Looking for Continued Growth, SGX Goes West

Spencer Doar

Spencer Doar

Associate Editor

Singapore Exchange has had a good stretch of late.

The exchange’s fiscal first quarter results were reported on October 25, showing approximately $149 million in revenues, a 7 percent year-over-year increase, and net profits of $66 million, a 9 percent year-over-year rise.

In a move to bolster such growth, SGX announced the opening of SGX America and a corresponding Chicago office on October 17. The opening represents the exchange’s first brick-and-mortar presence in the United States. The office may have started with just two people in a temporary workspace, but SGX CEO Loh Boon Chye sees the American branch as integral for the company’s overseas plan.

It was back in 2010 that SGX expanded to London to better serve its European customers. But as SGX’s European and American customers have grown to represent a third of the exchange’s volume (SGX currently doesn’t break the regional statistics down further), the argument for an American division took on the same nature as that for Europe.

Loh cited three key reasons for opening the office – the ability to better serve existing U.S. customers using SGX’s point of presence at CME’s co-location facility (established at the end of 2015), an opportunity to acquire new clients and a chance to develop new product ideas.

Booming Product Overlap

Back in June, Loh was quoted as saying, “I feel that Singapore, being the largest foreign exchange center in Asia, is possibly an area where we can—and should—see quicker development.”

The ensuing months have done much to make that desire a reality. The exchange’s FX futures complex broke multiple records in September, including the first time one million contracts traded since foreign exchange futures products started trading on SGX in 2013. The USD/CNH (dollar/renminbi) and INR/USD (rupee/dollar) contracts have done the heavy lifting.

With the volume boom, SGX’s USD/CNH market share is around 75 percent and its INR/USD market share is some 50 percent.

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Another key driver is the steel value chain – comprising coking coal, steel itself and freight. SGX launched coking coal futures in 2014, but didn’t launch market making capabilities in the product until 2016. Options on that contract were launched in September and now SGX has 99 percent of coking coal’s market share.

SGX’s allure as an offshore Asian trading center is bolstered by its ability to offer certain margin offsets. For just a few examples, there are margin offsets between the Chinese A50 and Indian Nifty futures and the Japanese Nikkei 225 and Taiwanese MSCI futures.

Capital Raising

Singapore has not been exempt from the global IPO decline and overall decrease in public companies. The company’s strategy to increase its presence in the capital raising process is now turning to other alternatives than just increasing traditional support for companies going public, though SGX is pursuing that as well.

SGX has invested several million in CapBridge through its investment subsidiary Asian Gateway Investments. CapBridge is an investment platform for emerging companies to gain access to funding from venture capital firms and accredited individual investors.

In early 2015, SGX contributed $1.5 million to be distributed over the course of three years and CapBridge gained regulatory approval from the Monetary Authority of Singapore to operate in February 2016. In September, a California-based company that developed the first waterborne data center raised $25 million via CapBridge. This October, Capbridge announced SGX would take a 10 percent equity stake in its platform.  SGX likes this exposure to non-traditional means of raising funds.

Loh said SGX also sees corporate debt listings as a way to expand its footprint as some companies are heading straight to debt markets.

SGX’s ambitions overall and in the capital raising space specifically are perhaps best reflected by the exchange’s desire to get in on the planned IPO of Saudi Arabia’s oil giant, Aramco.

If that long-odds shot manifests, it will be another feather in SGX’s cap.

 

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Looking for Continued Growth, SGX Goes West

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Spencer Doar

Spencer Doar

Associate Editor

On the 30th anniversary of the ‘87 market crash last week, Cboe, in collaboration with ProShares, hosted a panel discussion “Current Dynamics of the VIX Market.” There was a lot to glean – from the applications of VIX ETPs to unique characteristics of VIX futures to general perceptions of volatility.

Dominic Salvino, Group One’s VIX options specialist, had an analogy for the current low levels of VIX, comparing it to high February temperatures in Chicago. On February 18, the thermometer reached 70 degrees Fahrenheit, only the fourth time that’s happened since 1971. Is that weird? Yes. Is it worth noting? Yes. Does that mean that the thermometer is broken? No. The thermometer is simply reading the conditions in the same way it always has.

On the topic of ETPs, there were a couple of notable points. Rich Ledee, ProShares’ head of capital markets, was quick to compliment the success of Barclays’ volatility ETNs, specifically VXX, the bank’s short term VIX futures note, but also brought up a couple of idiosyncrasies of the product. First, VXX has a maturity date at the end of January 2019. (You read that right – prospectus here.) There is a lack of clarity on the Street around what will happen at that juncture regarding the note. There will likely be a creation of a new product and some sort of transfer but the prospect is a can of worms worth keeping an eye on. Second, by nature of being an ETN issued by a bank, there is counterparty credit risk and less transparency to consider which is different from ETFs (which is also why some folks are more leery about trading ETNs).

Second, there is a perception that VIX-linked ETPs are the dominion of the day-trading retail crowd. However, panelists were quick to turn that notion on its head stating that there are large institutional players (and plenty of prop shops) using these and, moreover, buying and holding these products despite the cost of carry. The Ontario Teachers’ Pension and the University of Chicago’s endowment were two such players mentioned.

There has been much ado about the effects of an unwind of all the short vol positions, but the sentiment of the panel was those fears are overblown.

The VIX is calculated off of calendar days rather than trading days, so there is an impact when a month has more holidays (this is priced in and not a trading opportunity).

The VIX may be low, but Cboe’s SKEW Index is elevated.

This was not the first time someone has brought it to light, but Anand Omprakash, director, equity derivatives strategy and structure for BNP Paribas, had a great chart overlaying the VIX with varying QE implementation periods. It’s hard to look at that chart and then try to argue that central bank actions have not had a dampening effect on market volatility.

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