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Nikkei Markets

Singapore Exchange hurt by HKEX's China derivatives move

Competition could eat into SGX's most lucrative business

SGX has been relying on derivatives to grow revenues and profits in recent years.   © Reuters

SINGAPORE (Nikkei Markets) -- Singapore Exchange's derivatives business has been growing steadily, offsetting continued weakness in the local bourse, but fresh competition from the Hong Kong bourse operator is threatening to dent the pace.

SGX shares have fallen around 6% since Monday when Hong Kong Exchanges and Clearing signed a license agreement with global stock index publisher MSCI to introduce futures contracts on the MSCI China A shares index, which track companies that trade on the Shanghai and Shenzhen stock exchanges.

Although HKEX is yet to announce a launch date, concerns about the impact on SGX's profits have grown.

The HKEX contracts compete directly with SGX's popular FTSE China A50 Index futures contract, which tracks the performance of 50 companies listed on Chinese exchanges.

In a report, DBS Group Research said the China A50 stock futures account for 9-13% of SGX's derivatives business, which is in turn the Singapore bourse operator's biggest source of income. Competition from HKEX in China stock futures could shave 4% to 11% off SGX's net profit.

"More than 95% of SGX's FTSE China A50 Index futures clients reside outside of Singapore...There might be pressures on SGX's derivatives volumes should clients decide to switch over, or if HKEX competes on pricing to gain market share," DBS said.

However, Jefferies analyst Krishna Guha described the sell-off in SGX shares as overdone, noting the Singapore company has managed to grow revenues from derivatives in the past despite competition from other exchanges. SGX has multiple uncorrelated revenue streams with a near monopoly position in clearing, he added.

For instance, last year, India's move to stop providing live market data feeds to overseas exchanges took aim at SGX's popular Nifty 50 Index Futures, which track 50 stocks traded on India's National Stock Exchange.

Arbitration proceedings are going on and Nifty 50 index futures continue to trade on SGX.

SGX has been relying on derivatives to grow revenues and profits in recent years. For the quarter ended December, derivatives revenue rose 35% to 112.9 million Singapore dollars ($83.3 million) to account for 50% of the total. By contrast, revenue from equities and fixed income fell 12% to S$85.6 million as the Singapore bourse operator continued to suffer from low trading volumes and delistings.

Over the past 10 years, SGX's derivatives revenue has increased by about 8% per annum on average, DBS said.

Asked to comment on HKEX's plan to offer China stock futures, SGX said market participants would benefit from an even larger liquidity pool for its suite of China equity derivatives.

Besides China A50 stock futures, SGX offers foreign exchange futures that let investors bet on the yuan's movements against the dollar and iron ore futures and options that are seen as a proxy to Chinese economic growth.

SGX clients who trade the various contracts enjoy margin offsets, which lower overall costs.

--Kevin Lim

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