Singapore Exchange, set to report its weakest profit in more than a year after a penny stock scandal hammered trading volumes, is placing a big bet on an increasingly crowded derivatives market.
The demise of SGX mini metals contracts, and lower volumes for its iron ore swaps since China launched a competing product, could be a warning sign for its ambitions as major international exchanges muscle into its home turf.
Since taking over as chief executive four years ago, Magnus Bocker has spearheaded the launch of new financial and commodity derivatives to make Singapore a regional gateway in Asia.
To diversify from cash equities, SGX has been putting an increasing focus on contracts that track Asian stock indices including the Nikkei 225 and China’s FTSE A50.
“They have done a decent job. They have focused on an area they have little bit more control over,” said CLSA analyst Marcus Liu, referring to SGX’s introduction of derivatives contracts.
Iron ore accounted for 90 per cent of all commodities derivatives cleared by the exchange last year. The success of the contracts – volumes more than doubled last year – helped propel its total derivatives segment to 28 per cent of the firm’s total revenue in financial year last year, from 21 per cent in 2010.
It also shows the potential of a steel contract SGX plans to launch.
But it also shows the dangers. From a high of 23.3 million tonnes in July, volumes fell to about 18 million tonnes a month in October to December after the Dalian Commodity Exchange launched a China-based iron ore futures contact.
There are already liquid steel futures on the Shanghai Futures Exchange. While these and iron ore are not easily accessible to those outside the country, creating an opportunity for a player like SGX, China is looking to open up its markets.
SGX is trying to carve out a niche for itself in commodities that do not put it in direct competition with established contracts, but that could become increasingly difficult as other exchanges look to a region that is providing the bulk of growth in physical commodities trade.
Atlanta-based IntercontinentalExchange, which runs the Brent oil futures benchmark, is buying the Singapore Mercantile Exchange, while top US futures market operator CME is looking at its upcoming European exchange as a proxy for an Asian exchange.
Hong Kong Exchanges and Clearing bought London Metal Exchange in 2012 to expand beyond equities and scored its first victory last week when SGX canned a competing LME mini metals contract that had failed to attract much volume.
A unit of Deutsche Boerse said last week it bought a 52 per cent stake in Cleartrade Exchange, the Singapore-based commodity derivatives bourse.
“What we’re offering is the ability to take away concerns about fungibility and clearing and to make you able to trade with anyone in the world,” Michael Syn, head of derivatives at SGX, said in November.
A penny stock scandal in Singapore, in which three stocks crashed spectacularly, after huge run-ups had turned them briefly into billion-dollar firms, knocked average daily turnover in the three months to December to the lowest in five years.The bourse is struggling to boost trading volume and attract high-profile listings, while Hong Kong is poised to win a slew of big-money IPOs this year.
SGX has also been hampered by a lack of depth in equity markets across Southeast Asia, with large companies not keen to list beyond their home markets.