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Waiting for the big one

Investment banks see Asia as the next big market, so the largest ones have all established derivatives operations in the main centres. That means fierce competition ­ but it's a fight for relatively thin demand. Regulators in some countries restrict use and local exchanges are undeveloped. But growth has come in surrogate markets and such instruments as covered warrants in Hong Kong. Antony Currie reports.

Just off Lan Kwai Fong in the Central district of Hong Kong is a bar called Midnight Express. Its yellow canopy sports the words: "Sponsored by MeesPierson Derivatives Clearing". It's an unusual piece of advertising for an investment bank, and only serves to reinforce the impression that Asia's derivatives business is faced with bottlenecks.

All the main western banks are in town now; some indeed are concerned there are too many for current conditions. Regulations in some countries restrict or prohibit derivative use. And, says a Hong Kong-based banker: "There are only so many companies out there which can benefit from using derivatives. There can't be more than 10 or 20 per country over here, and certainly no more than 200 throughout the region [excluding Japan]. That's not much business for all of us to be chasing."

Asia's popularity with big foreign banks is based on a widely held belief that the region will be the next big market. But some fear that a combination of low interest rates and an oversupply of investment banks in Asia is having a negative effect on the derivatives business. Competition between the foreign investment banks here is seen as being so advanced that it's driving margins down.

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