News analysis

Continuity lapse risks breaking traders' patience

In the digital age, the ability to keep operating even in the midst of internal failures, known as business continuity planning, can mean the difference between survival and going under. When it comes to big banks or exchanges, the health of the entire financial system can be at stake.

Perhaps the simplest definition of why the issue is so important is found in the first two paragraphs of the Monetary Authority of Singapore's (MAS') guidelines, published as early as 2003 and updated several times since: "The potential impact of a major operational disruption may incapacitate the financial system. The quick recovery of business functions after disruption is therefore crucial in maintaining confidence in institutions."

Singapore Exchange (SGX) executives may need reminding of those rules. Right now, it's fair to say that confidence in that institution has been shaken.

Futures on the Nikkei 225 Stock Average, which usually open at 7.30am, did not start trading on Thursday until about 10.15am. The delay also hit contracts on India's Nifty 50 Index and iron ore.

SGX gave little information publicly about what happened. Given the implications, it is understandable that it might prefer to avoid talking about it.

This was at least the fourth disruption at Singapore's trading venues in the past 18 months. It also happened at the worst possible time, the day after the Nikkei 225 most-active futures contract expired. On these days, known as a rollover, there is heavy activity from investors creating new positions.

The monetary authority asked SGX to investigate, a less forceful approach than the reprimand it issued in 2014, when trading was halted because of a power failure. There's little need for MAS to wield a big stick this time. The impact on the exchange's bottom line should be incentive enough for SGX to act.

Derivatives are its biggest breadwinner, accounting for 37 per cent of revenue in the first quarter of the exchange's fiscal year. That's even after a 24 per cent drop in volumes from a year earlier. The fall in trading follows two years of steady and strong growth in that business.

It is impossible to establish definitively whether the slowdown reflects fallout from the disruptions earlier this year. What is certain is that the latest trading glitch won't help.

SGX is setting an unfortunate track record here. To re-establish confidence, it must do better than saying the delay was the result of a "specific issue" that was "addressed immediately". (A near three-hour delay may not be every investor's idea of immediacy.) Fail to do so, and its customers may look elsewhere. Business continuity in derivatives is a given. The trading does not have to take place in Singapore.

BLOOMBERG

• This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

A version of this article appeared in the print edition of The Straits Times on December 10, 2016, with the headline 'Continuity lapse risks breaking traders' patience'. Print Edition | Subscribe