SHANGHAI
PROFIT&LOSS
NOVEMBER 16, 2017
Contents: SGX - Sustaining the momentum.........................................................6 China’s Growth Outlook: Finding Stability in an Uncertain World......10 Will the Global March of RMB Continue? ..........................................12 Will FinTech Change the Face of Chinas Capital Markets? ...............16 China’s Late Mover Advantage ..........................................................18
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Chairman’s Introduction David Clark, Chairman, WMBA
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China’s Growth Outlook: Finding Stability in an Uncertain World Wei Li, Senior Economist, China Global Research, Financial Markets,, Standard Chartered Bank China (Ltd)
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since launching its initial suite of fX products four years ago, sGX has reported consistent growth in this business segment. But can the exchange sustain the momentum going forward? reporting from Asia, Galen stops takes a look.
sustaining the Momentum Back in November 2013, Singapore Exchange (SGX) went live with trading for six deliverable and non-deliverable currency pairs: AUD/USD, AUD/JPY, USD/SGD, INR/USD, KRW/USD and KRW/JPY. As Profit & Loss noted at the time, the aim was clearly to establish SGX as the major hub for Asian currency futures trading. Fast forward four years and it appears that the exchange is well on its way to achieving this ambition, with the star performers in its FX suite being the INR/USD and USD/CNH contracts, the latter of which was launched in 2014. Last month the total volume of FX futures traded on SGX was 1.2 million, up 15% from October and up 72% compared to November 2016. The month-end open interest for all FX futures contracts hit a new high of 72,693 contracts, up 23% m-o-m and nearly 60% y-o-y. Trading in INR/USD represented 967,836 of this total volume and trading in USD/CNH represented 227,352. With one month of the year still to go, the total trading volumes for these contracts is already 6
KC Lam, Head of FX & Rates, SGX
up compared to 2016 by 28% and 229%, respectively. “I think that the biggest news regarding CNH is that we now account for 75% of the listed market and that we’re averaging over one billion in notional per day,” KC Lam, head of FX and rates at SGX, tells Profit & Loss. Indeed, November represented the third consecutive month that the notional average daily volume (ADV) of the USD/CNH contract has been over $1 billion. “Now that we’ve grown the volume to this size, more firms are beginning to take notice of the product. For example, now we have more banks approaching us www.profit-loss.com
that want to make markets or to take liquidity in this product,” says Lam. Similarly, with the INR/USD contract, the big story for SGX has been the extent to which its market share and the notional value of trading on this product have grown. Although the Dubai Gold and Commodity Exchange (DGCX) has traditionally been the incumbent platform for INR futures trading, in three short years SGX has managed to grow its market share to match DGCX. Explaining how SGX was able to increase its market share so quickly, Lam says: “I think it’s because we
Profit & Loss sHANGHAi • 2017 took a different approach. We started out by adhering to the highest regulatory standards where trading, clearing and compliance are concerned. For example, to allow global names to transact on our platforms, we are registered as a derivatives clearing organisation and foreign board of trade with the US CFTC and also recognised as a third country central counterparty with ESMA. We also keenly observe industry standards, such as the CPMI-IOSCO Principles for Financial Market Infrastructures. These are the kind or regulatory standards that we’re pushing for and consistently maintain.” He adds: “By contrast, when big firms want to trade on other exchanges that don’t have this regulatory recognition, they might incur higher and more punitive capital costs because those venues are deemed to be more risky.” The aggregate SGX INR/USD futures volume for No-
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Source: SGX
Source: SGX www.profit-loss.com
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vember was up 18% m-o-m, and 63% y-o-y, with 967,836 contracts traded. This translates to $29.8 billion in notional value, making November the second best month on record since the contract was launched. Trading in SGX INR/USD futures has continued to grow and remains above a high threshold of $1 billion per day. The average daily volume (ADV) over the last three months rose to nearly US$1.4 billion at the end of November. Data from SGX makes the upward trajectory of trading in this product very apparent. In 2015, notional trading in the INR/USD contract hit $1 billion during 16 days of the whole the year and in 2016 it hit this figure 29 times. By contrast, in just the past two months the notional value on this contract has passed the $1 billion mark 37 times, and has done so 93 times during the course of the whole year. Despite this rapid growth, Lam insists that there is further room to continue building volumes on SGX’s INR and CNH contracts. “We think that we can continue growing them, and one reason for this is the regulatory reforms that are happening. For example, reducing the cost of trading is a big driver for firms right now, so many of them are looking at whether trading on exchange will be more cost effective for them under the Basel III and Mifid II regulatory regimes,” he says. Although Mifid II is a European piece of regulation, Asian banks that operate globally are likely to feel its impact, warns Lam. “One misconception amongst a lot of Asia banks is that any regulatory rollouts in other regions, such as the US or Europe, don’t affect them. This is a fallacy, these are global products and so – one way or another – the regulations impact this market.” Giving an example of this claim in action, Lam points 8
out that ahead of the 2016 September 1 deadline for uncleared margin rules in the US, some firms in Asia expected the CFTC to issue a no-action letter to delay the implementation date of the rules. But the no-action letter never came and, because of the time difference, September 1 arrived in Asia first and some firms were suddenly reluctant to trade with US names for fear of not being compliant with the rules. As a result, says Lam, liquidity noticeably froze up. Interestingly, Lam also points to Brexit as a potential future driver of trading in Singapore. “I think that Brexit will encourage more trades to be booked out of Asia, and I think that Singapore and Hong Kong in particular will be the beneficiaries of this,” he says. The next step for SGX in terms of growing liquidity on these contracts is to expand trading into different time zones and geographies, which is why the exchange group announced in October that it had launched a US presence in Chicago. Lam claims that trading in the night sessions on SGX’s FX contracts has already been growing, indicating that these products are becoming more global in nature, and predicts that in 2018 a lot of the growth in these products will come from Europe and the US. SGX’s FX strategy does not rely solely on continuing to build liquidity on its existing contracts, however. The exchange is also looking at the possibility of "futurised” NDFs to try and bridge the gap between OTC and listed FX markets. This is actually part of a much broader trend that is occurring globally of listed exchange groups trying to grab a piece of the action on the OTC side of the market. CBOE acquired Hotspot, NYSE Euronext acquired FastMatch, Deutsche Boerse bought 360T and is now looking to launch rolling futures contracts www.profit-loss.com
via Eurex, and CME has announced its plans to launch CME Link, an OTC spot/futures central limit order book. “We’re taking a slightly different approach,” insists Lam. “We don’t believe in taking OTC products and trying to move them onto an exchange. What we want to do is allow an OTC product to trade the way that it does today in order to give market participants the ease of trading, but then we want to on top of that offer the surety of having a CCP behind that trade.” This new product would essentially allow OTC market participants to continue trading FX bilaterally in order to maintain flexibility but then, because the trade would be a futurised version of an NDF, the clearing can be guaranteed with SGX operating as the CCP. Not only will this product provide surety of clearing, but Lam says that it could also offer capital efficiencies for firms trading it. “NDFs are traditionally more expensive to trade because there are prime brokerage costs from the banks and most of the platforms also charge brokerage fees. One advantage that our solution will have is that our OTC and futurised NDFs are both cash settled and therefore we can net some of these trades down, whereas in the OTC market they would have to gross settle,” he says. Although it will be challenging for SGX to maintain the level of growth that it has experienced in its FX products in 2017, there appear to be very few headwinds to prevent the exchange from further building out the liquidity in these contracts. Given that offering improved capital efficiencies appears to be an important part of SGX’s broader strategy, it’s important to remember that the FX products that it currently offers do not exist in a vacuum.
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Navigating the New World Order for FX
David Clark, Chairman, WMBA KC Lam, Head of FX & Rates, SGX
For example, the exchange’s CNH futures contract exists as part of a broader China suite of products that includes the biggest equity derivatives index for China that exists outside of China and derivatives on commodities products like iron ore and rubber. This has helped SGX build and develop a trading ecosystem on its FX products because they have firms that
naturally need to hedge trading there, in addition to firms looking to express views about whether CNH is going to appreciate or depreciate. It also offers an opportunity for these capital efficiencies alluded to before. “We believe in building a portfolio of solutions rather than coming out with a singular FX product. By doing www.profit-loss.com
this, we add value to the way that we position the product and we’re able to offer margin offsets to market participants that enhances their use of capital. I would say that the trading environment today is more capital intensive than ever before, and we’ve realised this is a major pain point and so we’re trying to reduce that pain,” says Lam. 9
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China’s Growth Outlook: Finding Stability in an Uncertain World
David Clark, Chairman, WMBA Feng Guo, PH.d, Global Partner & Chief Economist, Heaven Sent Capital Management Group 10
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Will the Global March of RMB Continue?
Moderator: David Clark, Chairman, WMBA James Harte, Project Manager, KPMG Global Strategy Group Chris Chen, Representative, PNC Bank Beng Hong Lee, MD, Executive Vice President & Head of Markets, Deutsche Bank 12
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Coffee Break, Exhibition Hall
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Will FinTech Change the Face of China’s Capital Markets?
Moderator: Galen Stops, Editor, Profit & Loss Jason Fang, Managing Partner, Sora Ventures John Patrick Mullin, Senior Buy-Side Research Analyst, Guotai Securities Co, Ltd. Lucio Biase, CEO & Founder, LMRKTS 16
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speakers at Profit & Loss’ shanghai conference said that China might well enjoy a significant last mover advantage as it develops its fX markets.
China’s Late Mover Advantage Speakers at Profit & Loss’ Shanghai conference said that China might well enjoy a significant last mover advantage as it develops its FX markets. “There’s always a first mover advantage, and we’ve seen that with platforms like EBS and Reuters which became leading platforms and have in fact managed to maintain that lead. But I think that China actually has the potential to enjoy a huge last mover advantage, because they can actually learn from the mistakes of the past,” said one speaker on a panel discussing the next stages in the evolution of the FX market. They continued: “The global FX market has gone through a huge transition process in the past twenty years and Chinese firms can look at what has been successful during this time in other markets. For example, we see platforms with randomisers, more intelligent execution tools, more access to liquidity for end clients, these are the types of things that firms should be focused on bringing into China, but in small incremental steps so that everyone is comfortable with the process.” Another speaker argued that now is, in many ways, a “perfect” time for China to start opening up its FX markets, because new initiatives like the Global Code of Conduct are improving market practices, while a renewed focus on best execution is providing more transparency for clients about how their FX orders are being filled. 18
Unsurprisingly, the impact of electronification in the FX market was discussed at length on the panel. For starters, it was pointed out that as more of the global FX industry trades electronically that client demands around the technology have shifted. “The screens that firms trade FX on now don’t look much different to the ones they used ten years ago, but the way that people interact with information systems has completely changed. People are demanding ease of access, they want to be able to onboard without long processes and lots of big documents to sign,” said one speaker. They added that one of the advantages of electronifcation is that is it helps bring new participants into the FX market, broadening the liquidity ecosystem that exists. How to regulate electronic markets is an important consideration, but the panellists all argued that it’s actually easier for national authorities to implement surveillance and control measures once a market switches to trading electronically. “You need to have oversight and surveillance of markets to provide a certain level of comfort about the behaviour of market participants, and that’s easier when markets are electronified. For example, if you’re trading on a screen then surveillance can be automated, you can have a rulebook that can very easily be enforced, you can have throttling on an API, you can have hold timers on trades, it’s actually very www.profit-loss.com
easy to standardize the behaviour of market participants if they’re trading electronically,” they said. Despite recognising the potential for China to emulate the successful implementation of technology from other markets, the panellists also noted that the evolution of FX trading in the country remains significantly behind the more developed markets in the US and Europe. One speaker pointed out that some of the Chinese exchanges publish market data twice per second, which is roughly where the FX market was in these more developed markets in the early 2000s, noting that “there’s still a lot of incremental steps that need to be taken here”. They did note, however, that Chinese firms are waking up to the importance and value of data for their business operations. “In a world where data is king from a trading perspective, I think that banks in China are now starting to look at building algo trading capabilities and building a more quantitative approach to how they make markets to their clients. In that world data becomes incredibly powerful,” they said. The speaker concluded: “With the right comfort level and the right monitoring, as data is slowly made more available both onshore and offshore it will let this market gradually establish itself in the international scene and help diversify the participants within it.”
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What is the Next Step in the Evolution of FX Trading?
Moderator: David Clark, Chairman, WMBA Marc Bruce, Head of FICC, Jump Trading Laurence Timmons, Head of Sales, Asia Pacific, NEX Markets, EBS Brokertec Patrick Myles, Managing Director, Caplin Systems Raj Sitlani, Co-Founder and Managing Partner, IS Prime www.profit-loss.com
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David Clark, Chairman, WMBA Marc Bruce, Head of FICC, Jump Trading Laurence Timmons, Head of Sales, Asia Pacific, NEX Markets, EBS Brokertec Patrick Myles, Managing Director, Caplin Systems Raj Sitlani, Co-Founder and Managing Partner, IS Prime www.profit-loss.com
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