The Basic of Commodity Derivative – Crude Palm Oil Futures (FCPO)

By Evelyn Yong | 4 July 2018

FCPO is a Ringgit Malaysia (MYR) denominated crude palm oil futures contract traded on Bursa Malaysia Derivatives which providing market participants with a global price benchmark for the Crude Palm Oil Market since 1980 in the Commodity Futures Exchange. It is a legal agreement to buy or sell crude palm oil at a predetermined price at a specific time in future.

FCPO were standardised for 25 metric tons for a contract with minimum price fluctuation of RM1 per metric ton. The settlement of FCPO is on physical delivery. Hence, the buyer of the futures contract is taking on the obligation to buy the agreed amount of crude palm oil when the futures contract expires.

FCPO trading market available with 2 categories of market participants, hedgers and speculators. For those oil-related businessmen such as plantation companies, refineries, exporters and millers, they trade FCPO to manage price risk. To control their product cost and profit margin, they will hedge into FCPO to against unfavourable price movement in the physical market. For traders, they act as speculators in the market and gain leverage exposure to price movements of crude palm oil and earn the spread.

There are some rules and limits in trading FCPO. The daily price limits for FCPO are controlled to trade within the 10% of price varying in the spot month (the futures contract month closest to expiration). Once the FCPO price has raised or (dropped) by its daily limit, there will be not allowed to trade at any higher (lower) price until the next trading day. When there are at least 3 non-spot month contracts are traded at within 10% limit, the Exchange will announce a 10-minute cooling off period for all contract months (excluding the spot month). During the 10 minutes, all trades are only able to take place in the 10% limit. After this cooling off period, all contract months shall specify as interrupted for 5 minutes. Then, all contract months shall not be in trading more than 15% vary from the settlement price of the preceding business day.

The contract months for FCPO are spot month and the next 11 succeeding months, and after that, other months up to 36 months ahead. So, producers can hedge the prices by up to 3 years forward and with the first year of 12 consecutive contract months. For traders, the most active trading month usually will be the 3^rd month of the contract due to the contract liquidity. The final trading day for a contract will be at noon of 15^th (or preceding business day if 15^th is the holiday) of the delivery month. The tender period of FCPO will be from the 1^st to 20^th of calendar day of spot month.

The trading hours for FCPO separated into 2 sessions, which morning trading session is from 10:30 a.m. to 12:30 p.m. and afternoon trading session is from 2:30 p.m. to 6:00 p.m. As FCPO is a global trading platform, there are high volumes of trade from China’s traders in morning trading session while afternoon session is more attracted to European countries’ traders .

Bursa Malaysia Derivatives has restricted speculative position limits to prevent large price swings associated with excessive speculative trading. Hence, there are only 800 contracts allow for the spot month, 10,000 contracts for any contract month except for spot month and 30,000 contracts for all months combined.

FCPO is considered the most actively traded CPO futures contract in Malaysia and widely recognised as the Global Pricing Benchmark for Crude Palm Oil. Beside, FCPO is also the most price sensitive to the Palm Oil trading community. To increase the market liquidity and trading volume, Bursa Malaysia Derivatives had extended trading hours and the contract period of FCPO in the past February to encourage more trades and stimulate the market. Hence, traders can try to explore this market while seeking another investment tool.