Asset pool: Singapore's chances are improving against Hong Kong and Shanghai

Since it was founded by Sir Stamford Raffles in 1819, Singapore has been known as a commodity trading centre in Asia, first in rubber and tin.

Now exchanges are beating a path to the city-state as they tap the region’s fast-growing commodity and energy markets.

Last week Deutsche Börse, through its European Energy Exchange (EEX) unit, bought a 52 per cent stake in Cleartrade, a small fuel oil and commodity trading platform set up in Singapore in 2010.

IntercontinentalExchange, or ICE, in November snapped up the Singapore Mercantile Exchange (SMX) from India’s Financial Technologies group for $150m.

A third project is in the works from Japan, where the Tokyo Commodity Exchange plans to launch an over-the-counter (OTC) swaps trading platform in Singapore with Ginga, a Japanese broker.

While Deutsche Börse, ICE and their US rival CME Group all use Singapore as their sales headquarters for Asia, the deals demonstrate that a race is on to develop the bricks and mortar they believe is needed to capture more business from Asia.

The region offers the greatest growth prospects for energy and commodity derivatives, given projections of continued Chinese demand, which is spurring greater use of hedging strategies.

For Singapore, the backing of two deep-pocketed western exchanges could improve its chances against Hong Kong and Shanghai as competition between the three financial centres intensifies.

“Singapore has a long history of being a gateway for firms with Asian ambitions, and these recent deals help reaffirm this,” says Steve Grob, director of strategy at Fidessa, a UK trading technology company.

SMX, launched in 2009, failed to gain traction and offers a gold futures contract that has done poorly.

While Cleartrade has been more successful, it was seen as likely to do much better backed by an exchange with an existing, far larger, customer base and expertise.

“The bigger exchanges are able to put a lot more money and power behind these two underperforming assets,” says Bill Herder, head of the Singapore-based office of the Futures Industry Association.

But it will not be easy turning these acquisitions into viable long-term businesses, industry experts say.

For both ICE and Deutsche Börse, the aim will be to launch products that take advantage of a shift in OTC swaps to instruments more akin to exchange-traded futures, driven by sweeping G20 regulations that are reshaping global finance after the 2008 crash.

Richard Baker, Cleartrade chef executive, says it has “always been our intention to develop and expand our role” as an important participant in the “transformation of OTC freight and commodity markets to exchange-traded futures”.

But in a sign of how difficult it is to make new products attractive, even the incumbent SGX, the Singapore exchange, has struggled. On Thursday it indicated it might stop trading and clearing metals futures contracts it launched three years ago in a venture with the London Metal Exchange, in part as take-up had been low.

EEX could also use Cleartrade to capture traders active in Asia. Its parent's derivatives arm, Eurex, demonstrated further evidence of the group’s Asian ambitions earlier this month by buying a 5 per cent stake in the Taiwan Futures Exchange.

For ICE the purchase of SMX, rather than building an exchange from scratch, allowed the US operator to acquire at a stroke an exchange with a fully licensed clearing house.

Securing that licence would have taken up to two years. So ICE has saved precious time and stolen a march on US rival CME, which uses Singapore as its regional base where two-thirds of 60 regional staff work. “I don’t know how easy it . . . would have been for us to create an Asian exchange and clearing house,” says Jeff Sprecher, ICE chief executive.

Clearing will be crucial to ICE’s future product offering, since there is likely to be more clearing of OTC energy and commodity derivatives as the Monetary Authority of Singapore rolls out the G20 rules.

But it is unclear what products ICE will offer on SMX. Most industry experts agree that the opportunity lies with OTC energy and commodities, including contracts eventually denominated in renminbi.

But Hong Kong’s exchange, fresh from its acquisition of the LME, also has ambitions in commodities, including those denominated in the Chinese currency.

Shanghai also looms as a formidable competitor. Futures brokers in Shanghai are focused on the proposed launch of a crude oil contract by the Shanghai Futures Exchange, which recently set up the Shanghai International Energy Trading Center under the auspices of Shanghai’s pilot free trade zone, which is experimenting with a convertible currency.

“Now there is no crude derivatives market for northeast Asia, so Shanghai hopes to gain influence through its new international platform,” says Loewe Cai of China International Futures Co, one of China’s larger commodity futures brokerages.

More immediately, ICE’s acquisition pits it squarely against SGX. It has a fast-growing commodities business, including iron ore futures and options – its biggest contracts by volume – rubber and coal futures, and freight forwards.

Michael Syn, the exchange’s head of derivatives, says ICE’s acquisition of SMX “does not make it worse for us. It actually makes it better. We would much rather have them in Singapore because it anchors the energy trading community here”.

Additional reporting by Lucy Hornby in Beijing

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