Singapore Exchange faces test as China-led boom fades

Trading in one of the exchange's key futures contracts for Chinese shares has slumped by nearly three-fourths from a record high hit in early July.
Trading in one of the exchange's key futures contracts for Chinese shares has slumped by nearly three-fourths from a record high hit in early July.PHOTO: AFP

SINGAPORE (REUTERS) - The new head of Singapore Exchange Ltd, which was hit hard in its derivatives trading by China's economic slowdown, could face his toughest questions yet at an annual shareholders' meeting on Wednesday (Sept 23) as pressure mounts to find new sources of revenue.

Trading in one of the exchange's key futures contracts for Chinese shares has slumped by nearly three-fourths from a record high hit in early July, Thomson Reuters data shows, at a time when its derivatives business has been growing and contributes a rising share of its revenue.

"Singapore and other exchanges will have to do some serious thinking and look at other sources to boost revenues as offshore China-focused derivatives have had their day in the sun," said a derivatives strategist at a US bank in Hong Kong.

Chief executive officer Loh Boon Chye, known for his close ties with financial institutions at home, took the helm at the Singapore exchange in mid-July from Magnus Bocker, who over five years built the derivatives business into the main source of revenue for the exchange.

In the runup to a July stock market crash in China, the exchange had benefited from growing demand for futures and options contracts covering China and other Asian economies. China's decision to restrict trading of onshore future contracts following a market rout drove additional business to Singapore, where the volume of trading in China-linked futures rose to record highs.

But that trend is already fading as investors become increasingly concerned about China's economic outlook.

Trading in the Singapore-listed FTSE China A50 front-month futures, a proxy for China's main CSI300 share index, peaked at a record 4.1 million contracts in the first week of July, only to collapse to around 1.1 million as of last week, as investors become increasingly concerned about the Chinese economy.

Stock listings are also anaemic. Singapore equity offerings have fallen 65 per cent so far in 2015 and totalled just US$1.9 billion (S$2.69 billion), on track to be the lowest nine-month period since 2003, data showed. So far this year, there hasn't been a single initial public offering on Singapore's main board. Hong Kong, in contrast, attracted a near record number of IPOs in the runup to the Chinese market crash.

The Singapore exchange is relying increasingly on its derivatives revenue, which soared 42 per cent in the year to end-June and accounted for 38 per cent of total revenue, against 30 per cent the previous year. Revenues from its securities business fell 8 per cent and made up 27 per cent of the total.

Investors will be watching for Mr Loh's response to the challenges, although his options were seen limited. "The market is waiting to see what Boon Chye's impression of the challenge is or the opportunities for him are," David Smith, head of corporate governance at Aberdeen Asset Management Asia, one of the top 20 investors in SGX, told Reuters. "I don't think anyone should be looking to Boon Chye to turbocharge growth because when you are running an exchange, you are sort of largely dependent on the market participants for that."