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Singapore Bourse Embracing Derivatives Over M&A

Singapore Bourse Embracing Derivatives Over M&A
The SGX Centre, which houses the Singapore Exchange Ltd. headquarters, stands in Singapore. Photographer: Munshi Ahmed/Bloomberg

Singapore Exchange Ltd., Southeast Asia’s biggest bourse, is relying on derivatives for growth amid a dearth of merger and acquisition candidates in Asia.

SGX is planning energy and bond futures, Chief Executive Officer Magnus Bocker said. The bourse’s revenue from derivatives climbed 50 percent to S$234.5 million ($183.7 million) in the five years through June 2013, outpacing the 4.4 percent increase in equity trading to S$469.50 million, according to data compiled by Bloomberg.

“Our primary focus is organic growth,” Bocker said in an e-mailed response to queries on Aug. 2. “I cannot say that there are clear merger and acquisition opportunities in this region yet.”

Exchanges worldwide have been building their futures and commodities businesses as the value of stock trading dropped 38 percent from June 2008, according to the World Federation of Exchanges. SGX has been searching for other growth avenues since its $8.8 billion bid for ASX Ltd. was rejected by Australian regulators in April 2011. Since then about $16.3 billion in exchange deals have been completed, according to data compiled by Bloomberg.

Hong Kong Exchanges and Clearing Ltd. took over the London Metal Exchange in December and the Japan Exchange Group Inc., formed from the merger of rivals in Tokyo and Osaka, has said it wants to start trading commodities. Regulators approved IntercontinentalExchange Inc.’s bid for NYSE Euronext in June.

Organic Growth

SGX has fallen 2.9 percent since Bocker became CEO in December 2009. The stock hit a Bocker-tenure high of S$10.12 October 2010, the week before the company initated its failed takeover bid for ASX. The shares slid 0.4 percent to S$7.63 as of 2:05 p.m. in Singapore trading.

In the past three years, SGX rolled out the world’s fastest trading engine, scrapped the midday trading break and introduced dual listings of American Depositary Receipts. Brokerages are turning less bearish on the company, with the number of sell recommendations at the lowest since October 2011, according to data compiled by Bloomberg.

Credit Suisse analyst Arjan van Veen said he downgraded his rating on SGX in October 2010 because the ASX acquisition looked pricey and didn’t provide sufficient cost savings. Most of the capabilities the Singapore bourse was looking for from the transaction have been built organically, van Veen, who now rates the stock an outperform, said.

The Singapore bourse, which hosts the biggest market for Nikkei 225 Stock Average contracts outside Japan, started trading iron-ore futures in April and is preparing to add contracts on foreign exchange and Philippine and Thai equity indexes later this year.

‘Secondary Market’

To capitalize on the growing bond offerings on the exchange, Bocker said the exchange is looking at developing fixed-income products. Companies raised S$196 billion selling bonds on the bourse in the year ended June, compared with S$161 billion the previous year, SGX said in a statement on July 23.

“Fixed income is a very important infrastructure play for Singapore and SGX,” Bocker said. “While bonds being issued are growing rapidly, there is no adequate secondary market. We need to develop that before we could have a market for bond futures.”

SGX, located in Asia’s biggest oil-trading center, also plans to introduce trading of gas and electricity futures in a few years, Bocker said. Unit Asian Gateway Investments Pte. bought a 49 percent stake in Energy Market Co., operator of Singapore’s spot electricity market, for S$17.6 million in August 2012.

Gas Market

“Once we have the spot and futures market for electricity, it’s much easier to go into gas,” Bocker said. “Gas is much more of regional and global product than electricity. This may take a few years to develop fully. The gas market in Singapore has just started and storage tanks are just being built.”

Futures and commodities trading will become increasingly important for SGX, making the Southeast Asian bourse look a bit more like CME Group Inc., owner of the world’s largest derivatives market, Credit Suisse’s van Veen said.

CME, the world’s biggest bourse by market value, traded 309.9 million equity index futures in the six months ended June, according to data from the World Federation of Exchanges. That’s almost six times more than the volume of SGX, the world’s sixth-biggest venue for such contracts, the data show. The market value of CME, which also offers products linked to interest rates, commodities and energy products, is about four times that of SGX, data compiled by Bloomberg show.

SGX posted a 43 percent jump in profit for the three-months ended June, its best quarterly performance since the same quarter of 2007, as stock volumes rebounded and derivatives contracts climbed to a record.

‘Dominant Franchise’

“Over the next five years, derivatives will likely become the dominant franchise for SGX,” Credit Suisse’s van Veen said in a telephone interview on July 25. “Then we can start looking at SGX more a bit like CME. There’s a small probability for SGX to become a regional equities exchange. Chinese companies will normally list in Hong Kong. In derivatives it’s possible for SGX to really become a truly regional exchange.”

Bocker said while he is “honored and flattered” to be compared with CME, the U.S. bourse is still the industry leader.

“CME is the mother of all contracts, whether it’s in the energy, or the financial futures market,” Bocker said. “CME is a very successful and a long-established organization. We are inspired by them.”

Nikkei Futures

More than 4.5 million Nikkei 225 Stock Average futures contracts traded on SGX in June, compared with 3.6 million in Osaka and 1.6 million in Chicago, data from the bourse operators compiled by Bloomberg showed. Japan Exchange Group has kept a bigger share of the mini Nikkei 225 futures, whose contract size is about five times smaller than those offered on SGX and CME, based on the data.

“They are doing very well in the derivatives space but the cash equities is struggling,” Kenneth Ng, head of research at CIMB Group Holdings Bhd. in Singapore, said in a telephone interview July 29. “The negatives are mainly on the cash equities side because volumes cannot pick up.” CIMB rates SGX an underperform.

While cash-equity trading volume on the Singapore bourse increased 29 percent to $162 billion in the six months to June, SGX still lags behind exchanges globally coming in at number 24 in the rankings for value of stocks transacted, according to a WFE report.

Japan Exchange Group has 21 times more turnover than the Southeast Asian bourse. Hong Kong Exchanges handled four times as much stock volumes, while ASX transactions were three times more, according to the report.

“There’s a lot of opportunity for Singapore to gain market share by facilitating derivatives trading,” David Kallus, co-chief investment officer at New York-based CC Global Advisers LLC, which who trades futures in Singapore and Chicago, said on July 24. “The banks here are well capitalized. That’s very important for futures traders. The liquidity and volume of activity in the derivatives market here is quite favorable.”

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