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Asia Markets
Singapore Exchange Forging Ground in Derivatives
From the Wall Street Journal of Thu, 25 Dec 2014 23:39:55 EST
An office worker walks past a logo of the Singapore Stock Exchange in Singapore.
An office worker walks past a logo of the Singapore Stock Exchange in Singapore. Reuters

Starved of growth at home as stock trading volumes plummet, Singapore’s exchange is pushing into Asia’s riskier markets to stay competitive.

Singapore Exchange Ltd. , or SGX, has rolled out derivatives based on a wide variety of Asian assets from Chinese equities to the Indian currency, which allow yield-hungry investors to gain exposure to hard-to-buy markets across the region.

The drive into these foreign markets illustrates the lengths Asia’s exchanges are going to beef up connections with their counterparts and to give investors exposure to the less-developed but faster-growing markets of the region. The Hong Kong and Shanghai exchanges last month linked up to allow easy buying through each other’s systems while Thailand’s exchange is working with the Bank of China to promote Thai assets among Chinese investors.

“Competition has become more intense with different regional exchanges starting to do very well,” said Harsh Modi, bank and exchange analyst for Southeast Asia at J.P. Morgan . “I don’t see that changing anytime soon,” he said.

For Singapore, daily trading volume in securities—the bread and butter of most exchanges—slumped 50% to 1.8 billion shares a day in the third quarter, from a year earlier, according to SGX statistics. The exchange has struggled to attract big-ticket listings that might drive trading activity.

By contrast, derivatives trading volumes have soared, up 9% in the same period to a cumulative 28.8 million contracts and a record high.

SGX’s most successful derivatives products last month were the FTSE China A50 Futures and its Indian rupee futures contracts. It added futures contracts for six Asian currency pairs, foreign exchange futures for three currencies and stock market futures contracts for four Asian countries all in the last 12 months.

Such contracts offer the chance of big, quick gains for investors looking to bet on market moves, such as a recent surge in Chinese stock prices, and to do so using a stable currency like the Singapore dollar. But these bets can involve sizable losses if they go the wrong way. Companies also use derivatives to lock in prices of commodities or currencies and reduce the uncertainty in managing a supply chain.

Goldman Sachs , which has a “buy” rating on SGX, notes that the exchange derived 23% of its transactional revenues from derivatives trading in 2013 and 56% from cash equities. Of the 17 global exchanges it covers, SGX derives the most revenue from equity index derivatives with the exception of the Chicago Board Options Exchange.

SGX, which trades on its own securities market, is up 7.7% in the year through to Monday at 7.82 Singapore dollars (US$6.25) a share, compared with a 5.2% gain in the benchmark FTSE Straits Times Index.

Yet SGX hasn't given up on its securities market. This year it introduced a series of sweeping changes, including circuit breakers, market makers and liquidity providers, as well as tweaking rules to encourage and enable more retail investors to trade.

But though trading volume in November picked up slightly, the bourse has yet to see a sustained improvement, and brokers say that three separate interruptions to trading this year have hurt its reputation, particularly among retail investors.

Part of the sluggishness is due to low levels of volatility, according to Jenny Chiam, head of securities at SGX.

“There has also been a drop in speculative activity in the market after regulatory action was taken in the interest of investor protection and the overall quality of the marketplace,” she said. Singapore authorities have tightened regulations and launched a probe into trading activity after a crash in small-capitalization stocks last year, which hit retail investors particularly badly.

With few large local companies still unlisted, SGX has become a center for real-estate investment trusts, which generate yield income but don’t attract the same kind of active trading that other companies do.

The bourse’s chief executive, Magnus Böcker, has reached out to other stock exchanges in the region in an effort to drive volumes. But that too, has had limited success, and SGX’s bid to acquire Australia’s stock market operator ASX in 2011 was blocked by regulators. Instead, SGX is positioning itself as a hub for secondary listings.

But analysts say that unless it can attract more listings, particularly big names, Singapore’s bank- and real estate-heavy stock market is unlikely to gain much traction despite the measures that have been introduced.

“Derivatives will continue to grow with the addition of new products but it’s the equities side which is inherently disappointing and going forward given the state of the markets it doesn’t look like it’s going to pick up any time soon,” said Julian Chua, an analyst covering SGX at Nomura. “Unfortunately when you get involved in the derivatives business you have to take the good with the bad,” he said. “If there is an exceptional crisis event there could be a lot of margin calls and defaults.”

Write to Jake Maxwell Watts at

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