million customer accounts in the region with over 20,000 employees across 18 countries and territories: Australia, Bangladesh, Brunei, China, Guam, Hong Kong, India, Indonesia, Korea, Malaysia, Macau, New Zealand, Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam. The Far Eastern Economic Review has ranked Citigroup the region’s leading financial services company every year for the past 10 years. Citigroup has been in Asia for over 100 years and provides more services in more markets for more clients than any other financial institution in Asia Pacific.
Citigroup in Malaysia
Operating out of three branches in Kuala Lumpur, Penang and Johor Bahru, Citigroup in Malaysia provides corporations, consumers and institutions with a wide array of banking and financial service products and services under one roof.
Citigroup Global Corporate and Investment Banking Group is recognized as the leading financial services group by Finance Asia, The Asset and Euromoney magazine. The Group provides the most comprehensive range of financial services to corporate clients, governments and institutional investors. It is consistently ranked in the top tier of providers of M&A advice, equity and debt underwriting, securities trading, cash management, foreign exchange, trade, securities services and treasury in Malaysia as well as across the Asia Pacific region.
Combining world-class investment banking and commercial banking services to our clients, our leading-edge capabilities allows us to offer the most innovative and comprehensive ideas and solutions to our clients in all types of market conditions by providing them with bankers that have in-depth industry knowledge, local market acumen, product creativity and execution expertise.
Global Transaction Services
Citigroup Global Transaction Services provides innovative banking solutions to financial institutions, corporate clients and public sector entities around the world. Our consultative approach and focus on relationship banking enables us to help clients address strategic financial and operating issues, such as working capital and liquidity management, asset management, treasury integration, and exposure and risk management.
Our breadth and depth of experience, both in-country and crossborder, our extensive proprietary branch network, and our position as a service leader across financial markets are unrivaled in the industry. Citigroup extends this knowledge and experience to help our clients take full advantage of market opportunities virtually anywhere they do business.
Cash Management
Our cash team provides capabilities and solutions to help clients streamline their business processes, realizing greater operational efficiencies and managing working capital more effectively. With more than USD115billion in liability balances, Citigroup Global Transaction Services is the largest processor of cash flows globally. Our capabilities and solutions can accelerate cash collection, provide transparency of cash movement, reduce exposure to risk, and trim operating costs.
An independent price benchmark for global commodity markets for more than 23 years.
ICIS-LOR was established in 1980 with a commitment to monitor the cycles affecting global commodity market transactions, trends and current pricing.
Since then, it has grown to become the world leader in the provision of accurate, up-to-the-minute and completely authoritative global commodity market intelligence.
ICIS-LOR’s success is largely due to the fact that it understands the breadth and depth of market intelligence that your business needs to succeed. Become an ICIS-LOR subscriber and you’ll have a dedicated account manager who will ensure that you get the right information, in the right format and on time.
Our highly experienced and dedicated editorial teams in Houston, London and Singapore cover all areas of the industry, to ensure delivery of a complete picture of the pricing environment. The industry is so confident ICIS-LOR pricing data will be accurate, that in many markets the reported prices are the established benchmark. What’s more, many companies will only trade based on ICIS-LOR price assessments.
So whether you’re part of a global multinational company or any individual trader, we can offer you unrivalled pricing information and a level of service that simply cannot be beaten.
The ICIS-LOR product range A world of commodity market intelligence
ICIS-LOR reports on more than 100 global commodity markets ranging from Acetone to Xylenes, for Europe, the USA, Asia, the Middle East and Latin America.
Our global commodity market intelligence breaks down into the following products:
Price Alert
Real-time pricing for volatile products delivered via the Internet
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* Jet Kerosene Report
Historical Data
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For more information on Ethylene OTC Futures Contract, please contact :
Bursa Malaysia Derivatives Clearing Bhd
7th Floor, Exchange Square, Bukit Kewangan, 50200 Kuala Lumpur, Malaysia
Tel : 603 2034 7188 Fax : 603 2710 2308 Email : angelineyapeefang@bursamalaysia.com
Website: www.bursamalaysia.com
Ginga Petroleum (S) Pte Ltd
83 Clemenceau Avenue #13-08 UE Square, Singapore 239920
Tel : +65 6737 0777 Fax : +65 6292 9638 Email: hasedon@ginga.com.sg
Website: www.ginga.com.sg
Citibank Berhad
Level 45, Menara Citibank, 165 Jalan Ampang, 50450 Kuala Lumpur, Malaysia
Tel: 603 2383 1111/2383 2715 Fax: 603 2710 1101 Email: Shivonne.Cheng@citigroup.com
Website: www.citigroup.com
ICIS-LOR
51 Changi Business Park Central 2, #07-01, The Signature, Singapore 486066
Tel: +65 6789 8828 Fax: +65 6789 8898 Email: steve.tan@icislor.com
Website: www.icislor.com
