Founded in 1865 as "Hong Kong and Shanghai Banking Corporation," HSBC is the world’s largest banking and financial services group. It’s based in London, but when Stuart Gulliver starts his new job as chief executive of HSBC in January, he’ll be based in Hong Kong — surrounded, no doubt, by familiar faces.
That’s because the global financial community now considers Hong Kong to be a financial center on par with London and New York, according to Z/Yen Group’s eighth Global Financial Centres Index (GFCI 8). The survey, published in September, draws on responses from more than 7,500 international financial services professionals and also shows Singapore rapidly moving up the global rankings (see "Asia Rising," below).
Hong Kong has been ranked as the freest economy in the world for 15 consecutive years by the Heritage Foundation, even though it’s a "Chinese Special Administrative Region." The tiny nation’s financial services regulator, the Securities and Futures Commission, says more than 7,300 people and firms applied for licenses in the first seven months of this year. That’s an increase of 46% over the same period in 2009.
The Futures Industry Association (FIA) says that the combined trading volume of derivatives contracts on exchanges in the Asia-Pacific region surged more than 25% in 2009 and surpassed that of North America in the first quarter of this year to become the world’s leading trading region for the first time ever — a fact highlighted in a report by Boston-based consultancy Celent called "Derivatives trading in Asia: Struggle for regional supremacy."
The GFCI 8 also shows that Shanghai entered the top 10 and Seoul moved into the top 25. Shanghai is home to the Shanghai Futures Exchange, and Seoul, the capital of South Korea, is home to the Korea Exchange (KRX), which hosts the KOSPI 200 — options on which are the most traded contract on the planet. Indeed, in terms of volume, KRX is responsible for half of all Asia-Pacific volume, with the National Stock Exchange of India (NSE) a distant second, thanks largely to single-stock futures.
All of these centers, however, are off-limits to U.S.-based retail futures traders. Although KOSPI 200 futures are listed off-hours on CME’s Globex platform and a daily version of the options is listed on Eurex, KRX can only be accessed in prime time via domestic brokers, while India and China themselves remain hermetically sealed behind regulatory walls that are coming down slowly. Finally, Taiwan places restrictions on foreign accounts that make accessing these markets too difficult for most foreigners (see "So close but so far," below).
Over time, many Asian contracts may become available via intermediary platforms such as Globex. CME and NYSE.Liffe are both working aggressively to develop joint ventures with Asian exchanges. In addition to its deal with KRX, CME shares the world’s oldest trading link with SGX, and its palm oil contract was developed jointly with Bursa Malaysia. CME also lists futures on the yuan/euro, yuan/dollar and a handful of Asian equity indexes.
Until now, however, most Asian derivatives products have remained just out of reach because Hong Kong and Singapore, despite their top-notch communication networks, business-friendly governments and critical mass of skilled professionals, have had scant offerings in the futures department.
That could change in the next few years thanks to the arrival of glittering new exchanges with a clear derivatives focus and a mission to challenge established players.
The four exchanges
In Hong Kong, the established exchange is Hong Kong Exchanges and Clearing (HKEx), which lists futures and options on five equity indexes as well as on gold and HIBOR (Hong Kong Interbank Offer Rate). Meanwhile, the upstart is the Hong Kong Mercantile Exchange (HKMEx), which launched in October with futures and options on gold.
In Singapore, the established player is the Singapore Exchange Ltd (SGX), which lists both commodities and financial futures, and built Asia’s first central clearing facility for over-the-counter (OTC) transactions. Meanwhile, the upstart is the Singapore Mercantile Exchange (SMX), which launched in August with futures and options on gold, crude oil and currencies.
All four exchanges say they’re looking to become global hubs for trading in regional products and all are easily accessed by U.S. traders via retail trading accounts.
That access comes courtesy of people like Christophe Rilinger, head of marketing & communications at RTS Realtime Systems in Singapore. His company focuses on connectivity and the development of algorithmic software, and has been working with SGX and Nanyang Technological University (NTU) to develop the NTU-SGX Centre for Financial Education in Singapore.
Money for the center came from the $250 million "Reach" initiative that SGX is undertaking to build up its trading infrastructure and co-location sites going up in the first quarter of 2011.
"They announced the co-location sites two months ago and 90% of the co-location sites sold out the day of the announcement," Rilinger says.
"It’s going to be difficult for these new exchanges," says Fred Grede, who ran the Hong Kong Futures Exchange before it merged into HKEx and now runs the Chicago-based derivatives consulting group Vega Financial Engineering Ltd.
He gives both newcomers high marks for focusing on hard commodities over financials, but also believes the established players will move in quickly if the newcomers achieve success.
"Both SGX and Hong Kong Exchanges are, for the most part, stock exchanges," he says. "Derivatives have always been a kind of afterthought for them, but that’s already changing as they take a deeper and more serious look at other forms of derivative trading and other kinds of commodity trading."
He points out that both of the established exchanges have new leaders who have stated their desire to build up the derivatives business — former NASDAQ.OMX boss Magnus Böcker at SGX and former JP Morgan China boss Charles Xiaojia Li at HKEx.
"I would increasingly look for these two exchanges to focus more on other kinds of derivative trading for two reasons," Grede says. "One, because that’s where the growth is, and two, because they’re responding to the competitive threat from the [SMX and HKMEx]."
Celent Senior Analyst Anshuman Jaswal, author of the Celent report, agrees and says it’s important to keep in mind that the two newcomers also are competing with each other, not to mention a slew of established exchanges across Asia.
"HKMEx hopes to become a gateway to China’s huge demand for commodity products, while SMX hopes to serve Asia-Pacific’s regional needs as well," he says. "While both would have a niche in their respective region or country, they will face tough competition from the existing exchanges in China (Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange), India (the Multi-Commodity Exchange of India and National Commodities and Derivatives Exchange) and Japan (the Tokyo Commodities Exchange, The Central Japan Commodity Exchange and the Kansai Commodities Exchange)."
He does see one key advantage that both exchanges share over their competitors: both are starting fresh, unencumbered by clunky old technology.
Paul Rowady at TABB agrees. "They don’t have the legacy infrastructure to update as much. It’s easier to build something new than to renovate."
Rowady’s own report, "Trading in Asian Derivatives: Opportunities Near and Far," argues that, despite the rise of Hong Kong, Asia is a long way from agreeing on a bona fide financial center.
Both he and Jaswal stress that the biggest competitor newcomers face in the near term isn’t the established exchange in their own backyards or even the other far-flung Asian exchanges. Rather, their primary competitors are each other.
"I believe that SMX’s parentage will be to its advantage," he says, referring to the fact that it’s a project of MCX’s parent Financial Technologies. "Similarly, HKMEx’s location in the financial gateway of China should be to its benefit. So they are evenly placed."
Rowady, in the TABB report, points out that Asia’s financial landscape is a work in progress, leaving both Hong Kong and Singapore in danger of slipping if China or India relax the current restrictions. "Asia doesn’t really have a financial center," he says. "Singapore and Hong Kong win in part by default, but if China and India open up, things could change rapidly."
Mark Yeandle agrees. He oversaw the Z/Yen survey and recalls that Frankfurt, London and Paris were all within reach of the top spot in Europe just a few years ago.
The SMX hit the ground running in August with futures and options on products that already exist elsewhere: gold, WTI crude oil, brent-euro crude oil and the euro-U.S. dollar currency cross. None of the products have attracted significant volume, although the gold contract is physically-settled in a free-trade zone at the city-state’s Changi international airport in Singapore and appears aimed at providing regional price discovery.
In September, the exchange announced it was entering phase two of its product deployment, and soon would be launching the first-ever futures and options on two potentially lucrative products: international black pepper and iron ore. The latter will be tough to develop because SGX already clears OTC iron ore and has a 90% global share.
Pepper, like gold, will be physically-settled in Singapore, and its launch will be accompanied by an education and learning campaign covering leading exporters from Malaysia, Indonesia and Sri Lanka to Brazil.
HKMEx, meanwhile, has been off to a slower start. Initially set to launch in 2008, it finally got off the ground in October of this year. Like SMX, it has plenty of backing from abroad; but instead of Indian upstarts, HKMEx has a combination of Mainland Chinese investors and Western establishment expertise. Its clearinghouse is LCH.Clearnet and its president is former NYMEX Vice Chairman Albert Helmig. The exchange launched with gold — which, like SMX’s, is physically-settled.
SGX and HKEx aren’t sitting idly by as SMX and HKMEx build up steam.
SGX has proven adept at building joint ventures. Its mutual-offset deal with CME is the world’s oldest trading link. A more recent venture with the Chicago Board of Trade (CBOT) — the Joint Asian Derivatives Exchange (JADE) — showed a willingness to continue experimenting but was pushed aside by CBOT when CBOT merged with CME to form CME Group and replaced JADE with the Bursa Malaysia’s palm oil project.
More importantly, SGX became the first Asian exchange to offer central clearing of OTC derivatives in 2009 with its AsiaClear platform for energy and commodities swaps (including the above-mentioned iron ore swaps). The platform has more than 200 counterparties and the exchange has made no secret of its desire to use that as a basis for its coterie of futures products.
In October, it began clearing interest-rate swaps and says more financial products will follow.
HKEx, meanwhile, is looking to clear OTC yuan transactions — which could surge if China lets the yuan float.
At the recent Swiss Futures and Options Association (SFOA) meeting in Interlaken, several brokerage and exchange officials expressed fear that the credit-default implosion would put a damper on Asia’s move towards such OTC instruments, but regulators we spoke to said not to worry.
"We’re not dumb," said one Indonesian regulator. "We know that the product isn’t the problem — the problem is regulation."
Even China says it will introduce credit-default swaps by year-end.
"U.S. and European regulators right now are obsessed with regulation of over-the-counter markets, and it’s influencing everything as far as the regulatory structure is concerned," Grede says. "You, by and large, don’t see or feel that in Asia, and the reason for that is the types of products that led to the financial crisis over here are not that widely developed through Asia. They’re not so much trying to reel in something that got away from them as they are letting something evolve in a structured way."