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Nikkei Markets

SGX rides derivatives boom as listings stagnate

New products, forex trading trends to help even as competition grows

SGX's difficulties on the equities front continue to cloud its outlook and standing.   © Reuters

SINGAPORE (Nikkei Markets) -- The Singapore Exchange may be struggling to attract new listings and improve turnover on its stock market, but its profits are holding up as a boom in derivatives trading continues.

In the quarter ended September, a 21% year on year increase in derivatives revenue offset a 13% drop from equities and bonds, resulting in a marginal 1% rise in net profit.

In terms of revenue, derivatives accounted for 47% of the total, while stocks and bonds made up 41%.

The contribution from derivatives is even more substantial over a five-year period. Revenue from the segment rose 80% to 97.7 million Singapore dollars ($70.7 million) in the July-September quarter from the same period in 2013. By comparison, the daily average trading value of the stock market was little changed at S$1.07 billion.

The market is unduly focused on securities and fails to recognize the strength of SGX's multi-asset product suite, said Krishna Guha, an equity analyst with brokerage Jefferies, in a recent report analyzing its earnings.

In Asia, the growing popularity of derivatives, which are essentially contracts that derive their value from another asset, stems partly from the greater globalization of markets and more sophisticated investors.

Besides allowing access a wider range of assets, including those in emerging markets that may otherwise be hard to reach, derivatives allow for better risk management.

Hong Kong Exchanges & Clearing, with which the SGX is often compared, in August reported a 55% rise in the average daily volume of derivatives contracts traded on its futures exchange in the first six months of the year. Meanwhile, the daily value of stocks traded rose 64%.

Unlike the HKeX, which has benefited from a steady stream of bumper China listings in recent years, SGX has had little success in luring companies from the region, including China and India, to list in Singapore.

However, SGX's India, China and Japan stock market futures are among the most actively traded in the world, thanks in part to partnerships with index providers such as FTSE Russell and MSCI.

SGX has also been successful with currency futures and is the leading exchange for U.S. dollar-offshore yuan exchange rate contracts, which allow investors to bet on movement in the Chinese currency against the dollar or hedge against excessive fluctuations. Singapore is the biggest foreign exchange trading center in Asia and the third-largest globally after London and New York.

The bourse operator's potential to gain from derivatives trading made headlines in May when Indian exchanges filed a suit seeking to stop it from launching new Indian equity derivatives.

The SGX's existing Nifty 50 index futures contract, based on the National Stock Exchange's benchmark index, is hugely popular with investors seeking to hedge their exposure to Indian equities and the NSE feared that was causing capital to migrate offshore. The outcome of SGX's dispute with the Indian operators now rests with an arbitration panel.

Such disputes remain a risk as SGX leverages on other bourses to boost its derivatives business, say observers.

Competition is also growing within the country. For instance, the Asia Pacific Exchange started operations early this year.

"As new exchanges set up in Singapore, they can also create new trading ecosystems, which add to the marketplace," an SGX spokesman said when asked about the threat.

Looking ahead, SGX said it was confident about prospects, citing increased traction for its MSCI Net Total Return stock index futures as well as contributions from new products such as futures contracts that allow customizable expiry dates.

According to Guha of Jefferies, SGX's derivatives business would continue to grow as it offers access and hedges to regional markets in currencies that can be freely traded.

The Singapore bourse operator should also benefit from the shift in trading of foreign exchange from over-the-counter markets to regulated exchanges as well as continued market volatility that will increase demand for derivative products.

Overall, however, SGX's difficulties on the equities front continue to cloud its outlook and standing.

Data compiled by the Business Times newspaper show that companies worth more than S$12 billion delisted from SGX last year, a figure well above the S$8.7 billion market capitalization of newcomers to the Singapore bourse. The reasons for departure included mergers and acquisitions as well as major shareholders choosing to take their firms private due to low valuations.

With the privatization of warehousing giant Global Logistic Properties early this year, the value of delistings on SGX looks set to rise further this year.

--Kevin Lim

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