Caught between East and West, Singapore’s inexplicable economic miracle is often fodder for the Western media. From the lens of Bloomberg to the New York Times, it is often hard to reconcile that a pragmatic rational city state which neither exhibits the unbridled capitalism of the Wild West, nor certainly its politics and value systems, can be a model of middle-ground success.

This includes the contrast in navigating the pandemic, a steady balanced middle ground — hereto open for business, emerging safe and strong after two years without the unfortunate contrast seen recently of a health system overwhelmed, where in Hong Kong, some of the elderly with no beds wait in tents.

No, this is not somewhere in the Third World, but sadly a reflection of lack of contingency planning of “what if”, when zero-Covid is penetrated.

On the local capital market or bourse, there is one aspect that both the international and local media (which often re-publishes without analysis) agree on — the perennial lamentations of their state.

Labels such as “zombie exchange” and “graveyard” were slapped on Singapore Exchange (SGX) in commentaries by South China Morning Post on Oct 20 2021 and Bloomberg on Feb 21, respectively. However, since March 2020, the start of the pandemic, the Straits Times Index has outperformed the Hang Seng Index by a whopping 37%.

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Occasionally, commentators and experts, and increasingly more sell-side analysts, recognise the SGX group is a much more significant player in the global financial ecosystem.

It is clearly more than just equities trading, with its dominance in products as diverse as iron ore derivatives, RMB (renminbi) futures to its ownership of the Baltic Exchange — and ipso facto rights to the Baltic Dry Index and freight derivatives suite. Or its fast-growing foreign exchange suite that includes exchange traded futures, the BidFX and the MaxxTrader platforms, which together help risk-manage more than US$65 billion ($87.4 billion) daily. And even The Straits Times on Feb 17 had a commentary, “Derivatives will remain driver of growth for SGX”.

Later in the same day, Financial Times (FT) published something on SGX but with a more sensational headline, “Hong Kong breaks Singapore’s grip on China stock futures”.

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For the uninitiated, they might see this as a backhanded compliment, especially if one actually reads the article. Wait, Singapore has a grip on China stock futures? Indeed, it is a surprise to many that the way to risk-manage exposure to A-shares in China has been Singapore’s US$13 billion open interest, on the FTSE A50 futures contract.

To back up the sensationalist headline, the lead paragraph of the article reads, “Hong Kong has seized market share from its Singapore rival in China stock futures, opening up a winner-takes-all battle for control of how global investors hedge Chinese equities.”

Further down the same article, the Britons, hardly passing up a chance to evoke the two world wars, go on to recall financial markets’ famous “Battle for the Bund”. That was back in the 1990s, when electronic trading in Frankfurt eventually sapped trading of German government bonds (aka Bundesanleihe) from the London International Financial Futures and Options Exchange. A similar fate is portended for Singapore.

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Never the Twain, or on the Mark?

So the quote goes, “rumours of my demise” make good sales of newspapers, but are “greatly exaggerated”. Let me lay out why.

There is no question that Hong Kong Exchange and Clearing’s (HKEX) US$70.5 billion ($94.8 billion) market cap dwarfs SGX’s US$7.7 billion, and has vast resources to continue to offer free trading for MSCI A-shares futures for another six months, as flagged in the FT article.

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In fact, as a Chinese exchange — albeit “offshore” — one could argue that Hong Kong should enjoy a 100% market share as its birth right.

Free trading is neither sustainable, nor a guaranteed way to win business. The world’s largest exchange, CME Group, whose resources are reflected by its US$85 billion market capitalisation, offers free trading from time to time on iron ore derivatives. So did HKEX when it launched a similar product a few years ago. Yet, such attempts to compete left nary a dent on the SGX marketplace, which maintains a global market share of more than 95% while earnings fees from providing a good service.

Likewise, even though RMB futures were first established in Hong Kong, and SGX came a year later, it has won over a market share of more than 85% — and ironically, as a fully offshore market for a Chinese foreign exchange product. This in spite of HKEX hiring (at huge step-ups) SGX’s then-head of China sales, a strategy they have not left behind.

Besides poaching people, HKEX poached products too. In May 2020, it paid MSCI, the index provider, to shift its 27-year relationship with SGX over, bringing along a suite of products including, notably, the pioneering TiMSCI (Taiwan offshore futures) launched in the 1990s.

Yet, HKEX failed to establish a significant toehold in the offshore Taiwan equity futures market. SGX, in an unprecedented industry first, worked with FTSE, another key index provider, to establish an alternative product in two months, and within half a year, migrated more than $6 billion of open interest over from TiMSCI and retained its dominant position, including getting its new product approved even for onshore Taiwanese investors to participate in first.

Such a feat is more remarkable given how an estimated 80% of equity investors use MSCI equity benchmarks, which means it is much easier to use an MSCI product for hedging. In a bid to grow the volume fast, so as to justify the multiples on premium paid to MSCI, Hong Kong offered freebies. In contrast, SGX did not go down that slippery slope and maintained its fees. Singapore’s staunch defence of the trading liquidity is now legendary in the futures and options and exchanges community.

In the “Battle of the Bund” more than two decades ago, investors ditched the traditional open outcry and clubby banks and brokers of London, in favour of Eurex’s efficiency, even though those were the early days of electronification.

Within the multi-asset clearing house of Singapore, equity, commodity and foreign exchange derivatives trades thrived with technological superiority. Singapore held its ground by creating an ecosystem which benefits from capital efficiency from margin offsets, better market structure and rules for intermediaries and end users, as well as superior liquidity pools. Such traits, especially taken as a whole, are not easy to replicate.

Imperfect substitutes can be complements

According to data from Refinitiv, which was cited in the FT article, open interest on the SGX-FTSE China A50 futures contracts stands at about US$13 billion, and that liquidity has not dropped nor diminished since Hong Kong’s launch last September. In contrast, the competing HKEX MSCI China 50 Connect has generated a corresponding volume of around US$2 billion. As such, Hong Kong has “shrunk SGX’s market share” only by growing the pie. Technically, that’s correct, but so what if it does?

Practically speaking, if the pie (including China onshore futures markets for the CSI 300, CSI 500 and SSE 50) grows with future opening up of the onshore market, it could be net beneficial to SGX’s A50 product as arbitrage liquidity, with the similar but not the same MSCI A-share product, can be the win-win fuel that lifts the A50 volumes over time for SGX.

China, with a market size already hitting US$14 trillion — and growing — can surely have multiple benchmarks. A broad index representing the whole marketplace may not be the most “tradable” for the street. Look at the Nikkei 225 futures volumes versus Topix. Likewise in large markets, multiple benchmarks coexist, enabling greater liquidity including for S&P500, Nasdaq 100, Dow 30 and Russell 5000.

With the Chinese (both onshore and offshore) derivatives market still at its infancy and continuing to open up, if SGX’s market share drops from 100% to 50% or even 20%, while the market size multiplies by 10 or even 100 times, it is still an incredibly attractive proposition.

Evidence of this was seen in the spectacular onshore launch of CSI futures in 2012 before the domestic clampdown in 2015 from excessive speculation. Its market share (including onshore) dropped to single digits, but the overall business multiplied. Similarly, Nikkei 225 started trading on SGX and CME in the mid-1980s. As Osaka caught up in efficiency and the domestic market grew, the market share for SGX (which is still larger than CME) fell, but the absolute size of the business multiplied.

Given some positive feedback (from oldies my age) about the 1980s music reference to “Come on Eileen” in this previous column, let me throw in Lenny Kravitz this week — this battle of the exchanges will go on, and it ain’t over till it’s over.

We have seen reports of global banks (most recently Citi) moving senior equities staff out of Hong Kong to Singapore. It is a concern for trading and business continuity, and not merely the social cost on employees and families of a pretty tough Covid regime expats in Hong Kong have to put up with.

Hopefully, as the pandemic eventually lifts, life for my many friends in our North Asian “twin financial centre” will normalise. Whilst the buzz of nightlife in Lan Kwai Fong might come back, some trends may be harder to reverse. Historically (hence the role of London as a financial centre), there have been a host of reasons for onshore and offshore centres to co-exist. This includes, on the positive side, access to alternative international capital pools for the home country.

However, there are global investors and market participants who will choose to stay fully offshore. They will provide capital and liquidity to the A-share market. But will they want all their data, investing, hedging and trading algorithms to also completely follow suit? Or will they prefer international trading rules and market regulation? This constructive tension has had precedents since the dawn of financial markets, and it’s not going away anytime soon.

Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award in 2021.

It ain't over till it's over

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