Derivatives drive growth at Singapore exchange

SGX, the Singapore exchange, underscored how its business is being largely driven by derivatives with its second-quarter results boosted by record trading volume in future contracts based on a Chinese stock index.

The exchange has suffered from anaemic equities trading volume and, late last year, a trading outage which drew a rebuke from the Asian city-state's securities regulator.

Magnus Bocker, SGX chief executive, admitted that the quarter had been "challenging" but noted that efforts to spur trading in its equities market had started to pay off after signing up nine market-makers and 15 so-called liquidity providers for some mid-cap stocks last year.

Liquidity providers receive a discount on the fees that SGX charges if they commit to trading a certain amount of shares in value terms, while market makers provide quotes at a narrow bid-offer spreads on designated stocks.

Mr Bocker said that on two key measures of the health of share trading - the bid-offer spread and depth of the market - the equities business had improved. Revenue for the three months to December 31 from equities, which account for a third of the group total, were still down 1 per cent at S$52m, however.

Revenues from derivatives, which account for 30 per cent of group sales, were propelled 46 per cent higher amid strong demand for futures on the China A50 index, where volume shot up by 183 per cent, year-on-year, making it the exchange's best performing futures contract. That enabled the group to report a 19 per cent rise in quarterly revenue to $195.1m. Net profit for the period rose 16 per cent to S$87m.

Michael Syn, head of derivatives, said the amount of open interest in A50 contracts - meaning the amount of margin posted at the clearing house to back up future trades - indicated that pent-up demand was strong.

In addition there were a series of exchange traded funds (ETFs) slated for approval by the US Securities and Exchange Commission, based on Chinese A-shares, that also boded well for demand for SGX's China-related derivatives.

Second-ranked in revenue terms was a futures contract on India's Nifty 50 stock index, which rose by 23 per cent. SGX's longstanding flagship futures contract, on the Nikkei-225 index, rose by 10 per cent.

Mr Bocker said demand for the Chinese A50 contract was partly being driven by related interest in trading on Hong Kong-Shanghai Stock Connect in China.

SGX is due within two years to upgrade its derivatives trading system, originally provided by Nasdaq OMX, which he said would help accommodate increased interest in derivatives. That will allow 24-hour trading of its derivatives contracts.

The exchange is also working on a mutual trading access connection of its own with the Taiwan exchange. "It's a link which we are aiming to have up and running by the end of this year," Mr Bocker said.

It is also due in July to launch Asia's first corporate bond trading platform and has signed letters of intent with 35 banks and asset managers to participate, according to Li Renn, the SGX executive in charge of the project.

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