As was true for their counterparts in Europe and North America, 2001 was a memorably bad year for Asia-Pacific exchanges. They suffered a double whammy: first, US economic slowdown followed by the September 11 attacks and the ensuing sell-off.
"It was a dismal year," said a spokesperson for the Singapore Exchange Ltd (SGX). Volumes fell, reduced confidence often deterred investors from using derivative instruments except for the simplest hedging instruments, and new share issues plummeted.
Profits, revenue fall
The region's three listed exchanges -- in Australia, Singapore and Hong Kong -- all reported slumps.
Australian Stock Exchange Ltd (ASX) announced a 5% fall in net after tax profit in the year to June 30, 2001, after a fall in volumes. Revenue from new listings fell 6.5%. In the previous year, profit had jumped 6%, and ASX chief executive Richard Humphrey said the ASX would seek to diversify its income base.
Singapore Exchange Ltd said the number of IPOs fell by more than half from 87 in 2000 to 37 in 2001. In view of market conditions, a number of applicants held back their plans to list even after receiving in-principle approval from the Exchange. On a year-on-year basis, the market capitalisation of stocks on the SGX Main Board fell 14.9%, and the value of stocks on Sesdaq, SGX's small cap board, declined 23.6%.
SGX also recorded a decline in profit in its first year reporting as a listed company. Net profit after tax for the year to June 30, 2001, fell to SGD49.0m from net profit after tax of SGD107.9m for the previous year. It blamed a 12.5% fall in revenue mainly on a drop in securities trading in volume and value.
In Hong Kong, Hong Kong Exchanges and Clearing Ltd (HKEx) recorded a 34.1% drop in interim net profit for the six months ended June 30, 2001 to HKD365.6m, blaming sharply lower turnover. Average daily turnover on the Exchange fell 35.8% to HKD9.5bn, compared with HKD14.8bn in the period a year earlier.
The combined turnover on the four major Indian bourses declined, but the volume of shares traded on the four Exchanges, however, moved up marginally, according to India's Business Standard. In absolute terms, the aggregate turnover on the country's most active stock markets -- the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), the Calcutta Stock Exchange (CSE) and the Delhi Stock Exchange (DSE) -- fell by 54.4% in 2001.
The story was similar elsewhere in the region: reduced revenue, particularly in the last quarter, as a result of the September 11 attacks on the United States.
Exchanges cooperate but shy away from mergers
But exchanges still pushed ahead with plans to link up bilaterally, and also produced an initiative to improve global clearing and netting worldwide. Exchanges from Hong Kong, Australia, Singapore, Tokyo and elsewhere made important progress in deepening relationships or setting up new alliances, although mergers are turning out to be fraught with difficulty, particularly cross-border deals.
In January 2001, HKEx and Sydney Futures Exchange Ltd (SFE) announced a strategic initiative to develop new derivative trading and clearing services for Asia Pacific exchange-traded and over-the-counter (OTC) marketplaces.
"The international reputation, geographical location and product offering of both exchanges make SFE and HKEx natural business partners," Robert Elstone, SFE Managing Director and CEO, said. Elstone said both exchanges intended to cut costs and develop new cross-border trading and clearing opportunities.
HKEx chief operating officer Frederick Grede said the two exchanges' combined expertise and liquidity could enable such new services as 'cross-margining facilities, access to both exchanges' trading platforms, facilitation of access through clearing cooperation, and the harmonisation of derivative trading networks and clearing technology.'
In February 2001, the ASX abandoned plans to merge with its New Zealand counterpart, the New Zealand Stock Exchange (NZSE), a mutual owned by members. It gave no reason for the decision. The NZSE said there were concerns about both the benefits and costs to its members, and that some feared it was a straight takeover of the NZ bourse.
Critics fear the failure of the merger will hasten the exodus of New Zealand companies to list in Australia. It was the second setback in two months for the NZ exchange, while the NZ market suffered a separate setback with the January 2001 announcement of the planned departure of broking house Merrill Lynch.
The NZSE said it might, however, follow the ASX's example, and demutualise and then list. The Tokyo Stock Exchange, Inc (TSE) demutualised from November 1, while Singapore's exchange ended its first full year as a listed company.
Expectations of mergers are focusing on Australia, Hong Kong and Singapore, the three listed exchanges, which now have to answer to shareholders rather than members. All three have been looking offshore, mainly in East Asia and the United States, for partners or potential allies.
In April 2001, ASX denied that it was discussing merging with its Singapore or Hong Kong counterparts. While there might be cogent reasons for exchanges to merge, they gave rise to complex cross-border jurisdictional issues, the ASX said. High level talks between Australian, Singaporean and Hong Kong governments would be beneficial to the ASX's aspirations to form alliances within the Asia Pacific region, it added.
On a smaller scale, exchanges are pushing ahead with a raft of initiatives to boost cross-border cooperation.
In Spring 2001 SGX signed a memorandum of understanding with the Tokyo Stock Exchange for general cooperation. SGX said in early 2002 that it was exploring co-operation opportunities with the TSE relating to cross-access arrangements for co-trading and clearing of products listed on both exchanges, new product development, marketing, information technology development and information sharing.
In December 2001 HKEx and the Kuala Lumpur Stock Exchange (KLSE) signed a memorandum of understanding regarding the exchange of market information.
If the ASX could build a link with Hong Kong and Singapore, the three Asia-Pacific exchanges would have about 3% of the global equity market, according to one estimate.
Late in 2001, HKEx was still in talks with nine other exchanges about providing links for cross-border trading on participating exchanges, the Global Equity Market partnership. The 10 exchanges -- Australia, Belgium, Brazil, Canada, France, Hong Kong, Japan, Mexico, the Netherlands and the United States -- would link up to offer 24-hour trading. Within the Global Equity Market partnership, HKEx was also discussing bilateral links with the New York Stock Exchange. HKEx said in June 2001 that it was eyeing an early link-up with the New York and Toronto stock exchanges, ahead of a planned global trading link involving nine exchanges.
All systems go
In December 2001 the ASX and SGX's new international trading settlement and custodial system went live after successfully completing a broker pilot test. The system is designed to give Singapore and Australian investors access to each other's market, with 50 securities initially available.
The ASX has been pushing ahead with technology investment and is developing a virtual private network (VPN), an encrypted database operating on broadband which will help broaden its revenue base.
In March 2001, SGX launched SGXAccess, an open interface for securities trading that provided broader and more direct distribution of products. SGXAccess uses a widely accepted international protocol (FIX 4.2) and allows brokers to differentiate their products to clients.
In April 2001, SGX and Bloomberg announced that derivatives contracts on the SGX ETS would be accessible through Bloomberg terminals, allowing SGX to leverage on Bloomberg's extensive and global distribution network, extending the reach of SGX's derivatives products. SGX derivatives contracts which can be traded via Bloomberg terminals include Euroyen Futures, Japanese Government Bond Futures, Nikkei 225 Futures, Nikkei 300 Futures, MSCI Taiwan Index Futures, MSCI Singapore Index Futures, Straits Times Index Futures, S&P CNX NIFTY Index Futures and five-year Singapore Government Bond futures.
Early in 2001 Wellington-based Access Brokerage announced a new electronic share trading service, which it said would save investors money. Access said it had teamed up with electronic share trader E*TRADE Australia to offer New Zealand client investors online trading on both the New Zealand and Australian stock exchanges.
Exchange traded funds gain ground
Exchange traded funds (ETFs) continued to grow in popularity in 2001. ETFs are indexed funds that trade throughout the day in the same way as individual stocks. Designed to closely track the performance of an index or basket of stocks, they can be liquid and cost-effective investment vehicles.
In June 2001, the Tokyo Stock Exchange and the American Stock Exchange signed a memorandum of understanding establishing a strategic alliance for the cross listing and trading of US and Japanese ETFs. The two exchanges will work together to build a platform to list and trade the ETFs.
HKEx plans to list and trade more local and regional ETFs. It also plans to list and trade fixed-income ETFs. In a bid to increase liquidity, HKEx is now allowing market-making for ETFs which have listed without initial public offerings. A new ETF, China Tracker, listed on November 28, 2001.
HKEx is still looking at introducing equity linked notes and at trading regional securities and related products, it confirmed late in 2001. It also said it planned to move ahead with the introduction of Dow Jones Industrial Average futures and options to trade in Asian hours. The new derivative products were expected to start trading in the first quarter of 2002.
HKEx said it is integrating its derivatives clearing and settlement systems by the middle of 2002.
After SGX signed a joint venture agreement with the American Stock Exchange in December 2000 to develop an ETF market in Singapore and promote them regionally, trading of five ETFs started in May 2001 in Singapore.
In India, scrips in all stock exchanges from the end of 2001 started trading under the T+5 rolling cycle, except those 414 stocks that had already been trading under the uniform trading mechanism since July. Under the new mechanism, transactions will be settled in five days after the trade deal, as opposed to the previous practice of weekly settlement. The step has been taken to curb the manipulation of stock prices.
Eyes turn to China
China's B shares ended 2001 at the top of the world's league tables, after a February reform opening the formerly foreigners-only market up to local investors. No new firms listed on the B share market in 2001. While investors are salivating at the prospect of far greater access to China after it joins the World Trade Organisation, market information can be hard to come by.
In November 2001 HKEx, the Shanghai Stock Exchange and Shenzhen Stock Exchange unveiled China Stock Markets Web, an online initiative to offer greater disclosure on mainland markets. The service came six months after the three exchanges agreed to exchange securities and listed company data. China Stock Markets Web is integrated into the three exchanges' websites: www.hkex.com (Hong Kong), www.sse.com.cn (Shanghai) and www.sse.org.cn (Shenzhen). It covers listed company announcements and information, annual, interim and quarterly reports; share price data and major indices from the three markets.
Chinese regulators plan sweeping reforms to lure in foreign investors. They plan to merge the tiny USD15bn B share market with the USD500bn yuan-denominated A share bourse, the second largest in Asia after Japan.The new Shanghai-based bourse would have a combined capitalisation of about USD600bn.
Shanghai Stock Exchange is already preparing for this overhaul, which is not likely to take place for five years. An official said in May 2001 that the exchange was seeking a new trading platform that would allow a range of new financial products to be traded. The Shanghai official did not give a value for the planned investment and declined to give a timeframe for the upgrade, which would allow short selling, new financial products such as derivatives and index futures, and cross-listing with overseas markets.
Clearing the way for cross-border traffic
One of the biggest breakthroughs of 2001 came in clearing. The world's principal clearing organisations formed a central body, CCP 12, in August. CCP 12 is dedicated to improving global clearing, netting and central counterparty (CCP) services. CCP 12 will informally cooperate to tackle such issues as improved information sharing, enhancement of collateral usage, development of collaborative opportunities and identification of minimum standards for risk management practices.
Patrice Renault, CEO of Clearnet, was elected chairman of CCP 12 for a one-year period, and Walter Reisch, executive vice president of HKEx, was designated vice chairman and will take over as chairman for the second year.
"We're determined to make sure that the financial services industry infrastructure keeps pace with the growing demands for greater efficiency, risk management and lower cost," said Renault. "We believe that CCP 12 will encourage the industry dialogue needed to bring common standards, promote best practices and achieve interoperability."
CCP 12 will hold general plenary sessions of the membership as warranted about once every six months. In the meantime, more specific topics will be addressed by specialist working groups, with three groups formed at the most recent meeting to concentrate on issues related to:
- Collateral management -- chaired by George Hender of The Options Clearing Corporation
- Linkages -- chaired by Peter Axilrod of The Depository Trust and Clearing Corporation
- Risk management and best practice -- chaired by Andrew Lamb of London Clearing House.
CCP 12 members are:
- Australian Stock Exchange Ltd
- The Brazilian Clearing and Depository Corporation (CBLC), São Paulo
- The Canadian Depository for Securities Ltd, Toronto
- Clearnet, Paris
- The Depository Trust & Clearing Corporation, New York
- Eurex Clearing AG, Frankfurt
- Hong Kong Exchanges and Clearing Ltd
- S.D. Indeval, Mexico
- London Clearing House (LCH)
- The Options Clearing Corporation (OCC), Chicago
- Singapore Exchange Ltd/The Central Depository (Pte) Ltd
- Tokyo Stock Exchange
- Chicago Mercantile Exchange Inc, which joined in July 2001.
HKEx, a driver behind the move to develop a global clearing solution, was a co-sponsor of the inaugural clearing conference in early 2001. It said competition had raised overall standards through various market demands, including the demand for round-the-clock processing. "Globalisation has become a major driver of change. We see rapid growth in cross-border portfolio investment and diversification of investment products and markets," HKEx chief executive Kwong Ki-chi said.
