Exchange of the year, Asia: SGX

Singapore Exchange saw rapid growth in its core products this year as well as reaping the rewards of some innovative product development and bold strategy.

Volumes rose in its central markets of iron ore, electricity and freight, as well as petrochemicals. In the iron ore market, which is dominated by over the-counter trading, SGX achieved electronic execution of more than 172 million tonnes in the year to June, which represents growth of 16%. This is double the growth rate achieved over the same period last year.

“We believe we have brought iron ore to the stage where funds are starting to take note, where the pace of financialisation is starting to quicken,” says William Chin, SGX’s senior vice-president and head of commodities. From January to June this year, the exchange cleared over 1.4 billion tonnes of iron ore executed on exchange and OTC contracts. This gives it a market share of 98% of the cleared seaborne market.

It also enjoyed growth in its coking coal market where volumes rose 46% during the year to June, to 13.2 million tonnes. By offering iron ore, coking coal and freight contracts on a single platform, SGX can provide extensive risk management coverage to firms exposed to the price of steel raw materials, says Chin.

In October 2018 it announced the launch of a high grade 65% iron ore contract and is also considering the launch of a suite of steel contracts that would create a “virtual steel mill”, he adds.

SGX’s acquisition of the Baltic Exchange in 2016 continued to yield results this year, with volumes of forward freight agreements (FFAs) ballooning. FFA volumes surged 243% to 628,000 lots and its market share jumped from 45% to 60% in the year to June. “Putting together Baltic know-how in freight with SGX know-how in cargo offers strategic insight into the logistics chain,” says Chin. “The synergies have resulted in participants getting a much better sense of the cargo plus freight trade flows.” As a result, market confidence has grown in its FFA contracts, he says.

Additionally, the Baltic Exchange is working on publishing an index for liquefied natural gas (LNG) tankers. It will provide a reference price on the benchmark LNG route of Gladstone, Australia, to Tokyo, Japan. Following the setup of an LNG panelists group in January this year, the Baltic Exchange started a public trial of the index in July. “The numbers will be published once the Baltic Exchange is satisfied with their credibility and robustness. We could see LNG freight derivatives contracts in the second half of 2019,” adds Chin.

SGX is also playing an instrumental role in Singapore’s power market liberalisation with its electricity futures market. Volumes of electricity futures rose 44% to four million megawatt hours in the 12 months to June 2018, representing 8% of the spot market.

It’s highly important that the broker remains central to those workflows. In everything we do, we consider how it builds out brokers’ presence. It is a very, very important part of our strategy

William Chin, SGX

William Prajogo, assistant vice-president and product manager for electricity futures and petrochemicals derivatives, says: “The ability to manage price risk with liquid futures contracts is a key part of supporting liberalisation. We have been working very closely with the authorities and participants to offer electricity futures that provide useful risk management tools for participants to manage electricity price volatility.”

Additionally, in October this year, SGX’s full subsidiary EMC, launched an online auction, PowerSelect, where consumers can gain quotes from retailers. “We see PowerSelect as a means of supporting the liberalisation of the market,” he adds.

Another area of growth in 2018 has been SGX’s suite of petrochemical products, which saw a total volume growth of 72% over the past 12 months, with 3.7 million tonnes cleared up to June. Styrene monomer and monoethylene glycol contracts were added in October 2017 while the flagship paraxylene and benzene products accounted for the majority of volumes. “This is a fantastic area of growth for us,” says Chin. “It’s booming due to a fast-growing consumer sector and tremendous petrochemical demand in China.”

In a somewhat unusual move for an exchange, SGX embraced the broker-led OTC market with the launch of its Titan OTC Pro platform this year. This is a centralised platform enabling digitalisation of broker workflows, enhanced efficiency in OTC trade-matching, and offering unique pre-execution checks for trade certainty.

“It’s highly important that the broker remains central to those workflows,” says Chin. “In everything we do, we consider how it builds out brokers’ presence. It is a very, very important part of our strategy.”

The platform has proved popular with customers, as has SGX’s continual engagement with the market and updating of its products. “SGX constantly innovates and introduces new products and instruments,” says a Singapore-based trader of iron ore derivatives. “It works with vendors and customers to constantly improve existing products [and create platforms such as its] broker aggregator to better serve its customers.”