singapore hotel: Singapore Bourse Embracing Derivatives Over M&A

Singapore Exchange Ltd. (SGX), 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.”

To contact the reporters on this story:

Jonathan Burgos in Singapore at

jburgos4@bloomberg.net;

Eleni Himaras in Hong Kong at

ehimaras@bloomberg.net

To contact the editor responsible for this story:

Nick Gentle at

ngentle2@bloomberg.net

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