Having just announced its best quarterly financial performance in five years and a second quarter of record volumes in its derivatives business, the Singapore Exchange (SGX) hopes geographic advantages will help make a success of its new menu of Asian currency futures later this year.
The exchange will be offering futures in the Indian rupee, Singapore dollar, Australian dollar and the Aussie-Japanese yen cross in the third quarter of 2013.
"From a glass half full perspective, we see boundless opportunity," Michael Syn, SGX's head of derivatives said in an interview as part of a Reuters FX Summit in Singapore.
As futures comprise a tiny fraction of currency trading, and Asian currencies form a very small proportion of that futures trading, the scope to grow the business is tremendous, Syn said.
"Singapore is a pretty major Asian FX trading centre.
"It's playing to our natural geographical advantage that most of the key trading heads, the key price-makers and many of the key policymakers are based where we are matching and where we are trading."
SGX offers futures and options on U.S. dollar, Japanese yen and Singapore dollar interest rates, Asian equity indices and dividend indices. A subsidiary, Singapore Exchange Derivatives Clearing (SGX-DC), provides clearing for over-the-counter (OTC) derivatives, such as commodity and other financial swaps.
The exchange reported a net profit of $78 million in the January-March quarter, which is the third quarter of its financial reporting year from July to June.
Daily average traded volume for derivatives was a record 479,235 contracts for the quarter, up 52 percent from a year earlier and up 34 percent from the previous quarter.
The number of outstanding derivative contracts on a single day, termed open interest, also hit a record of 3.2 million contracts on March 7.
That jump in open interest was evidence players in the OTC markets were migrating to exchange-traded listed derivatives, possibly to comply with new regulations and mandates, Syn said.
"People coming to the exchange didn't just open and close positions. They opened and held," said Syn.
"And that tells you they are using the exchange to hold long-term structural portfolio-type positions and that they tended to be institutional clients who had migrated from OTC type structures."
Market participants expect a lot more such migration in the months to come as institutions and investors are forced by capital charges under Basel III and mandatory clearing and reporting rules imposed by the U.S. Dodd-Frank Act and other similar regional regulators to switch to the more transparent trading on exchanges.
FUTURES VS SWAPS
SGX began the process of registering as a derivatives clearing organisation (DCO) with US regulators almost two years ago. Once approved, it would qualify to clear swaps for any US person or organisation.
Syn hopes the exchange will soon get its DCO status. Also, US regulators have allowed SGX a no-action relief, which means swaps denominated in Singapore dollars, Asian non-deliverable forwards and commodity swaps currently cleared on SGX's AsiaClear service can continue being cleared as before.
In the meantime, SGX has created futures in some of its main swap instruments, such as iron ore and a few energy swaps, basically enabling US clients, to trade the listed version of the same instrument i.e. the futures rather than the swaps.
"We clear the swaps that clients trade as swaps and if they choose to transact that as a future, we'll also clear it as a future," Syn said.
"These multiple modes of clearing and transaction give the maximum flexibility to clients to deal with regulatory swings to left or right and also regulatory differences between countries in Asia and countries in the west, and their different mandates."
Still, the migration of investors from OTC swaps and forwards to futures is unlikely to be so massive as to cause a huge decline in OTC trading volumes, Syn said.
Investors will eventually have to decide if they prefer the liquidity offered in a futures trading platform, or the flexibility of picking the exact date and quantum that a bilateral swap offers.
"So it will be a tension between liquidity risk and basis risk for each currency," he said.
"I think the market might well develop where the first port of call for anyone seeking to hedge outright risk could be futures, and they might do switches to reach the correct date or to reach the right basis."