- Equity index derivatives led most of the growth in Asia, in particular those on the Japanese and Chinese markets. SGX’s China A50 futures and Nikkei 225 options have been flagged as the top two in a FIA league table on growth in equity index futures & options.
- Global and Asian figures were impacted by technical changes to KOSPI options. Excluding this single contract, Global and Asian growth numbers would be 7.4% and 12.8% respectively. SGX growth of 39% in 2013 remains higher than these adjusted numbers.
- China’s importance is growing quickly and the volume in SGX’s China suite is growing in tandem. Going forward, more liberalization can be expected from China and the SGX is introducing new China-related products in the equity, FX and commodities space.
The Futures Industry Association (FIA) recently released its new Annual Volume Survey. From 2008-2013, FIA found that the FTSE China A50 futures and Nikkei 225 options traded on SGX topped the global equity derivatives category. SGX China A50 futures’ volume grew 63894.2% to 21.9 million while SGX Nikkei 225 options grew 4260.9% to 10.2 million. In 2013 alone, the SGX China A50 futures more than doubled its 2012 volumes, making it one of the fastest growing equity index contracts in the world. Similarly, the Nikkei Options also grew rapidly at 132% YoY.
Table 1: Shooting Stars – Over the Long Term (Source: FIA)
Overall, global volume growth was 2.1%. However, this headline was impacted by a single contract, the KOSPI options whose volume fell sharply due to the contract size being multiplied by five times. Excluding this effect, global volume would have increased 7.4% and Asia’s volume would have gained 12.8%. SGX’s growth of 39% to 112 million contracts in 2013 remains higher than these adjusted numbers.
China’s importance growing quickly
From the 1980s to the 1990s, Japan had led Asia's economies in their race to first world status, Singapore, South Korea, Hong Kong and Taiwan were not too far behind. Today, the rise of China as the world's largest trading nation and the modernisation processes in India and Southeast Asia's populous nations make the Asia-Pacific a globally significant region. While the FIA survey found that North America had the fastest growth in volume at 9.9% and now accounts for 36.7% of global volume, the ranking would be different if Asia had adjusted for KOSPI options. Asia’s growth figure would become the highest globally at 12.8%.
Leading Asia’s charge was the trading of equity index derivatives in China and Japan. For China, CFFEX’s CSI300 futures was the key driver for China’s growth in equity derivatives while trading in commodities futures also picked up traction. Furthermore, the rise in open interest for commodities futures suggests more hedging rather than speculative activity.
Riding on this trend, SGX Iron Ore derivatives also continue to do well in 2014 with a record monthly volume of 31.7 million MT in January after another record breaking year in 2013. Meanwhile, open interest has also grown steadily, up 26% year to date to 36.3 mil MT. Increasingly, SGX is now a preferred hedging and price discovery centre for seaborne iron ore.
Going forward, there will be a lot to look out for from China. With further liberalization of the capital and FX markets expected, equity index and commodity options could well be in the pipeline for the onshore market. In response to strong customer demand, SGX has announced plans to launch CNH FX futures and options on the SGX China A50 futures in 3Q 2014 subject to regulatory approval.
“SGX China A50 futures has become a very relevant tool for market makers of China A-share funds. Closely tracking the performance of the onshore market, the A50 futures provides asset managers with an effective hedging tool to manage our delta risk. We are delighted to hear of SGX’s plan to introduce China A50 options as this will offer us added protection against volatility risks”, said Mr Tony Sun, Managing Director, Haitong International Securities.
Driving SGX’s rapid growth in derivatives
As the only internationally accessible futures on China A-shares market, participation in the SGX China A50 futures is well spread out across banks, hedge funds, pension funds, proprietary trading firms, asset management firms and individual investors. As offshore interest in the China A-share market picks up, the hedging needs of institutional investors and asset managers have risen and are increasingly more sophisticated. The SGX China A50 futures acts as a hedging tool for product issuers, an investment tool for investors who lack onshore access or as an arbitrage tool for traders between related products and onshore equities.
SGX continues to be the leading offshore exchange for Japanese derivatives, being the first to introduce Nikkei 225 Index Futures contract in 1986. Today, SGX Japanese derivatives are widely used by global fund managers, banks, proprietary trading firms for continuous price discovery and risk management. Swings in the Japanese market in 2013 spurred an increase in demand for SGX Nikkei Options which set a volume record of 121,973 contracts on 4 October 2013 and open interest record of 2,852,290 contracts on 12 December 2013. To meet growing demand for longer-dated risk management tools, SGX has also listed futures and options up to five years. Clients can benefit from greater capital efficiencies and reduce counterparty risk by clearing both short and long dated positions in a single portfolio.
The growth of open interest on SGX is a testament of investor’s confidence in SGX Derivatives Clearing. Operating in AAA-rated Singapore, SGX-DC’s clearing and settlement infrastructure have also been independently assessed under the International Monetary Fund's Financial Sector Assessment Programme (FSAP) as sound and efficient with an effective risk management framework. SGX Derivatives Clearing has high levels of compliance with the Principles for Financial Market Infrastructures (PFMI), which are the latest international standards for payment, clearing and settlement developed by the Committee on Payment and Settlement Systems (CPSS) and Technical Committee of the International Organisation of Securities Commissions (IOSCO).