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
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
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
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
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
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
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
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
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
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
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
Chasing the fast
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
However, Syn is more bullish: "All these
efforts will help create a market environment suitable for
investors new to Asia, including sophisticated participants and
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
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
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
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
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
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
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
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
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
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 [lower] true growth in notional value, as
contract size is significantly smaller in Asia."
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
"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 [in Asia] you may
see banks saying 'I don’t do enough business in
this country to justify becoming a clearing member, I may as
well shut down my business here’."
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
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
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
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.