Derivatives exchange of the year: SGX

In July 2020, when US index provider MSCI decided to ratchet up the licence fee it was offering SGX – by as much as 20% for some contracts, if market rumours are to be believed – the Singaporean exchange was faced with a choice: it could either pass on this fee increase to its clients, or it could work out a way of reinventing itself in a post-MSCI world.

SGX chose the latter option – a clear reminder that the kind of innovation that has served the exchange so well in the past is very much alive and kicking. The exchange latched on to the FTSE series of indexes and began shifting contracts.

“When we called our customers about the MSCI-to-FTSE switch, the first thing we did was apologise and say, ’we’re very sorry that we’re going to have to do this. And, moreover, you’re not necessarily going to be any better off: this is just a thing that we have to do, to get you from A to B’. And I think we succeeded by working together,” says Michael Syn, head of equities at SGX.

SGX didn’t ditch MSCI for all its markets, though. Singapore, where SGX also runs the stock market, was considered too important for SGX to turn away from MSCI altogether, and the exchange simply had to weather the higher fees.

For those other markets where clients could successfully be moved away from MSCI contracts with minimal market disruption, SGX used what Syn refers to as a “liquidity switch”. This was an innovative way to migrate open interest and trading activity from the old suite of MSCI products to the new FTSE Russell products that SGX wanted to introduce to its clients.

“No exchange has done this before,” says Syn. “It’s one thing to try and shift clearing positions from one exchange to another, but quite another to migrate a living and breathing order book between two non-fungible products. Everything’s different: the notional, the index history and levels, the tick size. There was a lot of workflow innovation we went through.”

A lot of work also went into securing the correct licences in the markets in which the exchange operates.

“This was where operator experience paid off, because we were able to work with multiple regulators to get the necessary approvals in place very quickly,” says Syn.

And, topping all of this off, SGX had to execute the shift within the space of just three months. MSCI had given the exchange a period of six months to switch the contracts, but Syn says that, with an election looming in the US, they wanted to do this even faster.

“Our assessment was that we had to get everything done and dusted before the US presidential election, because the biggest risk at the time was a lingering uncertainty over the outcome of the election, which could have stretched from November into January or February,” says Syn.

Accordingly, SGX was able to launch 35 products in two or three months, and switch the bulk of the liquidity – 99% of open interest – from MSCI to these new contracts within this timeframe.

One of the most important markets for the switch, according to Syn, was Taiwan, which is a highly liquid global market that trades 24 hours a day. As much of 40% of the market is made up by the shares of the world’s largest chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC), which is hugely important to technology firms around the world.

“Our customers were telling us that Taiwan was a particularly important 24-hour market for them, so we were chuffed that clients appreciated the value of the liquidity-switch service, the clarity of the process and much hand-holding from our client-facing teams,” says Syn.

The Taiwan case was slightly helped by the fact that there wasn’t really a viable alternative for much of the trading. The other obvious exchange that could have picked up the slack – Hong Kong’s HKEX – didn’t have the necessary approvals from US regulators to allow US clients to trade stock that was so heavily concentrated on a single company.

Feedback from clients speaks volumes about the success of the liquidity switch.

“I don’t think we’ll ever get to the bottom of what happened with MSCI, but SGX responded very professionally with how they have managed the migrations this year, especially around the MSCI Taiwan contract. These liquidity switches were communicated well, and very transparent, and I haven’t heard any negative comments about what went on,” says a senior executive at one global bank.

“Listing these products and going through the liquidity switch, with everything else that was going on [in] the markets this year, shows the high levels of resilience and determination that there is at the exchange.”