Switch from MSCI to FTSE Russell Offers Powerful Network Lessons
SGX learned much from the experience a year ago when their equity index products switched from MSCI to FTSE Russell. Those lessons are being utilized as they contemplate growing their equity index offerings by increasing the number of stocks in the A50.
The growing importance of China in global investors’ portfolios is driving this potential change, Michael Syn of SGX said in an interview with JLN over Webex. Syn is the head of equities at Singapore Exchange and serves as CEO of the stock market (SGX-ST), depository (CDP) and futures market (SGX-DT/DC).
SGX signed a strategic agreement with FTSE Russell in August of 2020 to develop multi-asset solutions in everything from equities to foreign exchange, commodities, fixed income and ESG. Its previous deal with MSCI, which expired in February of this year, focused just on equities. SGX retained its license with MSCI for the MSCI Singapore equity index futures and options.
Syn said SGX offers global investors a handful of tools to help them manage their key China macro risk factors, including currency risk, commodity risk (like steel and iron ore) and shipping. Steel and iron ore are China-centric markets, Syn said, noting the importance in China-related infrastructure development. He noted that SGX offers 80% of the shipping derivatives worldwide and how supply chain disruptions have made shipping costs rise.
SGX is widely recognized as a one-stop shop, multi-asset platform to trade Chinese assets and manage risk, including via the FTSE China A50 and the H50 suite of products and their RMB and iron ore futures, Syn said. The FTSE China A50 futures is the most liquid benchmark for the China market with about $7 billion worth of average daily volume and $11 billion in open interest, he added. Their USD/CNH futures are the most widely traded RMB futures with more than 80% market share of volume and open interest. And, SGX’s iron ore contract has 100% market share of volume and open interest in offshore iron ore derivatives.
But there is also interest in China for financialized access from hedge funds, traders and long-only funds. SGX offers these clients liquid markets that are accessible and trusted. And the U.S. dollar-denominated A50 index is compliant with U.S. sanction rules, something Syn said SGX and its partner FTSE Russell work very hard to maintain.
Syn said the “weaponization” of access to markets and specific equities makes trading harder and highlights the importance of SGX offering the longest trading hours in Asia at 22 hours a day. Also, SGX stays open for all holidays, including all Chinese and U.S.
He said compliance risk is one factor that does not decay over time. He said the trust SGX has earned over the years by working with FCMs and clients through the global and macro events like MF Global, Barings or even Covid, helps make SGX more efficient. “Efficiency comes from trust,” Syn said.
The SGX A50 contract trades about 500,000 contracts a day, but a recent change has seen up to 20% of the volume come during U.S. trading hours, Syn said. Previously 100% of the trade was when Chinese markets were open.
Syn said SGX learned customers don’t trade a product for itself, but rather they trade the product for the liquidity, risk management and clearinghouse. As internet firms like Google, Twitter and Facebook have found out, it is the network that has value. At the exchange, it is the network of traders and the information they bring to the market that gives validity to the price discovery process that attracts customers, Syn said.
Syn acknowledges the competition from HKEX for business in China and welcomes it. “Competition grows the market,” he said. He said if you can prevail in the competition, there is strong validation of your network, services and products. Syn said SGX seeks to offer the “gold standard” of trust, liquidity and access.
China is a big place and SGX does not offer everything. However, it has offered the A50 index since 2006. Syn said there is a long way yet to go and SGX is still in the early days of developing this market.
Syn also said that as opposed to the HKEX A 50 (note the space), SGX’s market capitalization A50 automatically changes the index, making it less expensive to maintain and hedge. Beta happens naturally as values change, instead of the “smart beta” weightings of HKEX’s A 50.
SGX is trying to grow its market more through a thoughtful process that “makes sense,” Syn said. The SGX market participants would like a product that matches the CME Group’s S&P 500 with 500 stocks, but the Chinese market is not quite there yet.
SGX and its partner FTSE Russell are nearly complete with the consultation of customer comments about a potential increase in size of the contract. A move to 100 stocks seems the likely move at this point, Syn said. The consultation ends this week.
The days of worrying about a late-night U.S. tweet that would roil the Asian markets have passed, but there are still many macro issues that bind China and the rest of the world together. Issues like Covid, bitcoin and the great reopening all drive volume on SGX from global investors, Syn said.
SGX offers the most liquid Taiwan equity index futures, which provides important risk management related to the micro-computer chip shortage. If Taiwan sneezes, Apple likely catches a cold.
China will only grow in importance to global investors, big and small. Having liquid, accessible and trusted futures markets to manage risk will only become more important. SGX wants the world to know it is “the” accessible, trusted and liquid market for trading China-related risk.