Derivatives exchange of the year: SGX

Asia Risk Awards 2018

Michael Syn, SGX

In February, the Singapore Exchange was dealt a blow when the main bourse in India said it would stop providing share trading data to overseas exchanges. But the swift-thinking SGX put in place a mechanism to preserve its position.

The move by India’s National Stock Exchange presented a problem for SGX, whose Nifty 50 futures index – one of the most popular ways for investors to tap into the onshore Indian equities market – relies on accurate data from India’s NSE for pricing.

The NSE action came close on the heels of a decision by India’s securities and markets regulator, at the end of 2017, to ban foreigners in India from issuing participatory notes, another market-access product that SGX used to give clients exposure to the Indian stock market. Many of SGX’s clients rely on being able to access the Indian stock market for hedging purposes and the exchange had to make sure they weren’t forcing clients to liquidate their positions, which could have disrupted the market and created unacceptable levels of risk exposure.

“There are challenges for offshore investors managing funds or for fiduciaries to access markets onshore in India, so there was very high demand among clients for SGX to continue providing access solutions,” says Michael Syn, SGX’s head of derivatives. “There is only one consistent way to describe our approach to India this year, and that is to have done our very best to maintain risk-management continuity.”

There are challenges for offshore investors managing funds or for fiduciaries to access markets onshore in India, so there was very high demand among clients for SGX to continue providing access solutions

Michael Syn, SGX

SGX also offers a suite of 50 Indian single stock futures, covering the most liquid names in the MSCI Index. The main challenge behind this initiative has been to generate sufficient liquidity for the futures, which doesn’t happen overnight, says Syn. The product was well-received by investors and about $1 billion to $1.5 billion of notional value traded so far, according to SGX. 

The product was well-received by investors and about $1 billion to $1.5 billion of notional value traded so far, according to SGX.

SGX has also brought other innovations to the market to the benefit of its clients. One such offering is FlexC, which allows non-delivery futures to be cleared as though they were standard currency futures. The maturity date of the futures can be any day within 100 days of the start of the contract, which is the maximum length of trade for most non-deliverable forwards. This allows clients to retain the advantages of trading over-the-counter while allowing them to enjoy the benefits of clearing, such as a reduction in counterparty credit risk.

“With forex markets moving towards central clearing, the FlexC solution will offer an effective way for maximising capital and operational efficiencies, lowering costs and counterparty credit risk, while retaining bilateral trading relationships,” says Syn.

FlexC is able to futurise currency pairs associated with the Taiwan dollar, Korean won, Indian rupee, Singapore dollar and offshore renminbi (CNH) markets.

The initiative, which went live at the end of August, has been well-received, says Syn.

“By bringing futures to the NDF market, SGX has given everyone the chance to play on a level playing field, including market-makers, the banks and the buy side,” says the Asian head of commodities for one broker. “Everyone can now play in the interbank market without worrying about prime broker fees, which theoretically should make the pricing better.”

The strength of the exchange was visible when it moved quickly to take advantage of the gradual opening up of Chinese markets, for example.

This year, Chinese authorities allowed foreign participation in two key commodity futures contracts: oil futures traded on the Shanghai International Energy Exchange; and iron ore futures traded on the Dalian Commodities Exchange.

Of these two contracts it is the iron ore one that SGX cares most about as it already offers iron ore futures contract. Instead of fearing the opening up of the DCE iron contract, the Singaporean exchange welcomed it and sees it as a great opportunity to tap into liquidity. The DCE iron ore liquidity is as much as 20 times greater than the liquidity of iron ore on SGX, according to some reports.

Participants in the SGX and DCE iron ore contracts are significantly different. While SGX attracts traders and others involved in the physical iron ore market, the DCE market is mostly electronic and characterised by retail investors.

“We’ve been hoping for and waiting for the interaction of these two pools of liquidity, which are very distinct,” says Syn. “We have already seen a transmission of liquidity from their market to ours.”

DCE’s opening up promotes enhanced risk management and information exchange between onshore and seaborne assets, which is driving the financialisation of iron ore as a tradeable macro benchmark, according to Syn.

SGX has also benefited from the inclusion of part of the Chinese stock market – so-called A-shares – in the MSCI Emerging Markets Index, which took place at the start of July. According to Syn, the most liquid proxy for these shares happens to be A50 futures traded on the SGX. This means the exchange has seen a jump of 30% of notional interest – $9.4 billion – since A-share inclusion.

It is this combination of innovation and fortuitous position that helped SGX enjoy one of its best years to date across all major asset classes: derivatives; equities; currencies; and commodities. Part of this has been down to pre-positioning in key markets that have started opening up, but another part has been focusing on what clients need and driving forward in this way.

“In this idiosyncratic risk environment for Asian portfolio managers, SGX played to its core strengths as the pan-Asia market infrastructure providing liquidity risk management with the longest trading hours in Asia, as well as central clearing anchored in Singapore,” says Syn.