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Introduction
1. Ms Foo Chi Hsia, High Commissioner of the Republic of Singapore to the United Kingdom (UK);
Distinguished panellists and guests;
Ladies and gentlemen, a very good afternoon to you.
2. It is my pleasure to welcome all of you here at SGX’s London Forum, and thank you for choosing to spend your afternoon with us. Many of you have been our partners and clients since we opened our London office in 2010. We are extremely grateful for your support in our journey in the West, even as we expanded our footprint in Chicago, New York and San Francisco.
3. We are now at interesting crossroads of what some would argue to be a shift in global power from the West to the East. This afternoon, our speakers will provide you with insights into the East, as that is where global capital is flowing to, and where SGX’s expertise lies.
SGX in the Heart of Emerging Asia
4. The world has changed in the last decade. We experienced the aftermath of the 2008 financial crisis; political uncertainty has risen around the world; and the emergence of de-globalisation set the backdrop for Brexit and the US elections in 2016.
5. Along the way, we also experienced significant structural shifts in the financial markets. Regulatory reforms following the financial crisis, as well as the rise of passive funds, are changing the way market participants behave. In a persistently low interest rate environment, active managers will need various tools and asset classes to find incremental returns.
6. Meanwhile, China is forging ahead with the opening up of its financial markets. Besides being the world’s largest consumer of raw materials, China’s Belt & Road Initiative has also cast the spotlight on key strategic commodities consumed and traded along the Maritime Silk Road. The internationalisation of its financial and commodity markets will accelerate the rebalancing of global markets toward emerging Asia.
7. Most recently, MSCI announced that it would quadruple the weightage of China A-shares in its indices using a three-step inclusion process. This means investors in most global funds will be owning more China stocks in the next few years. Analysts have estimated that the higher weightage could potentially draw up to US$125 billion of funds into Chinese A-share market this year[1].
8. Clearly, emerging Asia (EM Asia) is now on every investor’s radar. However, investors cannot look at Asia as a single market but an amalgamation of unique countries with its own idiosyncrasies. SGX is in the heart of EM Asia, not just physically in terms of our geographical location, but financially, given our status as an international hub for Asian equity derivatives, foreign exchange (FX) and commodities.
Connecting Global Capital to Emerging Asia
9. As the saying goes, a rising tide lifts all boats. The growth we have seen across our derivatives suite reflects the robust interest in EM Asia. Our overall derivatives market continues to hit new highs. In the month of February, we had a single-day record volume of over 2.8 million lots and open interest of 6.4 million lots, driven mainly by China.
10. Trading volumes in our Asia evening session has seen robust growth, demonstrating increasing participation from international investors in Europe and the US.
11. Risks and opportunities in Asia will grow in scale and scope. As a global risk management centre, anchored in Asia’s only AAA-rated jurisdiction, SGX plays a key role in connecting global capital to Asian opportunities. Global investors look to SGX to provide a highly liquid, single-point access to Asia, across multiple asset classes, round the clock.
12. Let me first touch on equities, using one of our recently launched products as an illustration.
13. In June 2017, SGX was the first exchange in Asia to roll out the first multi-country, multi-currency Emerging Markets (EM) net total return (NTR) index futures in Asia. These contracts are designed to offer investors exposure to both share price appreciation and dividend returns.
14. As at the end of last year, our MSCI NTR product suite stood at US$23 billion in notional open interest, representing a year-on-year growth of over 10 times. We continue to build out our single country and regional MSCI offerings, to offer investors the tools for a complete EM Asia strategy.
15. Besides equity index derivatives, we have also developed new equity products for traders capitalising on intra-day movements, such as our single-stock daily leverage certificates on selected Singapore and Hong Kong stocks.
A Sweet Spot in FX
16. Secondly, SGX is also in a sweet spot with regards to currencies, given the growing optimism in RMB internationalisation, especially with China’s Belt and Road initiative.
17. SGX benefits from a strong ecosystem – Singapore is the third largest FX centre in the world, the largest in Asia, and a global RMB centre. We are one of the leading clearing houses globally to accept offshore RMB for margin collaterals, clearing and settlement. This helps support greater use of RMB FX derivatives in a centrally cleared world.
18. Since the launch of our FX futures, US$1.85 trillion in aggregate notional has been traded across the franchise (Nov 2013 to Jan 2019), hitting critical mass. We had a strong start in January this year, with our FX futures reaching all-time high of US$105 billion, up 60% year-on-year. In the same month, USD/CNH futures volume increased 146% to hit over US$73 billion.
19. To strengthen our position as Asia’s largest, fastest growing and most diverse FX exchange, we recently launched our new SGX FlexC FX Futures. FlexC is an innovative feature that allows market participants to trade customisable FX futures in an OTC manner and clear the trades on SGX’s platform. We believe the futurisation of FX is where the industry is heading, as market structure and regulatory changes shift OTC trading to on-exchange.
20. We are also seeing an interesting coupling between FX and commodities – that is, participants hedging currency exposure, while seeking iron ore trading opportunities as a macro hedge for China. This brings me to my last, but certainly not the least, asset class – commodities.
Iron Ore Has Become Asia’s Global Commodity
21. Iron ore is fast becoming a leading macro proxy for economic growth, after crude oil. It is following the footsteps of the oil complex in terms of size and economic importance, and becoming Asia’s first truly global commodity.
22. The financialisation of iron ore dovetails with SGX’s drive to complete the “virtual steel mill” value chain. Participants in the downstream steel industry can use our iron ore, coking coal and freight derivatives to manage raw material and freight price volatility, while enjoying margin efficiencies.
23. SGX pioneered the world’s first cleared iron ore swap contracts 10 years ago, even though Singapore is neither a producer nor consumer of the commodity. After a decade of growing the ecosystem, we have close to 100% global market share of seaborne iron ore derivatives, and clear more iron ore derivatives than the physical seaborne market. This has driven our commoditization efforts in coking coal, where we have also seen exponential growth.
24. We now have diverse market participants comprising both physical and financial players, and funds make up over a quarter of our iron ore volumes. As China opens up its derivatives market, we expect the interaction of the two distinct markets in China and Singapore, to bring about even greater benefits for the enlarged marketplace. The winners will be those who are able to bridge the onshore domestic retail liquidity, with SGX’s liquid international seaborne wholesale pricing.
25. In 2016, the coming together of The Baltic Exchange with SGX brought about greater synergies, integrating the risk management of cargo and freight. We were the first, and are now the largest clearing house for forward freight agreements (FFA). We continue to build on our respective strengths to deliver value to market participants.
In Conclusion
26. Global institutional investors want two things. One, portfolio-replication services, with trading hours straddling Asia, Europe and US time zones. Two, unmatched access to EM Asia, with Asia-centric risk management tools across various asset classes.
27. This year, SGX celebrates 20 years as a neutral and trusted exchange, although our roots in derivatives go further back to over 30 years. I would like to take this opportunity to thank our partners and clients for your support, and we look forward to serving you for many more years. Thank you.
[1] Source: https://www.ft.com/content/2ce24a94-3ba5-11e9-b856-5404d3811663
