Hong Kong Exchanges and Clearing (HKEx) may be breaking new ground with issuance of renminbi-denominated (RMB) stock, but other bourses in the Asia-Pacific region, including the Singapore Exchange (SGX), are weighing up their opportunities too, according to Nels Friets, SGX's recently-appointed head of securities.
“Is there a role for RMB-denominated products on SGX? There may well be,” Friets suggests. “Many exchanges in the region may be looking at the possibilities. It's something we're looking at but we have to consider the operational and regulatory issues as well as demand. Given our Asian gateway strategy, we're constantly exploring ways to offer more products in more currencies to more investors.”
Prior to taking up his current position last month, Friets was the strategic advisor to trading venue operator Chi-X Global, with which SGX launched Chi-East, a pan-Asian dark trading venue, on 11 November 2011. Friets has also chaired the SGX securities committee as well as having been a founding member of the Securities Association of Singapore.
In April an RMB-denominated IPO was issued on HKEx by the Hui Xian Real Estate Investment Trust. Since then, HKEx has outlined options for future RMB equity issuance, including different models for dual currency listings, while the flow of offshore RMB, or dim sum, bonds has continued
with a two-year bond which raised RMB2.3 billion for Caterpillar, a US-based construction equipment and engine manufacturer. According to the Hong Kong Monetary Authority, CNH bond issuance reached 76% of last year's total by the end of May 2011.
SGX lists 12 dim sum bonds and will offer later this year clearing of OTC-traded Asian currency forwards including non-deliverable forwards in Chinese yuan, Indonesian rupiah, Indian rupee, Korean won, Malaysian ringgit, Philippine peso and Taiwanese dollar. Singapore-based banks, such as the Development Bank of Singapore, have pushed ahead with funding and service offerings denominated in the Chinese currency. “We're constantly exploring ways to offer more products in more currencies to more investors,” says Friets.
Having recently failed in its attempt to grow through acquisition of the Australian Securities Exchange, the possible listing of RMB-denominated instruments is just one of several ways currently being explored by SGX to grow volumes organically.
Another is the expansion of the number of American depository receipts (ADRs) listed on SGX. A total of 27 ADRs have been listed to date – including Toyota, NTT Docomo, and POSCO – all firms with a market cap of US$1 billion-plus. But in the January-April issue of The TRADE Asia, Chew Sutat, Friets' predecessor, admitted “it will be some time” before the programme achieves critical mass. Friets says SGX must take a proactive approach to generating volumes.
“I don't think we can take a ”build it and they will come' attitude to listing ADRs on SGX,” he says. “We need to build the awareness of long-only trading desks and other market participants to help them get comfortable with the idea that they can now trade China Telecom ADRs, for example, in the time zone from which the majority of their news flow derives, as well as in New York. Along with the awareness-raising exercise, we will also be increasing supply.”
An additional expected area of growth over the next 12 months is international exchange-traded funds (ETFs). A total of 95% of ETF trading on SGX is in non-Singapore ETFs and the exchange lists more international ETFs than any other Asian exchange. SGX's intention to extend both its ADR and ETF offerings has dictated further changes in its operations. From 1 August, SGX's securities market will trade continuously all day to eliminate the existing lunchtime gap when the instruments underlying the ADRs and ETFs are trading but their SGX-listed derivatives are not.
But SGX's efforts to generate more volumes are not restricted to new products: greater access and liquidity are also critical elements of the vision. On 4 July, SGX made trading cheaper for many market participants by reducing the minimum bid size for securities. A tightening of bid-ask spreads by up to 80% will offer brokers an estimated S$1.7 billion in annual savings, based on 2010 market turnover.
In April, SGX launched a new data centre and co-location facility as part of its S$250 million Reach project, and remains on track to launch the remaining phases of the initiative, including the world's fastest equities trading engine. The new data centre houses SGX's trading, market data and clearing infrastructure and offers a range of co-location facilities, including ultra-low latency trading and market data. While Reach – with its faster access and wider range of order types – is expected to attract more high-frequency traders from around the world, at the other end of the spectrum, the planned ASEAN link between south-east Asia's stock markets will increase order flow from the retail investors on Singapore's doorstep.
“If the ASEAN link can help a Thai broker facilitate his clients' access to instruments on SGX, that benefits us and them. It's not going to move the needle in a big way at first but over time intra-regional flow will build up,” says Friets.
With so many avenues for potential organic growth you may be forgiven for expecting Friets to downplay the attractions of mergers. Not so.
“My personal view is that exchange consolidation in Asia has to happen sooner or later from an economic and operational standpoint. It's just a question of where and how that first step will take place. Market participants want to deal with exchange operators on a global basis and consolidation and collaborations may therefore be the way forward,” he says.