Singapore Exchange

Derivatives Exchange of the Year

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In a year characterised by fear, the role of exchanges as transparent providers of liquidity has proven vital to the functioning of financial markets. Singapore Exchange (SGX) has won praise for its proactive approach to meeting market participants' needs and by continuing to offer a liquid and transparent trading platform, despite tumultuous market conditions.

"We operate a robust yet market-orientated regulatory regime, with all market participants expected to abide by the same disclosure requirements in the interests of transparency," says Chew Sutat, SGX's head of market development. "For example, we are quite unique in that we require all structured warrants and exchange-traded fund (ETF) issuers to provide two-way liquidity through market-making. This requirement ensures investors have a better idea of what the prices ought to be, enabling them to make more informed decisions."

Another of SGX's attractions is its international orientation. "We aim to be an Asian gateway by attracting a wide range of international issuers and customers to our exchange," says Sutat. "For issuers, having a wide range of both domestic and foreign clients to tap is beneficial, while investors clearly benefit from the tremendous diversification opportunities that are available."

The exchange launched Asia's first over-the-counter clearing service in 2006, to which 221 counterparties had signed up by June this year. "As counterparty risk is becoming increasingly important, our clearing service is very attractive to European and US counterparties who want to trade in Asia, as they will not have to worry about bilateral agreements and counterparty risk assessment," says Sutat.

As a result of such measures, fully 45% of the exchange's operating revenue in the year ending June 30 came from trading in foreign products and listings. And despite turbulent market conditions, securities market revenue grew by 37.9% to $449.6 million, while derivatives revenue increased by 33.6% to $156.3 million. The structured warrant market, meanwhile, expanded by 61.7% to a total trading value of $30.5 billion, with more than 40% of business generated from warrants on foreign stocks and indexes. "As all pan-Asian derivatives contracts are offered on a single platform, investors benefit from cross-margining efficiencies," adds Sutat.

The exchange has also played a proactive role in facilitating trading conditions for market participants across the region. "SGX is very responsive to issuers and investors' needs, conducting frequent meetings with market participants across the region," says Frank Drouet, Asia-Pacific head of global equity derivatives at Societe Generale in Hong Kong. "It is also among the more proactive exchanges in the region." For example, SGX reduced its minimum bid sizes by up to 80% in December. "Large bid-ask spreads create inefficiency and can hamper market liquidity," says Sutat. "Lowering the minimum bid-ask spread creates more efficiency for investors and allows hedgers to better manage their risk."

The exchange has also created products that benefit the wider Asian market. For example, to allow investors to better manage their risk positions and increase their trading opportunities, SGX launched the first internationally available pan-Asian futures contract based on the MSCI Asia Apex 50 index on May 21 this year. "Even if the volumes traded are quite low for the time being, the initiative shows the exchange is serious about wanting to promote a pan-Asian product," says SG's Drouet.

India initiatives

Another move welcomed by market participants has been the exchange's offering of SGX Nifty (India) index futures, particularly after the Securities and Exchange Board of India curbed foreign issuance of participatory notes linked to Indian underlyings in October 2007. "The opportunity to trade Nifty futures on SGX has been greatly appreciated, particularly after India tightened its regulation, as it has allowed offshore participants to keep exposure to the Indian market," says Drouet.

Meanwhile, the exchange reduced the contract size for SGX Nifty (India) index futures fivefold by changing its contract multiplier from $10 to $2. The result, coupled with changes in Indian regulations, has resulted in a surge in trading of Nifty contracts, from a negligible base in 2007 to 6.8 million contracts in the year ended June 30. "The downsizing of our Nifty contract in November was part of our strategy to bring what used to be OTC trades onto an exchange-listed platform," says Sutat. "This heightened interest in SGX as an offshore market for access to India."

Meanwhile, the exchange has led the move towards electronic trading, with continuous upgrades of its capabilities both for securities and derivatives. On July 7, it launched its Quest ST trading engine from Nasdaq OMX, to facilitate faster implementation of new products and services, and SGX Proximity Hosting Services on May 20, offering sub-millisecond access to SGX's trading engines - a first for Asian exchanges.

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