Singapore is swiftest in race to trade futures
By Samuel Shen and Zhang Shidong Bloomberg News
Published: September 5, 2006
SHANGHAI The Singapore Exchange on Tuesday began trading the world's first index futures based on stocks listed in mainland China, before the planned introduction of such derivatives in Shanghai.
Futures contracts for Sept. 28 settlement opened at 5,128 points in Singapore, compared with the spot price of 5,135.44 for the underlying FTSE Xinhua China A50 index, which tracks the A shares of the 50 biggest mainland-listed companies. The 50 firms had a total capitalization of 158.6 billion yuan, or $20 billion, as of June 30.
The Singapore Exchange is trying to become the center of futures and derivative trading in Asia. Asian bourses have resisted, however, with the Shanghai Stock Exchange suing to prevent its data being used for the Singapore futures contract.
The Singapore Exchange preceded Japan in trading index futures based on the Nikkei 225 stock average in 1986.
"Our ability to produce this index futures was never in doubt," Thomas Tey, senior vice president of the Singapore Exchange, said Tuesday. "We're extremely bullish and we expect to have a very good growth rate."
FTSE Group, owned by Pearson and the London Stock Exchange Group, said Monday that its venture, FTSE/Xinhua index, has the right to issue licenses for derivatives on its indexes and that there was "no basis" to sue.
The SGX FTSE Xinhua China A50 Index Futures will allow "any investor to participate in China's growth story," the Singapore Exchange said.
Economic growth in China accelerated to a decade-high 11.3 percent in the second quarter, more than triple the pace of expansion in the United States.
China has so far given only 45 qualified foreign institutional investors access to local shares and bonds, with a combined quota of $7.5 billion, or 1.6 percent of the nation's total market capitalization.
"Foreign investors will be the main participants in Singapore's index futures market, as domestic investors cannot easily invest overseas," said Liu Chunyan, head of derivatives research at Tongji University in Shanghai. "China may lose some of its power to price its own assets to foreigners."
China's tight control on capital inflows and its lack of risk-hedging tools for investors have prompted the development of derivative products elsewhere to mirror Chinese markets and attract foreigners eager to share growth of the world's fastest-growing major economy.
Stock exchanges also woo investors with these products for higher trading income.
The Chicago Mercantile Exchange, the biggest U.S. futures market, on Aug. 27 began trading futures and options on the yuan, to help investors ward off risks as China moves to a more flexible currency system.
Investors can also bet on yuan movement through nondeliverable forward contracts in Hong Kong and Singapore.
Singapore is betting that a growing investor base in the region, including hedge funds, will help Asia's second- biggest derivative market get a bigger share of the global market for credit derivatives, which increased 39 percent to $17.3 trillion in the second half of 2005, according to research provided by ISDAT.
There are 100 hedge funds in Singapore, managing about $6 billion in total assets, Teo Swee Lian, deputy managing director of the Monetary Authority of Singapore, said in March.
The volume of Nikkei 225 futures contracts traded almost doubled to 16.9 million contracts in the 12 months ended June 30, accounting for nearly half of total futures trading volume, according to the exchange.
The British lender Barings Bank was bankrupted in 1995 after one of its traders, Nick Leeson, made $1.4 billion in unauthorized derivatives trades at the Singapore Exchange.
Shanghai will probably start the trade in stock index futures in January after winning central government permission to set up a derivatives exchange in the city, Fang Xinghai, deputy director of the city government's financial services office, said in an interview in May.
The China Financial Futures Exchange will open in Shanghai next Wednesday, and its first product will be index futures based on Shanghai Shenzhen 300 Index, according to a report published Tuesday in the Oriental Morning Post.
China has in the past two years allowed trading of warrants, currency swaps and interest-rate swaps to help investors hedge risks as prices of stocks, bonds and currency are increasingly subject to market forces.
"At the start, Singapore's index futures will have a limited impact on the domestic market," said Yuan Xiaoli, an analyst at China Securities Research in Beijing. "However, as China deregulates its capital markets, there will be more direct competition."
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