Singapore Exchange (SGX) is currently South East Asia’s biggest equities and derivatives exchange and one of the few to offer hard currency exposure to Asian markets via options and futures. This has made it something of a gateway into the continent for foreign investors with about 80% of its users international.
With that in mind, it helps that SGX’s head of derivatives has something of an international background. Michael Syn studied at Cambridge then went on to work at UBS in London before eventually moving back to Singapore with DBS Asset Management and then being appointed SGX’s first derivatives head in 2011. It is the exchange’s position as a multi-currency, multi-country hub that has given SGX a sweet spot in the Asian market, according to Syn.
“Other exchanges have their own hinterland – like Dubai and the Middle-East or Hong Kong and China. Ours is offshore Asia.”
Syn has overseen bumper growth in the exchange’s derivatives segment over the past five years. In 2015, total traded volumes of derivatives increased by 55% compared to the year before. The exchange’s most active contract FTSE China A50 index futures saw a total of $1.1trn in notional traded volume last year, with July’s monthly record of $160bn turnover up nearly 350% on 2014.
Growth focus areas
Derivatives accounted for 40% of SGX’s most recent quarterly revenue amid soaring demand for futures and commodities contracts including the China A50 Index, Nikkei225 and iron ore.
Growth has evolved concurrently in existing products and through new products in recent times.
Contracts like the Indian-market linked Nifty range have seen a sudden surge of interest these past few years. The USD-denominated Nifty 50 equity index future, SGX’s fastest growing product, grew by 199% in the final quarter of last year compared to the same period in 2014.
The exchange has also seen huge growth in its iron ore derivatives which were up 121% in the last three months of 2015 compared to the year before.
Supporting the recent growth is chief executive Loh Boon Chye who was appointed from Bank of America Merrill Lynch last June. Syn feels the chief executive’s predominately Asian-focused, banking background gives him a good understanding of the region’s concerns.
“The chief executive has always been in the flow business,” says Syn. “Instinctively he understands what we’re doing is flow begetting.”
Loh, a board member of Singapore sovereign wealth fund GIC, says Syn has been influential in coming up with strategic ventures like the introduction of foreign exchange onto the derivatives platform. The latter has become an important concern for investors in recent times.
Foreign exchange volatility in the Asian markets—post-Shinzo Abe and Narendra Modi’s elections and following China’s currency interventions—has made investors crucially aware of currency risk in their equity-linked trades. SGX offers quanto futures—where the payoff in a different currency to the underlying— in 14 currency pairs to help mitigate this risk.
“FX is most interesting right now,” says Syn. “Historically investors that have only focused on equities are now looking at FX. We are now letting them hedge currency as well as equity on SGX.”
Coupled with product growth, SGX has also been focusing its resources on trading technology. Last year, the exchange embarked on its SGX TITAN project to introduce a new derivatives platform which will use the Nasdaq Genium INET technology that already powers SGX’s equities and bond markets.Due to go live in October, this is designed as a next generation platform for trading and clearing of derivatives and should help to lower trading and clearing costs for members and give end-users more control to manage their risks through self-service functionality and straight-through processing.
“The primary objective apart from making products cheaper and more reliable is to offer a lot of self-service functionality,” says Syn.
“This will allow institutional investors to do everything themselves including looking at how much they trade, their credit limits and creating stop positions. It gives you a better look on your capital-at-risk because you are doing it yourself.”
TITAN will also give the exchange a 24-hour derivatives market which is crucial for investors in markets like India, China and Japan these days, says Syn. He hopes it will also provide a meaningful price discovery mechanism for institutional investors and eventually lead to better liquidity.
The move to a new trading platform seems timely. SGX has not been entirely free from technological issues in recent years. Last October, the derivatives market was suspended for an hour as participants were unable to connect due to “intermittent tech failure.” This followed a similar suspension in August.
Syn emphasizes that the new platform rollout is not about “whizz bang tech” but the round-the-clock and self-service trading functionalities.
However, the pressure on the underlying infrastructure is only going to increase as SGX extends its products and services and volume continues to grow. Syn admits the increased complexity of price formation in the derivatives market requires robust infrastructure to support it.
Still, in reality, the derivatives side of the business has not been the main concern for SGX in recent years. It is the equity sector that has proven problematic.
The strains on equities started to develop in 2013 when $6.9bn was wiped off the market value of three small stocks following a sudden, as still-unexplained, price crash. Three years later, equity trading volumes have yet to recover. Daily average traded value in equities was down to $0.93bn in the last quarter of 2015, significantly below the $1.7bn for the same period in 2013.
Magnus Bocker, Loh’s predecessor, who was hired from the OMX Nordic exchange had been criticised for prioritising derivatives over equities during his tenure. Perhaps with Loh’s greater Asian-focus this might be rectified. Despite his derivatives hat, Syn says that SGX is committed to the development of all asset classes across its business.
“We have a premise to be integrated across all assets,” he says. “We want the entire asset structure of Asian securities to be serviceable. This is all ‘addressable’ because of the electronification and globalisation of the Asian markets. We will fail if we don't offer access to Asia.”
Syn believes the exchange has a lot of mileage left in its derivatives unit. SGX already has a number of products lined up for this year. In March, it announced plans to launch contracts on the MSCI China index which includes a selection of Chinese companies within and outside the country. The idea is to break out of the single country equity derivatives presence offering investors access to stocks in different jurisdictions or with different valuations to domestically-listed stocks—for example Alibaba listed in the US.
The same month SGX also announced that it was launching futures based on Indian sector-specific indices, the first products on Indian sector indices to be launched outside the country. The four USD-denominated contracts—referencing the SGX Nifty Bank Index Futures, SGX Nifty IT Index Futures, SGX Nifty CPSE Index Futures and SGX Nifty Midcap 50 Index Futures—are designed to tap into foreign demand for Indian investment, says Syn. Again it is a case of offering access to new markets which are not easily accessible for the outside world.
But ideas are not the issue. It is a case of getting things implemented and persuading investors to use the products over and over that is important, says Syn. “We have lots of ideas but we spend most of the time on implementation,” he says.
“Reusability is a factor. Clients are exhausted by new products so you need to persuade them to reuse a product. With domestic exchanges you have your moral authority and can carry your end users more easily. We need to be persuasive and make sure global clients are okay.”
Products can certainly take a while to get off the ground. SGX’s own Nifty futures were originally launched in 2000 but failed to gain any traction until recently. Syn believes it is a snowball effect—a product will gain traction much faster once it gets the initial push. And he believes, in general terms, the basic elements for growth in exchange volumes are there given the growth in fundraising across Asia where capital markets activity is as strong as it has ever been.
“Our growth is compounded by the fact that capital markets are continuing to grow,” says Syn. “In China, India and Indonesia and so on banks are pulling back from lending and companies are having to raise more money in the capital markets. As a result of this it is natural that our open interest is growing.”
Syn believes that SGX’s derivatives business will also be helped now that the exchange is able to focus its attentions on product rather than regulation which had taken up a large part of the past five years. “In the last few years we have had to spend a lot of time getting compliant with international regulations like Basel III and Dodd Frank,” says Syn. “But we have exited that now. What was regulation is now growth.”
Still, despite all the positivity, there are some wider threats on the horizon. The collapse in global commodities prices following a slowdown in consumption by China has shaken investor sentiment in Asian markets and placed more focus on the issue of wrong-way risk, says Syn.
“The wrong way risk concept—where you are doing business with a counterparty on an asset and if the asset fails so does the counterparty—is very important these days. It makes the role of a central counterparty (CCP) like us all the more important.”
While the role of SGX as CCP is in sharper focus, the point of wrong-way risk is that if it continues to impact markets it may well lead to a decline in overall trading demand. Indeed signs of investor tension are already out there.
“Credits are weakening in a way we haven't seen before,” says Syn. “As petrodollars are leaving you are seeing redemptions and things getting hit. There are all sorts of credit risks cropping up because of the collapse in commodities. The supply creation in terms of bonds and equities is there-- a lot of people are coming to the capital markets with shares. But we don't know if demand could be destroyed given the macroeconomic issues.”
Syn says that the exchange can only work on keeping the cost of access low to help it users. The rest is up to the market. SGX’s position as an exchange for longer-term investors should help it in this regard. The exchange has more open interest as a proportion of traded volumes than most other Asian exchanges which means there is much lower turnover velocity than other places. SGX’s position as a hub for international investors means the ingredients for growth are all there.