Asian stock and derivatives exchanges sense growing competition from electronic trading and internet-based networks that might supersede them. Their response has been to demutualize, decide to run themselves as commercial businesses rather than private clubs, list publicly, merge, embrace new technology, and allow traders remote-access.
In Singapore, the stock exchange is bracing itself for the effects on its member broking firms of deregulation of commissions, and futures exchange Simex, according to its president, Ang Swee Tian, is increasingly mindful of competition from non-exchanges. The two are merging. Ang says he is particularly impressed with the stock exchange's IT teams, which he hopes may work with Simex members on improving settlement and back-office procedures.
Ultimately, Ang expects: "The integration of cash and futures will reduce the cost of capital required in using these markets." He adds: "We hope that with stock exchange futures contracts, users can post shares they've purchased in the cash market as collateral against futures positions."
Remote access is another issue. Already 80% of Simex end customers are outside Singapore and though market-makers are needed to provide liquidity, Ang reckons there should be no problem with trading from Hong Kong, Tokyo or London. There are already links with the Chicago Mercantile Exchange and the Paris Bourse.
Looking further ahead, the prospect is for greater regional cooperation between exchanges. "All of us would like to trade regional stock exchange futures," says Ang. "Perhaps we could somehow combine electronically our liquidity pools and then allow the customer to decide where to clear."
In Hong Kong a merger is also under way between the stock exchange and the futures exchange. It should be completed next month. "Today, if I am a stock exchange member and also have a seat on the futures exchange, I face two margin requirements," says Lawrence Fok Kwong Man, senior executive director in the regulatory affairs group of the Stock Exchange of Hong Kong. "After the merger, firms can have much better inter-market risk management and more prudential management of their finances." Later a clearing house for the combined exchange should permit shorter settlement cycles.
The Stock Exchange of Hong Kong will itself be listed, probably next year, and be owned by outside shareholders not a few member firms. As a listed company it won't be able to regulate itself. The Securities & Futures Commission will do this. The exchange will continue market surveillance and overseeing listing standards, but will no longer regulate member trading firms. The FSA will regulate all securities dealers, a task it now shares with the stock exchange, which regulates member firms.
As a commercial organization, the Hong Kong exchange will now be hungry for more business, including more listings. It has already set up a smaller-company section and is keen to promote itself as the centre for mainland Chinese companies to list and raise capital. But some dealers wonder whether, in its eagerness, it might turn a blind eye to shortcomings among smaller companies or mainland companies. Former state-owned enterprises have run into trouble with international creditors over the past two years.
Fok insists that the exchange will not go down market. "We feel that high regulatory standards are one of our biggest assets. If we give way on that to win business, we will lose out because quality companies won't want to list and investors may not want to invest."
Some huge Chinese initial public offerings are scheduled, notably for oil companies SinoChem and CNPC. Fok says: "We all know full well that if mainland China wants to continue attracting international capital, they must run their businesses on the operations side and the financial disclosure side up to international standards."
Hong Kong should also benefit from Taiwanese owners of plants in mainland China coming to raise money. It remains politically difficult for them to fund in Taiwan and invest into China.