Asia: Pieces Falling Into Place

Jim Kharouf

Jim Kharouf


Talking about Asia often leaves professionals from those regions a bit tongue-tied.

When JLN decided to do a special report talking about Asia, many of those experts had the same question: “Which country? Asia is a big place.” Indeed, talking about Asia is difficult, given the number of markets and regulatory differences, not to mention geographic distance between various Asian financial centers.

The debate still goes on over which one or two or three are the most important in the region. Some say Japan, while others discuss Hong Kong’s status. Others like the positioning of Singapore. And this doesn’t include Australia, South Korea, Taiwan, mainland China or India. But collectively, the region is a force in the derivatives world. Futures volumes in Asia represent 35.6 percent of the total global volume, ahead of North America’s 33.6 percent, according to the FIA.

In this JLN Special Report, several themes emerge in the video interviews conducted in recent months, in particular that Asia’s central financial centers still have plenty of potential.

Singapore swing

Singapore Exchange, or SGX, made much of its noise in the markets with a failed attempt to purchase the Australian Securities Exchange in 20111. But since then, it has continued to roll out new contracts as well as new clearing services. Last year, the exchange posted derivatives volumes of 80.5 million contracts, up 11.4 percent from a year earlier, according to the FIA Annual Survey. This came during a year when the Asia Pacific region posted a 23.4 percent drop in volume, from 2011, according to FIA statistics.

2012 Global Futures Volume by Region*

35.6%Asia Pacific
33.6%North America
8.2%Latin America

*Based on the number of contracts traded or cleared at 84 exchanges globally. Source: FIA Annual Volume Report

SGX reported that in its 2013 fiscal year ending June 30, derivatives volumes jumped 32 percent to a record 100.6 million contracts. The exchange posted nice volume growth in its Japan Nikkei 225 futures contract, up 29 percent to an average daily volume of 151,184 during its 2013 fiscal year. Its China A50 futures average daily volume rose 204 percent to 70,456 contracts as one of its fastest growing products.

And SGX has continued to grow its iron ore swaps contract, with fiscal year volume of 370,240 contracts, up 198 percent from a year earlier. The exchange continued to push forward with its clearinghouse initiatives for OTC clearing adopting international principles and lowering margining costs for member firms. (See our interview with Michael Syn, Senior Vice President and Head of Derivatives, Singapore Exchange)

Singapore Exchange (SGX) Annual Volume*


*Rounded, measured in millions of contracts. Source: FIA Annual Volume Report

Hong Kong Looks West

Meanwhile, Hong Kong Exchanges & Clearing (HKEx) surely shook the derivatives world with its $2.1 billion purchase of the London Metal Exchange (LME) in July 2012. Changes at LME have been few so far, but the move will transform the way China and other Asian participants access and use LME’s global metals trading platform and infrastructure.

Charles Li, CEO of HKEx, has energized the exchange and the region’s commodities markets.

He wrote in his June report that “the LME is equipped with the expertise, intellectual property, brand, and membership necessary to help us develop into a true global leader in commodities.”

Hong Kong Exchanges & Clearing Annual Volume*


*Rounded, measured in millions of contracts. Source: FIA Annual Volume Report

Li added that HKEx will build LME Clear, improve electronic access to the exchange and add a trade repository. It also wants to leverage that trading and clearing platform for Asia-based commodities contracts as well as build a mutual access bridge to mainland China.

“We are looking at new base metals products that may supplement those in other markets, and also seek to launch commodities products other than base metals when appropriate. Over the long term, we aim to offer physical settlement for certain commodities that are appropriate for our market,” Li wrote. “We want to develop Hong Kong into a commodities platform where international products can meet mainland liquidity, and mainland liquidity can connect with international liquidity.”

While many eyebrows were raised at the price of LME, $2 billion-plus, the exchange showed some momentum in its overall profitability in 2013 after a lackluster 2012 in terms of volumes. Volumes fell 14 percent in 2012 to 119.8 million contracts, according to the FIA Annual Volume Survey. However, HKEx volumes were up 8 percent in the first quarter (the latest available) for derivatives, up 5 percent for LME contracts, up 18 percent for stocks and up 17 percent for equity options.

While its cash equity business remains strong, revenues from LME contributed HK$420 million out of HK$2.2 billion in the first quarter. Profits rose 12 percent for the quarter to HK$1.4 million. Its equity and financial derivatives products have also been strong, with EBITDA from the category rising 74 percent to HK$331 million.

Japan Gets It Together

And in Japan, it finally happened — the country’s fragmented market system is coming together. The latest, and perhaps the most significant move is the merger of the Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE), which was completed in January 2013, forming the Japan Exchange Group (JPX).

Its clearing services were merged in July and margin reductions are a key focus for the new exchange. A new co-location service was offered in May addressing technological issues that outsiders sometimes found lagging behind other markets.

Japan’s Exchanges Derivatives Volume*

Year 2010 2011 2012
Tokyo Financial Exchange 116.0M 140.4M 66.9M
Tokyo Commodity Exchange 27.6M 31.7M 25.4M
Tokyo Stock Exchange** 26.8M 24.7M 29.0M
Osaka Securities Exchange** 196.3M 194.1M 205.1M

*Rounded, measured in millions of contracts. **Tokyo Stock Exchange & Osaka Securities Exchange agreed to merge in January 2013, under a new holding company called Japan Exchanges Group. Source: FIA Annual Volume Report

The TSE and OSE merger makes the exchange the third largest equity market by stock listings, with more than 3,400 companies. And as some have said, this will help Japan regain the top spot among Asian financial centers, ahead of Hong Kong and Singapore.

Derivatives are also part of the merged market which now runs on its J-Gate platform, technology from OMX Click-XT, with its Topix and Nikkei 225 futures contracts. The exchange expanded its contract months out to five years in July and margin offsets were also introduced between the two index products.

Q1 2013 Top Equity Exchanges By Share Trading Value

$3.18TNYSE Euronext (US)
$2.14TNasdaq OMX
$1.40TJapan Exchange Group*

*Tokyo Stock Exchange & Osaka Securities Exchange agreed to merge in January 2013, under a new holding company called Japan Exchanges Group. Source: World Federation of Exchanges

Meanwhile, Japan’s commodities markets essentially consolidated when Tokyo Grain Exchange shifted four contracts – corn, azuki, soybeans and raw sugar – in February to the Tokyo Commodity Exchange. TOCOM then created a separate agricultural division for those contracts. One other grain contract shifted over to the Kansai Commodity Exchange. Interestingly, TOCOM runs on the Nasdaq OMX trading platform as well.

Indeed, these three markets are looking optimistically at the future. Easier access to markets means potentially more trading from the West into these key centers, not to mention within the region itself. The key will be just how easy but safe it can be.

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