Regulatory change to Taiwan’s derivatives market will see increased derivatives volumes and higher participation from foreign asset managers as trading rules are softened, according to new research.
The steady growth in trading of both exchange-traded and over-the-counter (OTC) derivatives in Taiwan, driven largely by FX contracts, will continue, with the easing of trading rules letting foreign firms, which accounted for only 6.5% of trading volume in 2011, partake in larger numbers.
The report, from consultant Celent, proposes strong competition in Taiwanese markets will extent to derivatives trading as rules for foreign traders and investment in China are eased in coming years.
Hua Zang, an analyst with Celent’s Asian Financial Services Group and author of the report, said the country’s high trading volume in FX would lessen as institutional investors diversify across other instruments.
According to Zang, the deregulation process expected over the next four-to-five years will result in more market participation from traditional asset managers.
“Proprietary firms, pension funds, asset managers and mutual funds will increase overseas derivatives trading. Major drivers include the increasing internationalisation of risk management and deregulation, allowing more pension funds to invest in overseas and derivatives markets,” the report reads.
There are 13 products categories in the bank-dominated OTC derivatives market, with interest rate products the most popular accounting for 86% of the total trading value in 2011 and derivatives use is favoured by larger firms, with 51.5% of large listed firms using them, compared to 43.1% of mid-size firms and 32.3% of small listed companies.
Taiwan asset management institutions prefer equities and bonds over derivatives, the report revealed. Equity accounts for 59.6% of the total assets under management and bonds accounted for 36.8%. For banks, in the OTC market, the major product is FX, which accounts for 88% of total value, followed by interest rate products, which accounted for 11%.
FX is highly traded due largely to the importance of exports for the country, which makes currency swings a major risk for corporate activity, and the report signalled steady growth in FX trading volumes.
Meanwhile, NYSE Euronext and the Taiwan Futures Exchange (TAIFEX) have agreed to explore bilateral business opportunities and connect their respective customer bases in Asia, Europe and the US through NYSE Euronext’s order routing system. The co-operation will support the development of futures and options markets at both bourses and serves as a framework for developing products, establishing a two-way order routing partnership to facilitate reciprocal order flow and explore distribution channels.