The power of Asia’s economic rise, led in sheer size by China and India but occurring just as dynamically right across the region, is so impressive that it is becoming the dominant fact in international relations.
Positioned at the heart of this change is Singapore – a state whose economic might far exceeds its size. The country’s strong and stable political and legal systems, convenient location on natural trade routes, cultural diversity and determined openness to the outside world are its key advantages.
This picture is reflected in the financial world, too, where Singapore is recognised as one of the world’s leading centres for trading and capital raising, even though it is not always particularly highly ranked numerically.
Thus, Magnus Böcker, the Singapore Exchange’s new CEO, acknowledged in the company’s annual report for the year to June 2010: “In terms of rankings, exchanges in the region as well as alternative trading platforms are rapidly catching up with us. If we consider volume traded, our securities market is small compared to global exchanges, while compared to five years ago, our position in the global derivatives market has also fallen.”
In the same report, Böcker said SGX was the 24th most active exchange by the value of securities trading and the 26th for derivatives. But by the market capitalisation of its own stock, it was the seventh largest.
The difference indicates the market’s view of Singapore’s potential. It was this same sense of strength and dynamism that made SGX the dominant partner in its proposed merger with the Australian Securities Exchange, even though ASX is a much bigger stockmarket and derivatives market, with 2010 revenues 10% larger than SGX’s and 24% more profits.
Though the Australian public and politicians were not convinced, ASX’s management was sold on the idea that SGX was, as its slogan says, ‘The Asian Gateway’. Allying with it, they believed, would build up Australia’s capital market and make it more competitive on a global scale.
Had the deal succeeded, it would certainly have created a much larger exchange group on the Asian stage. Employing over 1,100 people, the exchange would have listed over 2,700 companies from 20 countries worldwide, with more than 200 listings from China. Its derivatives exchanges would have offered investors 400 contracts.
The deal is dead for now, following its rejection on April 8 by Wayne Swan, the Australian treasurer, as contrary to the national interest. However, it sent a very clear signal about the ambition of SGX – which is unlikely to take defeat lying down.
Already in mid-April, announcing a good set of quarterly results, Böcker acknowledged a sense of disappointment about the merger’s failure, but was keen to move on, saying he was now looking ahead to continuing to “deliver shareholder value”.
He hinted that SGX would now look for another merger partner in Asia, where regulators were less likely than in Europe or the US to create obstacles. However, he said SGX could also deliver “organic” growth, continuing to compete with the new global superpower exchanges.
Seeking a niche
What position, then, can Singapore aspire to among the exchanges of its southeast Asian neighbourhood, the Asia Pacific region as a whole, and the world?
A quick look at the other markets in Asia suggests an answer. As FOW has remarked before, the derivatives exchanges of Asia fall into four groups. China and India are one – very large, multi-exchange markets, still largely closed to cross-border traffic, in both directions, although there are exceptions. These markets are clearly going to develop powerfully according to their own destinies.
South Korea is a case unto itself – the huge liquidity in one product, the Kospi 200 Option, makes it unlike any other market. Japan’s seven exchanges have been stagnating, with the exception of Osaka Securities Exchange and its Nikkei 225 contracts. Reforms are beginning but it will be several years at least before Japan begins to catch up with international peers.
The fourth group are the southeast Asian exchanges, from Taipei to Jakarta. Of these, the Taiwan Futures Exchange is the largest, by number of contracts traded, with 140m in 2010. It is followed by Hong Kong Exchanges and Clearing, with 116m. Next comes SGX on 61.6m, and then Bursa Malaysia (6.15m), the Thailand Futures Exchange (4.52m), and the much smaller Jakarta Futures Exchange and Singapore Mercantile Exchange.
What makes Singapore unusual is not its size; nor is it growing particularly fast. But whereas all the other southeast Asian exchanges are focused on their domestic markets – locally listed stocks, sometimes interest rates, or homegrown commodities such as palm oil in Malaysia – the risks traded at SGX are nearly all international.
Hits and misses
Like most derivatives exchanges around the world, SGX has grown robustly over the past five years, though it slumped in 2009 and 2010’s growth went into digging out of that hole. Trading has more than doubled from 28.5m contracts in 2005, including the Singapore Commodity Exchange, which SGX bought in 2008.
In that time, some of the two exchanges’ products have dwindled: SGX’s Euroyen Tibor Futures and Sicom’s two rubber futures. SGX’s once-active Eurodollar Futures were already dying in 2005 as a result of CME Group’s launch of Globex, which made trading in the Chicago contracts globally accessible.
The big success of the last few years has been the S&P CNX Nifty Index Futures on Indian stocks, which swelled from just 9,900 trades in 2005 to 10.5m last year.
Otherwise, the main contracts today are the same as then – futures on the MSCI Taiwan Index (15.6m trades in 2010), the MSCI Singapore Index (3.72m), and the Nikkei 225 (28.8m).
In 2010 two other products began to do well. One was FTSE Xinhua China A50 Index Futures, whose total of 532,000 trades last year was helped by China’s clampdown on what it sees as excessive trading of its domestic equity index future, the CSI 300 at Shanghai Futures Exchange.
The other was Sicom Gold, with 645,000 trades. This contract has hit trouble this year, however, as the Monetary Authority of Singapore has been uncomfortable about some aspects of it, and hence has delayed giving it approval to migrate to SGX from Sicom – a change that the group wants to make with all Sicom’s contracts.
Michael Syn, head of derivatives at SGX, explains the growth at the exchange: “SGX’s mutual offset agreement with the CME covers Nikkei 225 and Nifty futures and three other contracts, allowing round-the-clock trading of these contracts. As these derivative contracts are mostly US dollar and in some cases, yen contracts, investors trading these contracts gain easy access to Asian markets without capital controls or other structural restrictions which exist in the onshore markets.”
Singapore, in other words, is an easy, attractive place for investors, both Singaporean and international, to invest in or hedge stocks from China, Japan, India or Taiwan – and even Japanese government bonds.
SGX also has big plans in commodities, although its volumes at the moment are low. The RSS3 and TSR20 rubber futures used to trade more than 1m contracts each a year; in the first quarter of 2011 volume was just 43,500 between them. The exchange has recently begun consultation on moving them to SGX’s main platform.
At the main market, Fuel Oil 380cst Futures were launched in February 2010 and Robusta Coffee Futures this January – volume so far is slight.
Liquidity is starting to build in SGX’s futures on zinc, copper and aluminium, launched in February in partnership with the London Metal Exchange, which is supplying settlement prices. So far zinc and copper have recorded over 20,000 trades each and aluminium 10,000.
Chasing the fast money
Any exchange nowadays that wants to increase its derivatives trading volume and attract new participants must invest in technology. SGX knows it. Last month, it launched the first two components of its S$250m Reach technology initiative. By April 19, it had signed up 50 market participants to its colocation service, which the exchange said would allow connections 250 times faster than normal.
SGX Reach, which the exchange claims is “the world’s fastest trading engine”, will start operating in August. Later in the year, SGX will link its markets with liquidity hubs in international financial centres including London, Chicago, Tokyo and New York.
Colin Macfarlan, head of Asian futures at Credit Suisse, says: “The Reach initiative has been reasonably successful, but it won’t change the dynamic of volumes substantially. Latency initiatives will of course help but arbitrage strategies in primary markets tend to benefit most.”
However, Syn is more bullish: “All these efforts will help create a market environment suitable for investors new to Asia, including sophisticated participants and algo traders.”
High frequency traders are a key target for the exchange. “The entry of HFTs into markets improves liquidity and velocity, thereby benefiting market participants as a whole,” says Syn. “SGX is constantly enhancing its market environment to draw new participants including HFTs. About 30% of SGX’s derivatives volume comes from HFTs and we believe there is still room to grow their participation level."
If Singapore is a good place for a derivatives exchange, SGX is not the only one to have noticed. In August last year, the Singapore Mercantile Exchange opened its doors, offering futures on physically settled gold and cash-settled West Texas Intermediate and Brent crude oil, as well as becoming the only exchange in southeast Asia that offers trading in euro/dollar FX futures.
The exchange was set up by Financial Technologies (India), the group behind India’s Multi Commodity Exchange and about 10 other markets.
On April 15, SMX launched cash-settled gold, copper and silver futures, in what the exchange said would be “the first of more launches taking place this year”. Dollar/yen and Australian dollar/US dollar futures are set to start trading on April 29. Other products SMX is working on include futures on the Metal Bulletin Iron Ore Index and on black pepper.
So far, the most successful contract is the euro/dollar, with 10,000 trades in each of January and February and 5,000 in March – an overall level which the bourse says meets the targets set at launch. With each contract worth €25,000, the monthly trade is worth €125m-€250m. The 1,000 barrel WTI contract is traded about 1,000 times a month, the gold future hardly at all and the Brent contract, denominated in euros, has never been traded.
Still, this is a lot more successful than the Hong Kong Mercantile Exchange, which has similar ambitions but according to its website on April 25 was still waiting for a licence from the Securities and Futures Commission of Hong Kong.
SMX expects to grow as it builds up trading and clearing members. A spokeswoman says it has global ambitions: “The potential is great, not only for domestic markets, but also for crossroads between physical and derivatives activity,” she says. “When we have established a firm trans-Asian platform, international participation will increase naturally to plug into a larger base of Asian traders and investors. Our identity as a global exchange grows on the back of our success as an organic proxy to Asian trade flows. It helps that our trading hours span the Asian, European and American time zones.”
Futures broker Newedge recently became a member of SMX. Laurent Cunin, head of Asia Pacific at Newedge in Hong Kong, says: “It was important for them that we became a member. We now have skin in the game and want it to succeed – however, trades are still relatively slow, so we are hoping that it picks up.”
A new hybrid
In February this year, another market opened in Singapore – Cleartrade Exchange, an OTC exchange backed by London’s Freight Investor Services, with clearing provided by LCH.Clearnet. The bourse has begun offering forward freight agreements on major shipping routes, as well as iron ore and fertiliser swaps on its broker-neutral trading screen. It subsequently launched four daily China Steel Indices in April.
Richard Baker, the bourse’s chief executive, told FOW’s sister title FOi at the exchange’s launch: “It’ll be a five year evolution. Volumes will be small to begin with, mainly block trading of phone-brokered deals. The trading screen is what was missing before. There were too many closed pools of liquidity. But we’ll be able to effectively process electronic orders, with straight-through clearing to LCH.Clearnet.”
Early signs are positive. In its first quarter, over 70,000 contracts were dealt on the exchange. “Cleartrade Exchange has seen a great deal of interest since our official announcement in January as a regulated market operator,” Baker says. “Membership approvals for principals, brokers, investment banks and general clearing members are progressing well and this, coupled with the execution of such a high volume of trades across freight and iron ore, is testament that the approach we are taking in the market is right. Our next major milestone, in continuing this success, is the go-live of a critical mass of principals on the platform in late April.”
While SMX and Cleartrade are in some senses directly competing with SGX, most of the other exchanges around the region are not.
Thus, the success of these markets is more of an encouragement to Singapore’s ambitions than a threat. Macfarlan says Credit Suisse has seen growth across the whole region recently, and the trading numbers bear him out.
Just 300km north of Singapore is Kuala Lumpur, where Bursa Malaysia looks set to grow this year after four years of almost identical volume. Bursa Malaysia Derivatives’ products, including its flagship Crude Palm Oil Futures, are now traded on CME’s Globex platform, giving investors increased access to the exchange and improving liquidity.
Following its 2009 deal to sell a 25% stake in its derivatives business to CME Group, Bursa Malaysia said it expected its daily derivatives trade to double in three to five years from then current levels of around 26,000 contracts a day. So far this year, the average has been about 37,000.
The Thailand Futures Exchange is having a good year, too. Its daily trading volume hit a new high on March 15 at 46,891 contracts, though the average is more like 25,000 to 30,000.
Product diversification has worked well for the Bangkok exchange: volume has more than doubled from 2.15m contracts in 2008 to 4.52m last year. As recently as the beginning of 2008 the only active products were futures and options on the SET 50 Index. These (mainly the futures) still make up half TFEX’s volume. But it now averages 5,000-7,000 single stock futures trades a day, as well as 3,000 to 4,000 each of Gold and Mini Gold Futures. On March 21 it listed futures on 16 more SET 50 stocks from nine sectors, bringing the total number of single stock products to 30.
A market is beginning to stir in Vietnam. Last month at a conference in Hanoi, Ta Thi Thanh Binh, deputy director of the market development department of the Vietnam State Securities Commission, said the country would have a derivatives platform by 2014.
Taiwan’s market is big and thriving. Like Korea’s, its biggest contract is an index option – the Taiex Option, which was traded 95.7m times in 2010. That’s still only a third of the volume every month in the Kospi 200, but it’s more than any other contract in southeast Asia. The corresponding futures, four times bigger in denomination, were traded 25.3m times last year, and the mini version, the same size as the option, 13.9m times. These futures are directly competitive with SGX’s MSCI Taiwan Index Futures, although for the moment, there seems to be plenty of room for both products. The Taiwan Futures Exchange also offers MSCI Taiwan contracts, but they are little traded.
Besides these, it has a wealth of sectoral Taiwanese indices and some single stock futures and options trading.
The China question
The key question for many in the region is when China will open up its derivatives market to foreign participants. “China is the headline story over here; it is a question of when, not if the market opens up,” says Macfarlan at Credit Suisse. “We expect to see some activity by the first quarter of next year following encouraging signs in the most recent five year plan.
“Both China and India have a long term strategy of building strong markets from within, based on fewer but stronger institutions. It’s a sensible approach.”
Cunin agrees that China will open the doors to its derivatives markets. “I don’t know when it will happen but there are positive signs,” he says. “We are in talks and consultation with the government but there is little concrete information at the moment. Some are saying that we might see movement by the end of the year but I think it will take a little longer.”
All this creates competition for Singapore. However, not all are bullish on the recent growth of the region. In the view of John Mathias of JM Consulting, “The problem which faces countries and exchanges in southeast Asia is fragmentation. There has been growth, but spectacular volume growth has hidden
Mathias adds that many Asian exchanges tend to be highly speculative, with relatively low open interest compared with high volumes. This is related to the fact that “the main type of player in many regional exchanges is the retail investor”.
Cunin adds that Newedge’s investor clients currently have little interest in the southeast Asian markets outside Hong Kong or Singapore, as liquidity is not yet large enough to attract them. However, he expects the picture to change next year as the markets continue to grow.
“It is exciting to be here at the moment,” he says. “Coming over from New York is challenging, as in the States there is one regulatory framework. Over here, each country has its own jurisdiction and so it is hard to be efficient but there is a lot of growth out there.”
Need for simplicity
Experts believe integration across the region is essential to the success of the derivatives industry in southeast Asia. However, moves to consolidate may be thwarted by regulatory obstacles.
Mathias says: “Asian exchanges are hampered by incomplete mutual recognition between regulatory regimes. There are many regulatory restrictions across the region, relating to cross-border selling or marketing of exchange products. Furthermore, detailed issues in regulatory authorisation have slowed down the growth of remote membership. Global brokers are currently having to tackle this fragmentation but there needs to be a dedicated effort to harmonise regulation across the region.”
Concerns are also being raised over clearing. As the world moves to central counterparty clearing, there is a risk that the current divisions between countries in southeast Asia will remain and rule out any possibility of a central clearing pool for the whole region or remote clearing options for investors.
Last month, Keith Noyes, Asia Pacific director at the International Swaps and Derivatives Association, told Reuters: “In some countries
SGX wants to fill the gap for a regional clearing house. At the Futures Industry Association’s Boca Raton conference in March, SGX president Muthukrishnan Ramaswami said the exchange planned to become the “multi-asset class clearing hub” for Asia. However, chief executive Magnus Böcker said he expected as many as three more clearing houses to emerge in the region.
Through its over the counter service AsiaClear, originally for oil and freight swaps, SGX launched clearing facilities for interest rate swaps in Singapore dollars in November last year and said that “plans are under way” to clear foreign exchange forwards in US dollars, sterling and euros.
By March 31, AsiaClear had cleared $36.9bn of interest rate swaps, with 11 members participating.
In April the Financial Times reported that the Monetary Authority of Singapore was in the process of appointing a Chinese bank in Singapore to clear renminbi trades. That would allow Singaporean banks to access the Chinese currency direct, rather than having to go through Hong Kong – an important step forward for Singapore.
Even more encouraging may be the news that the longstanding project to build an Asean Trading Link is coming to fruition. Later this year, if all goes to plan, the leading exchanges in the Association of South East Asian Nations will be connected by an order routing network for equity trading. This will mean members of SGX, Bursa Malaysia, the Philippine Stock Exchange and the Stock Exchange of Thailand can trade on any of the exchanges. If any of the exchanges are connected to external networks, orders from those can also flow to any of the markets. The Indonesian and Vietnamese exchanges are expected to join later.
At the moment derivatives are not covered by the link, but once it is in place, adding them should be technically feasible. More cross-border share trading should also stimulate demand for SGX’s strongest suit in derivatives – foreign equity indices, which can be used as hedges when investing in stocks. At the moment, SGX does not offer direct contracts for the Asean markets, apart from its MSCI Asia Apex 50 Index Futures, which haven’t been traded for two years.
At the centre
However the Asia Pacific derivatives market develops, it is likely Singapore will continue to play a central role. The country’s history and culture, the present state of its markets’ development, and the ambition of its participants all point that way.
As things stand, SGX’s big deal with ASX is off. It is clear the exchange wants to make another move, but no one knows in which direction it will be. Many of the other exchanges in Asia are unlikely to be merger candidates, because of their ownership structures or legal regimes.
Until another deal is announced, SGX will continue with its organic strategy – which is to be internationally focused, trying to draw money in from around the region and the world, to invest in Asian markets. At the same time, it wants to capture more of the lively OTC and commodities business coursing through Asia, via its exchange-traded contracts and its clearing service.
SMX and Cleartrade both have the same ambition, and the fact that all three are based in Singapore is testament to the state’s importance – perhaps exceeded only by London and New York – as a commodity trading centre.
The exchanges of southeast Asia have realised that the way ahead lies in connecting with each other and with the world at large. Bursa Malaysia’s agreement with CME Globex is a case in point; the Asean Link is another.
Plenty of institutional, political and legal obstacles lie along the route to a more integrated southeast Asian market. But when it comes to internationalising its derivative markets and making them accessible from overseas, Singapore is at the forefront.