And as businesses seek to reduce the risk of wild price swings in currencies or commodities, for example, the Singapore Exchange (SGX) said that is likely to further drive demand for hedging or derivative instruments this year.
A derivative is a contract between two or more parties made on an underlying financial asset like iron ore.
The contract reduces the risk of price fluctuations, as market players can trade the floating or spot price on the agreed commodity for a fixed price.
With higher volatility expected following the withdrawal of US stimulus starting this year, there could be increasing demand for derivative products.
Michael Syn, head of derivatives at the Singapore Exchange, said: “We have come close to the end of a long period of quantitative easing, and to the extent that the marketplace fears the extraction of some of this liquidity, I think volatility will come back to the marketplace.
“And the need therefore to hedge in more than one direction, and to clear in more than one direction – that becomes increasingly important. So we foresee that for the products that we offer, which are hedges for underlying Asian risk, that need will continue to increase.”
SGX has leaned more heavily into the derivatives market for growth in recent years.
The strategy follows a spate of accounting scandals among Singapore-listed Chinese firms between 2008 and 2010, and a failed bid to merge with the Australian Securities Exchange in 2011.
And the derivatives bet appears to be paying off. For example, since it started clearing iron ore swaps in 2009, SGX currently clears about 90 per cent of the world’s iron ore swaps.
Efforts by SGX to introduce new products have benefited clearing members like Phillip Futures.
Teyu Che Chern, CEO of Phillip Futures, said: “We have witnessed them launching several new contracts this year, and we are the seeing the volumes on the Nikkei, China A50 do well. And this year, they have added Thailand and they have launched several currency futures.
“So it will take time for the volume to grow further, and meanwhile, (with) the latest CFTC (Commodity Futures Trading Commission) regulation, I think it further cements their aspirations to become a gateway for Asia.”
He added: “Over the last three to four years, we are witnessing a growth of around 10 to 15 per cent in terms of volume per annum. I think there is more education being done for the investing public, there are more exchanges that are launching more futures products… we expect the volume growth to continue.”
Phillip Futures said financial institutions and proprietary traders make up 80 per cent of its customer revenue base. Retail clients make up 15 per cent, while corporate hedgers make up the remaining 5 per cent.
On Monday, SGX became the first Asian clearing house authorised as a Derivatives Clearing Organization by the US derivatives regulator, the Commodity Futures Trading Commission.
This means SGX will be able clear over-the-counter derivatives for US customers in the Asian timezone.
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