SGX, the Singapore exchange, is preparing to defend one of its jewels — the futures contracts that allow overseas investors to speculate and insure themselves against sharp, sudden moves in Chinese blue-chip stocks.
The exchange’s FTSE A50 is the sole offshore futures contract for China. It traded 28m contracts in its last quarter, up from 17m in the whole of 2013, and it accounts for around 45 per cent of the volumes in SGX’s derivatives business.
That hegemony came under threat in March after rival Hong Kong Exchanges and Clearing (HKEX) struck an agreement with MSCI, the global index provider, to license futures on the portion of its flagship Emerging Markets index that relates to Chinese stocks.
MSCI is highly influential in global markets; analysts estimate that lifting the weighting in the Emerging Markets index could send as much as $125bn into Chinese stocks.
FTSE A50 contracts traded in its last quarter, up from 17m in whole of 2013
SGX’s derivatives business, the group’s biggest revenue generator, has been built largely on futures of Asia’s largest equity indices — in Japan, Taiwan, China and India. The market reaction to the MSCI deal was immediate.
Credit Suisse called it “one of the biggest risks for SGX”, adding that “if HKEX goes ahead with the launch, it would negatively impact SGX’s profitability and share price”. Citigroup lowered its rating to “sell”; SGX shares fell more than 9 per cent in the following days.
But Loh Boon Chye, SGX chief executive, was unperturbed, arguing that the exchange supplied investors with what they needed in a world where interest rates remained low. “It’s no longer just about investing in emerging markets as a bloc, such as ‘Asia’ or ‘Africa’, but about investing in one country,” he said.
“What makes SGX unique and relevant? You can trade different asset classes, they offer correlation and there are more efficiencies [in its clearing house], such as if you want to go long China, short Japan.” He added: “If you have a China portfolio strategy, we have a much broader country access, we provide the unifying platform,” noting that SGX had A50 equity and offshore renminbi futures, as well as commodities trading.
With its links to the Shanghai and Shenzhen exchanges, rival HKEX is pitching itself as a gateway between domestic Chinese investors and products, and the rest of the world. But it has yet to receive regulatory approval for its MSCI contract, and futures markets typically take years to build up liquidity.
Even so, SGX argues that the two contracts cater to different investor demands. The new HKEX futures will track all 421 large and mid-cap Chinese “A-shares” in MSCI’s benchmark Emerging Markets index. That could include Chinese companies listed in Hong Kong or New York.
SGX’s A50 futures index is designed to be hyper-liquid and is more weighted to financial stocks; offshore investors can track the 50 largest Chinese blue-chip shares by market capitalisation. Investors who want to hedge their exposures to the MSCI benchmark might prefer the MSCI future. A hedge fund seeking exposure to the Chinese market could turn to the A50 contract, as it is best able to replicate the market.
Both sides could benefit if investors are willing to trade with China and set aside concerns about official intervention in the market.
“Having two different exchanges offering highly correlated futures tracking the China A-share market may also bring about a new class of clients: the arbitrage traders,” suggest analysts at DBS, the Singapore bank. Mr Loh also highlights that SGX has thrived despite losing market share, pointing out that it once held a monopoly on trading futures on Japan’s Nikkei index.
“Japan now has 80 per cent of the market, but the market is 50 times bigger,” he says. Even so, SGX is diversifying into other markets, based around Singapore’s more traditional strengths. The city state is Asia’s largest foreign exchange trading hub. To that end, in March SGX purchased a stake in BidFX, a forex trading platform, for $25m with an option to purchase a controlling interest.
The Singapore authorities are trying to encourage investment banks to place more of their physical infrastructure for trading forex, such as servers and data centres, on the island. That way local traders can receive faster, more up-to-date prices than those from Tokyo or London.
Banks such as Standard Chartered, UBS and Citigroup have already announced plans to do so. “Over the next five years we would like forex to be as meaningful as equity index derivatives,” Mr Loh says.
SGX also has designs on building out futures relating to commodities and freight to cater to the hundreds of container ships that dock daily in Singapore.
The shipping industry is expected to benefit in the coming decades as China’s Belt and Road Initiative — a project to build infrastructure across Asia — comes to rely increasingly on Singapore’s deepwater port.
Among its plans, SGX wants to use the 2016 purchase of London’s Baltic Exchange to help it build a market for container index futures. A Chinese market that is opening up rapidly might be a threat but could also power the next evolution of Singapore’s financial services industry.
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