Abenomics Boosts Singapore Bourse Profit: Southeast Asia

Singapore Exchange Ltd. may post a 51 percent jump in fourth-quarter profit, the fastest growth in six years, as renewed interest in Japanese shares made it the No. 1 venue for trading Nikkei 225 Stock Average futures.

SGX, as the operator of Southeast Asia’s largest stock market is known, will today report net income rose to S$92 million ($72.8 million) in the three months ended June 30 from S$61.07 million a year earlier, according to the average estimate by six analysts in a Bloomberg News survey.

Japanese index futures contracts have become Singapore’s most actively traded, as Prime Minister Shinzo Abe’s reforms have spurred equities. Japan’s broader Topix index capped its biggest rally over three quarters in more than 30 years on June 30. The Nikkei 225 jumped 58 percent from Nov. 14, when elections that brought Abe to power were announced, through the end of June. The coalition led by Abe’s Liberal Democratic Party won a majority of upper house seats in elections this weekend.

“SGX’s derivatives business has been doing well,” Julian Chua, an analyst at Nomura Holdings Inc. in Kuala Lumpur, said in a telephone interview on July 12. “When there was a lot of focus on Japanese equities, the volumes of Nikkei futures picked up as well. Derivatives still has pretty good prospects.”

Derivatives trading volumes jumped to a record in June, led by demand for futures contracts on the Nikkei 225 and the FTSE China A50 Index, the bourse operator said on July 3.

Derivatives Growth

The source of profit at the company partly owned by Japan Exchange Group Inc. has shifted from cash-equity trading and initial public offerings to derivatives in the past few years.

Revenue from the cash market declined to S$437 million in the year to June 2012 from S$450 million in fiscal year 2008, according to data compiled by Bloomberg. During that period, contributions from derivatives trading climbed about 30 percent.

Average daily derivatives transactions jumped 77 percent to 556,728 contracts in June, a new monthly record, according to the SGX. The Japanese index futures contracts are the most actively traded in Singapore, followed by those from China, Taiwan and India, the company said.

The derivatives business benefited from a rally in Japanese equities from last November, SGX Chief Financial Officer Chng Lay Chew said in April.

SGX shares gained 0.7 percent to S$7.54 as of 1:40 p.m. in Singapore, heading for its highest close since May 30. The stock had climbed 6.9 percent this year through yesterday, compared with a 2.1 percent advance for the benchmark Straits Times Index.

Preferred Venue

More than 4.5 million Nikkei 225 futures traded in Singapore in June, compared with 3.6 million Nikkei 225 futures in Osaka and 1.6 million in Chicago, according to data from the Singapore and Japanese bourse operators compiled by Bloomberg. The Japanese bourse has kept a bigger share of the mini Nikkei 225 futures, whose contract size is about five times smaller than those offered in Singapore and Chicago, based on the data.

“Investors prefer trading futures in Singapore where they have access to a variety of products, including futures on China, Japan, India and Taiwan markets,” Nomura’s Chua said. “Rather than keeping accounts in each of the different Asian markets, traders can come to Singapore and trade a lot more variety of products.” Nomura is Singapore Exchange No. 3 shareholder, according to data compiled by Bloomberg.

The Southeast Asian bourse has been focusing on increasing the number of international participants in its futures and options market, Chng said in April. SGX said in March it had 43 derivatives trading members, compared with 27 equities brokers.

“They are actually hitting a critical mass of volume,” Arjan van Veen, an analyst at Credit Suisse Group AG said in a telephone interview July 16. “You need the volume, you need the systems, which they put in place a few years ago.”

Delay Setback

SGX suffered a setback in April, when derivatives trading was delayed for three hours by a computer breakdown, prompting company officials to apologize and pledge to review procedures.

Exchanges worldwide are seeking to build their futures and commodities businesses as contributions from equities trading decline. Hong Kong Exchanges & Clearing Ltd. bought the London Metal Exchange in December after posting its lowest quarterly profit since the global financial crisis. The Japan Exchange Group, formed from the merger of rivals in Tokyo and Osaka, has made expanding services in derivatives its main objective.

“We see derivatives as being the bright spot in SGX’s line-up of businesses,” Srikanth Vadlamani, an analyst at Daiwa Securities Group Inc. in Singapore, wrote in a note on July 11. “We are reasonably confident that there’s is still scope for secular volume growth in this segment.”

The average daily value of stocks traded on SGX fell to S$1.41 billion in the year through June 2013, after peaking at S$2.18 billion in 2008, according to data compiled by Bloomberg.

Currency Futures

To develop the derivatives business, the Southeast Asian bourse plans to introduce foreign exchange futures in the second half of 2013, starting with the U.S. dollar-Singapore dollar, Indian rupee-U.S. dollar, Australian dollar-U.S. dollar and Australian dollar-Japanese yen currency pairs. SGX started trading iron-ore futures in April and will introduce contracts on Philippine and Thai equity indexes by the fourth quarter.

“Derivatives will outgrow equities and continue to be a bigger part of the pie,” said Credit Suisse’s van Veen. “Five years from now I think people will think of SGX more as a derivatives exchange than equities, or at least equal. In the short-term it is still more determined by equities.”

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