SGX: MSCI Singapore Index Futures Contract Starts Trading In Smaller Size And Finer Ticks

• On 2 November, the contract multiplier and minimum tick size for the MSCI Singapore IndexSM Futures (SiMSCI Futures) contract has been halved to S$100 and 0.05 index points respectively. Initial margins have also been reduced to S$1,540 per contract.
• The change provides more accessibility of the SiMSCI Futures and allow market participants to construct a more efficient hedge to their Singapore equity exposure.
• The SiMSCI Index staged a strong performance in October, chalking up returns above that of other developed markets’ indices. Higher historical volatility seen recently in the SIMSCI index triggered increased interest in SiMSCI Futures.
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Recent Performance of SiMSCI Index

The MSCI Singapore Index^SM (SiMSCI Index) is an investable benchmark index based on the performance of stocks listed on the Singapore Exchange (SGX). Comprising 28 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation of the Singapore equity universe. During the month of October, the SiMSCI Index outperformed other developed markets’ indices with returns of over 9.4%. 

Table: % Price Change of Indices in US Dollar Terms

Source: Bloomberg as of 30 October 2015

The robust performance in October came after a volatile period in August and September. 10-day volatility rose to September to 33.42% on 3 September, the highest level achieved since 2011. The moves coincided with hedging activity to provide downside protection. At the back of heightened volatility, the SiMSCI Futures contract traded 372,378 lots and 315,764 lots in August and September respectively.

Following a recent review on the Straits Times Index (STI), the SiMSCI Index started to exhibits a closer correlation to the former.  With an increase of two additional common constituents, correlation between these two indices has increased from 0.95 (3 September 2014 to 3 September 2015) to 0.98 (3 September 2015 to 30 October 2015), which allows for tighter arbitraging between the equity gauges.  

Table: Top Ten Constituents of the SiMSCI Index

Source: Bloomberg as of 30 October 2015

Enhanced SIMSCI Futures with a smaller contract value and tick size

From 2 November, the contract multiplier for SiMSCI Futures contract will be reduced to S$100.  Based on the price of 344.8, the notional value of one SiMSCI Futures contract will be halved to S$34,480. Due to a smaller notional size, initial and maintenance margins are reduced to S$1,540 and S$1,400 respectively.

Market participants with a portfolio of relevant Singapore stocks can hedge their directional exposure through the SiMSCI Futures contracts. Unlike equities, a future contract permits the use of higher leverage and shorting. A trader only needs an initial margin of S$1,400 to gain an exposure to S$34,480 of Singapore equities assuming a futures price of 344.8.

A finer tick size of 0.05 index points will better reflect the underlying SIMSCI index movement.  Based on the price movement between Jan-Sept 2015, had the SIMSCI tick size been implemented, we would have seen an increase of futures price movement by about 2 times.  This would allow more trading and arbitraging activities between the underlying index and futures.

A smaller tick size would also mean lower roll cost for hedgers.

Contract Specifications for MSCI Singapore Index^SM Futures (Effective 2 November 2015)

*includes 4 minutes of Pre-closing and 1 minute of Non-Cancel Period at the end of the session