Free «Singapore Exchange Limited» Essay

Introduction

This report will introduce the Singapore Exchange (SGX) and identify how investment professionals in Ireland may benefit from it. First a brief overview about the creation of SGX will be give. Then, the different divisions of the exchange will be introduced, and their functions will be explained. Next, benefits of the SGX will be stated. Finally a conclusion will be drawn.

Singapore Exchange Overview

Singapore Exchange Limited was the first demutualised, integrated securities and derivatives exchange in Asia Pacific. It was formed in December 1999, from the merger of the Stock Exchange of Singapore (SES) and the Singapore international Monetary Exchange (SIMEX) (Singapore Stock Price, n.d.). More than 40% of companies listed on SGX come outside of Singapore. “SGX is also Asia’s pioneering central clearing house” (SGX, 2011b, n. pag.). “SGX businesses comprise six segments:  Securities; Derivatives; Market Data; Member Services & Connectivity; Depository Services and Issuer Services” (SGX, 2011c, p.4).

Singapore Exchange Divisions

SGX has different divisions, which are responsible for handling specific operations. Singapore Exchange Securities Trading Ltd (SGX-ST) (formerly SES), and Central Depository Pte Ltd (CDP) serve the securities market. Singapore Exchange Derivatives Trading Ltd (SGX-DT) (formerly SIMEX) and Singapore Exchange Derivatives Clearing Ltd (SGX-DC) operate the derivatives market. Singapore Exchange IT Solutions Pte Ltd (SGX-ITS) provides IT Support. Central Depository Pte Ltd (CDP) provides clearing, settlement and depository services (Tan, 2005).

Tan (2005) writes that SGX-DT provides a big range of derivative instruments consisting of options and futures contracts on a number of items: currencies, bonds, rates, stock indices, commodity futures such as Brent crude, and other (see Appendix B). The exchange uses two trading systems, the open outcry and the Electronic Trading System. These systems enable trading in different time zones. SGX-DC runs the Mutual Offset System (MOS) which allows a trade made in one exchange, to be transferred in another exchange. This makes the SGX-DC derivatives more liquid, as they can be sold on other exchanges as well as the SGX. Through SGX-ITS, brokers can provide merging financing, internet IPO and electronic share loan services. In November 2000 SGX-ITS initiated the Vision Broker III-ASP online trading system, which allowed brokers to provide online trading to their clients. According to Pulses, through the SGX-ITS’s e-Services Data Centre interface broker’s clients can access stock price, analyst reports, portfolio management instruments, and place orders all via the Internet (cited in Tan, 2005). In the end of 2001, CGX and Australian Stock Exchange created an electronic link for some of their equities, which enhanced these stocks’ liquidity and enabled cross-border trading. The SGX continues looking into other exchanges to make similar agreements.

Singapore Exchange Performance Highlights in 2011

In 2011 SGX’s major revenue contributors were securities and derivatives, 44% and 21% respectively (see Appendix F). Options and futures contributed to 75% of derivatives traded that year. Same year, SGX’s offshore futures traded amounted to: US$50 billion in China, US$270 billion in India, US$3.4 trillion in Japan and US$900 billion in Taiwan (FGX, 2011a). In 2011 SGX’s securities daily average value (SDAV) traded grew by 6% to 1.6 billion Singapore dollars. In the same year a record volume of 66 million derivative contracts was recorded.

In 2011 SGX group’s revenue was 661million of Singapore dollars, a 3.3% increase compared to 2010, see Appendix E. In 2011 the operating profit fell by 1.32% to 374 million Singapore dollars. The fall was attributed to bad performance in Asian market due to inflationary pressures in major Asian economies and Japan’s earthquake and tsunami tragedies (SGX, 2011c).  Before the “credit crunch” crisis and during the financial market bubble in 2008 the group earned 769 million Singapore dollars in revenue and 528 million of that was operating profit. As the Appendix E shows, SGX had a constant growth of base dividend and share price throughout the 2008-2011 year period.

According to SGX (2011c) the group has a well diversified business portfolio that consists of different asset classes, including a big portion of derivatives. SGX uses a comprehensive Enterprise Risk Management (ERM) framework which helps to manage risk that can be foreseen. Furthermore, SGX plans to adopt a new risk management system, which will enhance risk management competence and sophistication, as well as deliver an integrated assessment of risk. For their market data services SGX has added new features – low latency derivatives data and commodities quote. “Launched the first clearing platform in November 2010, for financial derivatives in interest rate swaps and cleared a total of $110 billion in notional value by 30 June 2011” (SGX, 2011c, p.5). According to Dealogic SGX has gone up to being ranked 6^th internationally in IPO funds in the first half of 2011, from 16^th position in 2010 (cited in SGX, 2011c).

How Investment Professionals May Benefit From SGX

Singapore Exchange allows investors to benefit from Asian markets growth. SGX offers the world’s biggest offshore market for Asian equity futures market, based on three major Asian economies – China, India and Japan (SGX, 2011b). According to Market Watch (2012) China and India are considered to be in the top 10 fastest growing economies in 2012, with GDP growth of 9.52% and 7.82% respectively. SGX provides a wide range of financial products and services (refer to Appendices A-D).  

Besides providing the usual derivatives on market indices, commodities, currencies and interest rates, SGX also provides dividend futures contracts on Nikkei Stock Average Dividend Point Index. This unique instrument allows hedging Nikkei stock’s dividend risk and, due to low correlation with other asset classes, can be applied to create an efficient portfolio. The common derivatives mentioned before allow hedging commodities, currencies, interest rates and certain stock market fluctuations, as well as speculating on those fluctuations. Many businesses hedge oil prices through derivatives, due to high dependency on that commodity. When oil prices go up petrol costs follow, and so do most other costs, as petrol is used in transporting and production of most products.  By including the SGX financial products in the portfolio, investors from non-Asian countries achieve country diversification, thus if the Asian markets perform well and the other – badly, they will be offset, and vice versa.

Conclusion

Investment professionals in Ireland can significantly benefit from the Singapore Exchange. The exchange provides a wide range of financial products, including securities, derivatives and commodities. The investment managers can receive high returns as well as geographically diversify their portfolio by investing in the Asian fast growing economies through the SGX. Variety of derivative instruments (future contracts, options, forward contracts, swaps) provided by SGX enables to create different hedging as well as speculative strategies for the investors. SGT-ITS provides user-friendly trading system, which optimises the investment procedures, which Irish brokers and their clients can take advantage of. The implementation of plans regarding linkages with other Exchanges will increase the liquidity of the securities, derivatives and commodities of the Singapore Exchange. SGX has also shown a constant share and base dividend growth in the 2008-2011 year period. Despite adverse environment in 2011 the SGX group managed to increase their revenue and have a reduction of just 1.32% in operating profit, which shows that the organization is able to face adversity and cope with unexpected events. The Singapore Exchange is constantly growing and improving by setting new records with their financials trade; introducing new products and services; improving their risk management; and going up in global rankings.