Singapore Exchange Ltd. will increase revenue from derivatives 10 percent to 15 percent this year as the operator of Southeast Asia’s biggest bourse introduces more products linked to benchmark stock indexes in the region, President Muthukrishnan Ramaswami said in an interview.
The bourse plans to add equity-index futures on the Philippines and Thailand to offerings that include Nikkei 225 Stock Average and Indian contracts, he said. Derivatives account for between 25 percent and 28 percent of total revenue, Ramaswami said. Singapore Exchange, which failed in its bid to buy Australia’s main bourse two years ago, is focused on Asia and doesn’t want to own venues in the U.S. or Europe, he said.
SGX is planning yuan and foreign-exchange futures, as well as commodities contracts as it seeks to become a trading hub, Ramaswami said. An agreement to offer reduced-size London Metal Exchange futures will probably be renegotiated after the largest bourse for industrial-metal trading was bought by Hong Kong Exchanges & Clearing Ltd., he said.
“Singapore has become a good facilitator of derivatives transactions,” Ramaswami said. “It’s much easier to transact in Singapore than to go directly into each of these individual markets. Investors find that rules don’t change overnight. The jurisdiction is safe. Its a AAA-rated country.”
The cost of complying with stricter global regulation of derivatives is among the challenges the bourse faces, he said. Jurisdictions around the world are requiring more transactions to be processed through clearinghouses after the financial crisis that began in 2008.
Singapore’s central bank released a discussion paper last month about proposals to regulate over-the-counter derivativestransactions. SGX, the only licensed clearinghouse in the city- state, processes non-deliverable forwards and standardized interest rate swaps in Singapore dollars and U.S. dollars. The Monetary Authority of Singapore has said it may allow other entities to provide clearing and repository services.
“Compliance costs have grown significantly for us,” Ramaswami said. “Keeping up with the regulation and applying to be recognized in each jurisdiction is a cost issue.”
SGX spends about S$30 million ($24 million) annually to comply with regulations, he said, compared with S$10 million a few years ago.
SGX reported in January a 17 percent jump in net income to S$76.3 million for the three months ended Dec. 31. Average daily transactions in the derivatives market increased 30 percent to a quarterly record high of 358,532 contracts during the period, the company said. By contrast, the average value of shares traded rose 11 percent, it said.
Clearinghouses operate as central counterparties for every buy and sell order executed by their members. Each party posts collateral to the clearinghouse, which is the intermediary in the trade, reducing the risk in the event a trader defaults on a deal as the counterparties would spread the open positions to the remaining members.
Processing of commodities transactions such as iron ore is another increasing source of revenue for Singapore Exchange, according to Ramaswami. The bourse had a record 18.2 million metric tons of iron-ore swap and options contracts in January, SGX said.
SGX AsiaClear, which clears more than 90 percent of the world’s iron ore swaps, will start offering an iron ore futures contract on April 8.
The potential loss of LME mini contracts, offered since 2011, after Hong Kong’s purchase of the venue will have limited impact because they aren’t a big business, Ramaswami said. SGX offers LME futures on aluminum, copper and zinc. Just two zinc contracts changed hands in February and none for the other metals, according to monthly statistics from the bourse.
“We don’t feel an intense competition with Hong Kong,” he said. “Both of us have roles to play. Hong Kong is very much more China focused and we are very much more Asia focused. The two don’t eat each others’ lunch. We have an enormous growth potential.”
SGX isn’t currently discussing mergers with rivals, Ramaswami said. Exchange operators have been the subject of $50 billion in attempted deals in the past three years, most of them never consummated, amid shrinking profits for securities trading, according to data compiled by Bloomberg. Regulators scuttled a merger agreement between NYSE Euronext and Deutsche Boerse in February 2012 because it would have created a dominant European exchange operator for derivatives.
“We don’t have any ambition to buy and run something in the west,” Ramaswami said. “We’re not likely to buy something in the U.S. and Europe to run it there.”
The IntercontinentalExchange Inc.’s proposed $8.2 billion acquisition of NYSE Euronext is an interesting deal, he said.
“I’m envious,” he said. “The real thing that ICE is buying is derivatives business in Europe. The search for scale has dropped off most people’s radar and its been replaced by relevance to a marketplace. We want to be relevant in the Asian context.”