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."