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To increase market efficiency and promote liquidity and depth, Bursa Malaysia Berhad (“Bursa Malaysia” or the “Exchange) has expanded its market-making framework that takes effect from today.
With the expanded framework, market makers are accorded greater flexibility to quote prices and respond to market demands. The changes introduced via this expanded market making framework is aimed toward further improving market makers’ ability to manage risk by hedging their exposure to price volatility in the underlying securities.
The expanded market making framework shall foster more efficient market making through the following changes:
1. Qualifying criteria for foreign entities to participate as a market maker has been expanded to allow for foreign entities that meet the prescribed criteria in the Rules of Bursa Malaysia Securities Berhad (“BMS”) to register as a market maker. This qualifying criteria will be in addition to foreign securities or derivatives brokers already allowed to participate.
2. A new category of market makers has been introduced called Derivatives Specialists who will be allowed to utilise the Permitted Short Selling (“PSS”) framework for the purpose of market making. It should also be noted that:
· An entity that has been appointed by Bursa Malaysia Derivatives Berhad (“BMD”) as a market maker in respect of Single Stock Futures Contract or Stock Options Contract may apply to Bursa Securities to be registered as a Derivatives Specialist. Nevertheless, there are currently no Single Stock Option Contracts listed on BMD.
· A Derivatives Specialist will be permitted to carry out PSS on the underlying securities of the Single Stock Futures Contract or Stock Option Contract which are Approved Securities[1], as part of the market-making activities of the Derivatives Specialist in the derivatives market.
3. Existing market makers of Structured Warrants (“SW”), Single Stock Options (“SSO”) and Single Stock Futures (“SSF”) will also be allowed to undertake PSS. In this respect:
· The expansion of the PSS framework now allows the afore-mentioned market makers to execute PSS of the underlying securities of SW, SSO and SSF, which are Approved Securities.
· For market makers of SW, PSS will facilitate the issuance of single stock put warrants which often require market makers to short sell the underlying shares to hedge their put warrant positions. This augurs well for the SW universe by introducing greater diversity. Making more put warrants available will allow market participants to buy protective puts and capitalise on any downward movements of the underlying instrument.
· As for SSO and SSF, the ability to carry out PSS is vital. Without this, the ability of market makers to provide liquidity to investors would be hampered.
Market makers are an integral part of the ecosystem, improving market efficiency and providing greater liquidity, especially for less traded and less liquid stocks. As such, we believe this expansion will further enhance the attractiveness and competitiveness of the capital market, thereby enticing more investors and market participants.
Further details of the expanded Market Making framework can be found in PO Circular R/R 13 of 2020 at the following link:
https://www.bursamalaysia.com/regulation/securities/rules_of_bursa_malaysia_securities
