Perhaps unsurprisingly for a centrally planned economy, Chinese authorities' reaction to a precipitous fall on the domestic equity markets was to intervene. With the Shanghai Composite Index falling 8.1% on the first day's trading of 2016, regulators introduced circuit breakers in a bid to tame the markets. The result: twice in the space of a few days, trading was halted within 30 minutes, causing the China Securities Regulatory Commission to abandon its initiative just a week after introducing it.
The government-led halts on trading in January echoed the private sector response to a 30% fall in equity market values in July 2015 – an experience that saw 1,600 of the combined 2,600 firms listed on the Shenzhen and Shanghai bourses suspend trading. It was a PR disaster for China PLC – and a major headache for RQFII China exchange-traded funds (ETFs). The renminbi-denominated vehicle was supposed to be an improvement on the QFII system which only allowed investors access to P-notes, whereas RQFII meant they could physically access shares onshore in China.
Instead, as investors took their money out of RQFII ETFs, those remaining were left with a product that was highly illiquid and with significant tracking errors. This was not the case for A50 futures traded on SGX; the underlying index continued to update with suspended shares replacing with ones that were still active.
The net result, according to Michael Syn, head of derivatives at SGX, was that those using the cash-settled index for hedging purposes "didn't skip a beat".
"Last year and leading into the start of 2016 was an extraordinary period in A-Shares – with some eye-openers onshore in policy terms for circuit breakers and price limits. Initiatives which would have taken international exchanges months and years to consult on were implemented twice in a few days."
But as the onshore market was buckling under the pressure, SGX's A50 futures contract kept rolling.
"For SGX to have a product that manages forward risk on the A-share index at a period in time when the price formation process was so genuinely challenged was ... interesting. That was the perspective that we took – it's not a question of volumes or market share, but whether we could operate an orderly, continuously-matching futures market when the underlying is experiencing such stress. And this was when the SGX A50 contract really cemented its international status; it's a young contract that has grown up," Syn says.
Syn says SGX did nothing during the time of heightened volatility in China. Instead the strong performance of the A50 contract is a reflection of a focus on risk management when it was set up. The head of derivatives says the exchange's risk management department dug deep into potential concentration risk and scrutinised the difference between the onshore and offshore markets.
"Our price limits were sensible – so price formation didn't unintentionally gravitate towards the boundary, which is what happens when a well-intentioned 'circuit breaker' is inappropriately designed. No point tripping the house when you boil the kettle, which is kind of what occurred. So when ETFs lost ability to replicate and lost anchor to their net asset value, the SGX A50 order book was orderly and liquid."
It wasn't just the performance of the Singapore bourse's existing contracts that Syn points to as a highlight of the last 12 months; the launch of composite indexes that cover both multi-country and sub-country investment themes is something he views as a major step forward.
Away from China, SGX looked to capture increasing investor appetite for India with the launch of four sub-country indexes in conjunction with NSE – the most important of which is the Nifty bank index. Comprising 12 financial stocks, its onshore volumes are already half of its parent index and Syn is confident this can be replicated offshore.
"India is in a stage of growth where China was 15 years ago, when investors looked first at exposure to financials such as BoC or ICBC. India is now going through that phase – investors want banks, especially when onshore carry is 9% in a world of zero or negatives," he says.
The Nifty Bank launch was one of 20 such new products that SGX rolled out last year as it cemented its position as Asia's offshore investment centre, not only for the headline stories but also some of Asia's more niche attractions.
The SGX MSCI Indonesia Futures contract, the only liquid offshore way to access the biggest market in Asean countries, saw growth of 13% year on year, while its Philippines equivalent traded eight times the previous year's volumes.
"Singapore has always been more than an offshore China hub. For SGX we think of ourselves as consisting of four clusters: Taiwan and Japan (North Asia), China, India and Asean," says Syn.
The week on Risk.net, December 2–8, 2017Receive this by email