Adding to the pile

New products

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New derivatives contracts are popping up across the region, as some of the more sophisticated exchanges attempt to attract international investors. Bina Brown reports

Asia’s derivatives exchanges have been busy over the past year. While some markets have been focusing on the basics – such as introducing long-awaited interest rate futures contracts – others have been launching a steady stream of new additions to their exchange-traded derivatives suite. And this boom in new contracts is set to continue, with several of the larger exchanges planning to focus on international derivatives products in an effort to attract greater numbers of overseas investors. “The exchange is a gateway for regional products by international investors, and a gateway for regional participants wanting to trade international products,” remarks Jimmy Ang, executive vice-president and head of derivatives trading at the Singapore Exchange (SGX).

But whatever the country, there seems to have been an increase in activity in new products. Hong Kong and Singapore have been the most active, launching a selection of international products encompassing Japan, the US and China. In Thailand and Malaysia, however, it is the development of a bond futures contract that has been occupying the exchanges’ time. Across the Pacific, after a relatively inactive two years, the Sydney Futures Exchange (SFE) is stepping up its derivatives activity, recently unveiling a new intraday option product. Meanwhile, the Australian Stock Exchange (ASX) looks to be taking on the SFE for control of Australia’s exchange-traded derivatives market, launching its first futures contracts on the country’s equity index in January, with an electricity futures contract scheduled for October.

Singapore has been among the most active in the region, as the exchange’s management team continue to search for new ways to attract a pool of investors outside of the city state’s four million-strong population. Derivatives trading volumes on the exchange increased by 12.5% to a record 31 million contracts in 2001. SGX’s latest addition has been a selection of Japan-related contracts, including a full-size Japanese government bond (JGB) futures and option contract, launched at the end of April, which joins the existing mini JBG contracts. The two JGB contracts are fungible, allowing traders to offset positions at a ratio of 10 mini contracts to one full-size contract, giving traders more opportunities for hedging, says SGX’s senior vice-president and head of strategy and product development, Benjamin Foo. “Traded alongside with the mini JGB contracts, the availability of both full-sized and mini JGB contracts will meet the diverse trading, arbitraging and risk management appetites of SGX’s global clients and intermediaries,” he says.

Following on from its MSCI Taiwan and MSCI Singapore stock index futures, which both recorded record trading volumes in 2001, SGX also introduced an MSCI Japan index futures contract in May. “Most importantly, the inclusion of MSCI Japan index futures provides traders and risk managers with enhanced trading opportunities and risk management capability in Asia,” comments Foo.

The exchange also signed an agreement with the Tokyo Commodity Exchange (Torcom) in April to cooperate on the launch of a Middle East crude oil futures contract on SGX. The contract already trades on Torcom, and by listing it on SGX, the exchange hopes to benefit from Japanese traders eager to deal beyond Japanese trading hours. “Torcom closes mid-afternoon Singapore time, just when the Middle East opens,” says SGX’s Ang. “It immediately creates an extended trading hours opportunity.” Torcom’s members also become associate members of SGX with access to the exchange’s other products. “So they get access to more products as well as extended trading hours,” Ang adds. “This could pave the way for energy and commodity products [on the exchange].”

However, as with some of Europe’s exchanges, the 15 single stock futures and options have suffered low turnover since their launch on SGX last October. In April, monthly volumes only reached 1,530 contracts, compared with 1,425,315 contracts for the eurodollar futures. “For a product that has not even made its debut in the US, it needs more education,” says Ang. “Activity has been on the quiet side, but there has been regular trading.”

Hong Kong Exchanges and Clearing (HKEx) has also recorded sluggish volumes on its 20 single stock futures and options, launched last October. Average daily volumes on the single stock futures, based on five stocks each from the US, Japan, South Korea and Taiwan, totalled a mere 13 contracts a day from their launch to the end of 2001, compared with an average 18,220 contracts a day for the Hang Seng Index futures contract.

HKEx recently delisted one of its poorly performing contracts, removing its one-day rolling currency futures contracts for euro, yen, pound and Deutschmark, which had posted an average daily volume of 17 contracts in 2001. “The delistings are the result of frequent reviews of our product portfolio to ensure that our products are meeting the needs and demands of the market-place, in a cost efficient manner,” comments an HKEx official.

Nonetheless, HKEx plans to launch more international products in the coming year, as Hong Kong, like Singapore, looks to attract an investor base beyond the confines of its own borders. The exchange introduced a Dow Jones Industrial Average futures in early May, which traded 259 contracts in its first five days, and more products focusing on China are planned to accompany the existing MSCI China free index, according to HKEx chief operating officer Fred Grede. “In the derivatives market, we are looking at Hong Kong and China products, as well as regional and international products,” he says.

But it is the volumes of derivatives traded in South Korea that other exchanges in the region aspire to. The average daily trading volume on the Korea Futures Exchange (Kofex) more than trebled in 2001 to 46,622 contracts, compared with 12,200 contracts in 2000, say exchange officials. Its treasury bond contract, the KTB futures, accounts for 80% of the volume. By contrast, the Kosdaq50 index futures contract has been sluggish since its launch last December, says Phillip Cho, manager of international business and research at Kofex in Busan.

This is largely the result of the phenomenal success of the Korea Stock Exchange’s Kospi200 futures and options contracts – the most actively traded equity options contract in the world with volumes jumping more than 300% in 2001 over the previous year. Investors in the domestic market seem to be turning to the most liquid of the two equity contracts, say participants.

William Wilson, managing director, securities services division at Merrill Lynch based in Sydney, agrees, noting that despite the seemingly endless appetite for derivatives products, the liquidity pool is only so big. “A lot of money is spent every year trying to develop new products but they are not always going to be successful or liquid,” says William Wilson. “One of the reasons is there is only a certain pool available for debt and equity derivatives.

The ASX, meanwhile, hopes to develop a viable futures market under the ASX brand, with its new ASX mini200 and ASX mini50 futures contracts, launched early this year. However, trading activity has so far been poor, with 1,471 contracts traded in April, compared with 1,355,066 for the more established equity options contracts.

Melissa Ardern, Sydney-based manager of derivatives market development at ASX, says while it is early days for the ASX mini futures, inquiries from retail investors are very strong. And it will not be long before there are new equity-based futures products aimed at the retail investor. “We have other futures products under aggressive development and the ASX board is supporting our move into futures,” she says. Indeed, in late May, the exchange announced that it will launch an electricity futures contract in October. The contract is being developed in conjunction with a number of energy firms, such as CS Energy and Duke Energy.

While the ASX is developing its derivatives market, however, the SFE is stepping up activity in its own options products, with the recent launch of two intra-day options contracts on the three-year and 10-year treasury bond. Average daily turnover in the first two weeks of trading was 3,700 contracts, according to the exchange.

The SFE is also planning to introduce a futures product based on the underlying indexes of associations and government bodies, such as the Meat and Livestock Corporation, later in the year for the low volume, but valuable commodity products such as cocoa and cattle.

Index futures and options and government bonds form part of the Stock Exchange of Thailand’s (SET) much anticipated product list, if and when the Derivatives Bill ever makes it through Thailand’s parliament. “Initially, our focus will be on equity and interest rate based products. So far, we have been exploring and working on several products, namely index options, index futures and government bond futures,” says Rinjai Chaiyasut, vice-president of the derivatives market project at SET. “At this point, it is quite difficult to have a definite schedule of product launch as the Derivatives Bill is still in process.” It is expected that the new law may be passed either at the end of this year or mid next year, he adds.

Activity also continues apace at the Malaysia Derivatives Exchange as it races to boost the number of available products. MDEX made its first foray into listed bonds futures products with the March launch of a five-year Malaysian government securities futures bond. It is also hoping to launch single stock futures possibly before the end of 2002, and an Islamic futures contract is planned for release in 2003, says K Sree Kumar, senior manager for strategic planning and product development at MDEX in Kuala Lumpur.

But despite this surge in development so far this year, it seems certain that other products will follow. While the smaller exchanges slowly build up their product range, aim for initial public offerings and implement trading systems, the more developed exchanges are looking at how to boost volumes and revenues that little bit further.

New derivative products launched this year

Australian Stock Exchange (ASX) ASX mini200 and ASX mini50 futures contract January 30, 2002 1,471 contracts in April
Hong Kong Exchanges and Clearing (HKEx) Dow Jones Industrial Average futures contract May 6, 2002 259 contracts in first week
Korea Futures Exchange (Kofex) Korea treasury bond futures options May 10, 2002 3,110 contracts from launch to May 27
Malaysia Derivatives Exchange (MDEX) Five-year government bond futures contract March 29, 2002 8,146 contracts in April
Singapore Exchange (SGX)

Full-size JGB futures and options contracts

 

MSCI Japan index futures

April 18, 2002


 

 

May 15, 2002

41 contracts for futures in April, none for options

607 contracts from launch to May 22

Sydney Futures Exchange (SFE) Intraday option on three-year and 10-year treasury bond April 30, 2002 Not available

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