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August 3, 2015

SGX: Setting the pace in Asian Foreign Exchange

Singapore Exchange (SGX) has a long and successful history of innovation in the derivatives markets. Central to this was early recognition of the benefits of offering customers access to a portfolio of regional Asian products in a single venue, based on markets which were largely closed to foreign investors or did not meet their risk management standards or trading practices.

SGX: Setting the pace in Asian Foreign Exchange

By William Barkshire

Singapore Exchange (SGX) has a long and successful history of innovation in the derivatives markets. Central to this was early recognition of the benefits of offering customers access to a portfolio of regional Asian products in a single venue, based on markets which were largely closed to foreign investors or did not meet their risk management standards or trading practices.

Building upon the success of its equity index products, which includes the market leading FTSE A50 offshore China contract, SGX is now gaining respectable traction in its nascent FX product suite. Located in the leading FX trading centre in Asia, SGX offers the full range of regional currencies mainly tradable against the US Dollar both as exchange traded and cleared futures contracts as well as the clearing of OTC traded non-deliverable forwards (NDFs).

With clearing of NDFs currently on a voluntary basis, SGX’s OTC NDF clearing volumes of in excess of USD 4 billion since launch, remains modest relative to overall market activity. Volume has however recorded a surge of 70% in 2014 over 2013 and an increase of close to 10% this year-to-date as compared to the similar period last year.

In the case of OTC products it is only a matter of time before clearing of foreign exchange will likely be mandated, and with new margin requirements for uncleared derivatives, this will significantly propel the attractiveness of SGX’s offering and its volumes.

This view is echoed by a number of key market players. Mr Lawrence Chan, Managing Director of Business Management & Support, Treasury & Markets in DBS Bank commented that, “The Asian Non-Deliverable FX Forwards clearing solution offered by SGX is a positive step towards the development of Singapore financial centre ahead of potential global regulatory changes in the FX markets.”

SGX also currently offers eleven FX futures contracts. With over US$55 billion in aggregate notional value traded since the launch in November 2013, recent volume developments mean that it is now the fastest growing FX futures market globally. The star performer has undoubtedly been the Indian Rupee/ US Dollar contract which hit a daily volume record on 8th April 2015 with 32,000 contracts traded which is more than USD$ 1 billion in notional value.

Consistently tight spreads of 0.3 pips are achieved during Indian trading hours as compared to NDF spreads of 2 pips for the Indian Rupee. In addition, the SGX RMB futures contract launched in October 2014 is already being quoted with consistently tight spreads 15 months out. With increased customer queries and interest in the RMB contract, SGX is planning to add CNY/SGD, SGD/CNH, EUR/CNH and USD/TWD to its Chinese-nexus suite of FX futures.

Volumes are also developing in the Singapore Dollar and Korean won contracts. Since its launch in October 2014, SGX RMB futures have successfully grown with a total notional value of 35 billion yuan traded.

The recent uptake in futures volumes and open interest closely reflects the growing demand by global investors to trade FX derivatives on a regulated exchange platform providing greater market transparency and robust price discovery in the Asian time zone. Market interest is likely to grow considerably as a result of the advantages of foreign exchange futures offering direct access to a complete end to end solution with trading in a fully transparent central limit order book – this is likely to prove very timely as regulators seek to encourage the move of the foreign exchange markets to such platforms following similar transitions by all other major asset classes and in light of recent bank scandals and the need to ensure best execution. There is absolutely no reason why the FX markets should be an exception to this trend.

The recent move by the Swiss National Bank in January 2015 to allow its currency to trade freely against the euro not only stunned the markets but also exposed a number of players to significant losses as traders on electronic FX platforms were locked out of the markets due to imposed limits on price movements and could not liquidate positions. SGX does not have price bands for its FX contracts and guarantees trade at the point of execution. These market events again demonstrated the benefits of regulated futures market with centralised clearing and an electronic central limit order book that fulfils best execution practices and guarantees all matched trades.

Investors also have the added reassurance that SGX is regulated by the Monetary Authority of Singapore (MAS) and has 30 years of proven derivatives clearing experience. It was also the first Asian CCP authorised as a Derivatives Clearing Organization (DCO) in 2013. In January this year, SGX received its registered Foreign Board of Trade (FBOT) status from the US Commodity Futures Trading Commission (CFTC). In April, SGX was also recognised by the European Securities and Markets Authority (ESMA) and continues to provide derivatives clearing services to customers in the European Union.

Users of SGX’s equity index and commodity products have the added advantage of hedging their foreign exchange exposures within the same trading venue as well as enjoying potential inter and intra product margin offsets between these and foreign exchange products.

In addition to the move towards greater transparency, Basel III and the Supplementary Leverage Ratio will also significantly increase the costs for prime brokers of providing credit to customers. SGX’s clearing of foreign exchange products will therefore become significantly more attractive as these new regulations begin to bite.

SGX recently announced a partnership with EBS, ICAP’s market leading electronic foreign exchange business, to develop new Asian currency products and services and strengthen the liquidity in both the FX OTC and futures markets in Asia.

This underpins a widespread view that the exchange trading and clearing of FX futures and forwards has a very bright future and will play an increasingly mainstream role as a core part of the FX flow model.

SGX is rightly taking a long term view which is likely to prove to be shrewd driven the fundamental change in the structure of the foreign exchange markets driven by new regulations and the need for capital efficiency by banks. Players in the foreign exchange markets should closely watch this space.


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