Will three be a crowd in Singapore?

Major derivatives groups InterContinental Exchange and Eurex are both in the process of setting up clearing houses in Singapore, but will their ventures succeed in establishing the country as Asia’s clearing hub?

By None

After conquering their respective domestic markets, Atlanta-based Intercontinental Exchange (ICE) and German trading venue Eurex have landed in Asia, each armed with a clearing house.

US and European clearing house operators have had their sights set on lucrative expansions into Asia for years now, deeming the region to hold far more growth potential than their own.

Asia’s derivatives volumes in both the listed and OTC markets have soared in comparison to their western counterparts over the past five years and with the mandatory central clearing of swaps on the horizon, some of the world’s most established groups are gravitating towards the Asian market.

Those tuning in to annual investor presentations of the likes of Eurex, ICE and CME could almost guarantee there would be a slide dedicated to growth in Asia under the heading of ‘medium-long term strategy’. Derivatives industry conferences have also set aside ample time to discuss the matter on panels, while media publications were sure to include headlines such as Exchanges turn attention to Asia in their ‘five takeaways’ from each conference.

Despite all the flirting around making moves though, it wasn’t until recently that anyone invested in some infrastructure to accompany their people on the ground in the region.

In November 2013, derivatives juggernaut ICE decided to buy the Singapore Mercantile Exchange (SMX) while on a three-year acquisition rampage which also saw it takeover the New York Stock Exchange.

While other groups invested in Asian exchanges through cross-listing deals, or by taking small stakes in the institutions, the purchase of SMX gave ICE an exchange and clearing house in Asia, something its rivals hadn’t ventured into yet.

ICE joined domestic incumbent Singapore Exchange in having a clearing house on the ground, and when Eurex got the go-ahead for its own Singapore-based clearing house in January 2015, the foundations were set for the country to become the Asian hub for derivatives central clearing.

“More than anything this shows that there is room in Asia for growth and that it is a viable market. People are looking at it as a solid place, as opposed to in the past where it was more of an outpost,” explains Bill Herder, CEO of the Futures Industry Association Asia.

“Singapore has become a hub because of the security, safety and the connectivity that is available here.”

“There is growth potential, especially on the OTC side because it is such a huge market. Whether it is non-deliverable forwards or commodities, Asia is still largely bilateral.”

ICE and Eurex have managed to carve out highly liquid markets in Europe – with the former also having a major US branch – though Asia is a different beast.

ICE has said it will clear three products – Mini Brent Crude, One Kilo Gold and Chinese Renminbi futures. Eurex will offer selected listed derivatives which are traded during Asian market hours. The German exchange group said it will extend that range to include listed derivatives based on Asian underlying assets over time.

“Given that the CCPs in place or starting in Singapore have strong exchanges related business backing, and an increasing desire to trade global contracts and clear them in situ, that is probably going to underpin the derivatives business in Singapore,” said John Warren, head of post-trade in Asia for technology vendor SunGard.

“Where it relates to CCPs, I think there is still an open question about how many survive. The first ones that I tend to think will go are the ones that don’t have a natural derivatives business.”

The key to success

The initial benchmark for success will be getting clearing members onboard, something both CCPs have been quick to try and achieve. ICE had announced three clearing members at the time of publication – KGI Ong Capital, UOB Bullion and Futures Limited and Phillip Futures. UOB has also signed up with Eurex Asia Clearing.

The addition of further brokers to these clearing houses will be a sure sign of confidence that there will be investor demand for the two CCP’s services. Through doing this, major Asian banks will also be signifying their interest in trading US and European products such as the Bund, Bobl and Schatz listed on Eurex.

“We see that Asian investors and corporates are seeking to diversify their investments through various futures and options instruments that are listed on ICE or Eurex,” says Matthew Png, managing director and CEO, UOB Bullion and Futures, which first gave its backing to Eurex in May 2014.

“At the same time, with the increasing liquidity of derivatives in Asia, European and US exchanges are looking to this region to strengthen their client base and increase their trading volumes.

“With these clearing memberships, UOBBF is the broker that can reach across the continents and establish relationships with European and US banks, helping them to clear their European and US products on the same book. We can provide them with timely and reliable clearing services for Eurex Exchange and ICE Clear Singapore products and transactions during regular business hours.”

SGX has been reaping the benefits of a being the sole clearing house in a flourishing derivatives market over the past decade, but now these western establishments have decided they wanted a piece of the success.

While some of the existing business could move towards the new entrants, it may not be bad news for SGX though, as the addition of the derivatives heavyweights will undoubtedly grow the space, and possibly establish Singapore as Asia’s clearing hub.

Major international banks are already on the ground in Singapore, but the addition of ICE and Eurex could be set to pull in the business of smaller brokers from the US and Europe.

With increasing capital requirements coming into force, there may be a drop-off in the activity undertaken by these large institutions, therefore the arrival of smaller firms in Singapore could be a welcome boost to business.

For SGX their share of the market may decrease, but an increase in the size of the entire market would ultimately benefit them.

Troubles ahead

As the incumbent, SGX already knows it has liquid products and a plethora of clearing members to ensure its business will continue to succeed. For the new entrants, there are still some barriers ahead.

One industry expert – who preferred not to be named – said that three clearing houses may be too much for Singapore, and explained how another exchange heavyweight also considered the move before pulling back.

“CME actually researched the move years ago – they actually have a bigger presence than everyone else out here – and came to the conclusion that there was no sense to build a clearing house out here,” they explain.

“It comes down to what products they are offering. If there is nothing new for them to trade and nothing new for them to clear then why would they use it?

“There are multiple currencies and there is a lot of competition between the currencies. The other thing people ask is, ‘does a country the size of Singapore really need three CCPs?’”

The source added that clearing houses, brokers and exchanges are all driven largely by regulatory changes at the moment and that the move may be hinged on some of the stringent rules coming into force in Europe and the US.

“I personally think a lot of the CCPs out here are here to hedge against regulatory issues in the US and Europe,” the industry expert adds.

“There is growth on the clearing side but the question remains – ‘do you need a presence in Asia to do it?’. LCH.Clearnet is massive, but they don’t have a CCP out here, just people.”

With three CCPs in the country, the amount of business coming from Singapore will certainly have to increase for them all to prosper, especially in currencies. ICE’s launch of Renminbi-linked products will certainly place it in direct competition with SGX which touts itself as the gateway to China, along with Hong Kong Exchanges and Clearing.

This could create an extremely crowded market in Singapore.

“One issue is the overpopulation of products. There has to be some real underlying need,” said Warren.

“I would expect that the rate of release of products on exchange is going to ramp up significantly,” said Warren, referring to SGX.

Ultimately, ICE and Eurex have followed through with their strategic goal to move into Asia and tap into one of the derivatives market’s most lucrative regions. Whether it will succeed or not will depend largely on investor demand for their products in the coming years.