In June, the Singapore Exchange (SGX) recorded unprecedented levels of forex futures trading, while Investment Trends’ 2017 Singapore contracts for difference (CFD) and FX report refers to a 7% increase in the number of active CFD/FX traders last year compared with 2016.
Jeff Ward, global head of non-deliverable forwards and forwards, and head of FX Asia at NEX Markets, observes that a number of geopolitical and macro-economic events have driven currency volumes on the SGX.
Among them: talk of trade wars between China and the US; plus the recent strength of the US economy and rising US interest rates strengthening the dollar and making yields in emerging markets (EMs) less attractive, further weakening Asian EM pairs.
The weakness in the Turkish lira, fuelled by domestic policies and US sanctions, has added further pressure to EM currencies as investors fret about risk, he adds.
The main SGX contracts are offshore renminbi (CNH) and, to a lesser extent, Indian rupee (INR), notes Richard Leighton, CEO of agency broker DeepWell Liquidity Management. He says SGX appears to have taken some market share from the Hong Kong Stock Exchange in June in CNH futures.
“Given the high volume of Nifty [a National Stock Exchange of India benchmark] contracts traded in Singapore, there is likely to have been an uptick in INR futures to hedge equity FX risk positions,” he says.
R5 CEO Jon Vollemaere suggests that in challenging times for the Chinese currency, FX futures are more appealing than cash for some sectors of the market.
Alina Karpichenko, global marketing manager at connectivity and IT infrastructure provider Avelacom, refers to significant movement of trade flows to the island city-state because it is more tax efficient to trade FX in Singapore than in Tokyo.
According to Matthew Lempriere, head of Asia-Pacific at BSO, the regulatory environment is another factor contributing to market growth. One of the key points of the Monetary Authority of Singapore (MAS) industry transformation map was to create an environment that encouraged FX liquidity providers to physically locate matching engines and pricing engines in Singapore.
“Encouraging new technology adoption across front, middle and back office makes it very attractive for people to build new FX technology, which in turn makes it very attractive for FX players to do more in Singapore,” he says.
This is reflected in a number of recent developments, with DeepWell locating its Asian FX business hub in Singapore, XTX Markets building a new electronic FX pricing and trading engine there, and Spark Systems partnering with IPC to access Equinix’s Singapore data centre.
According to Avelacom’s Karpichenko, requests for deployment of IT infrastructure in Singapore from US and European institutional capital markets firms have increased significantly.
Spark Systems’ COO Jason Wang Kee Huat acknowledges that, without access to volume data from voice brokers, it is difficult to provide hard data on the extent to which local market matching has increased during the past 12 to 18 months as customers in the region transfer risk amongst themselves.
“We have not yet started our client-to-client matching platform, but demand for this type of activity is growing as the buy side sees banks shift their roles from principal to agency,” he says.
Local players are undoubtedly taking advantage of the new liquidity landscape and the MAS is encouraging this trend, according to BSO’s Lempriere.
“This is a good market to be in for local players, for both making money and offsetting risk,” he adds.
|Jason Wang Kee|
Huat, Spark Systems
Wang Kee Huat at Spark Systems also refers to increased communication from non-bank market makers who want to start offering their liquidity to Asia-based clients and connect to the various platforms, adding that this trend is likely to continue as CNH remains heavily traded.
He is confident that Singapore will maintain its status as Asia’s primary FX trading centre, adding: “Trading firms and banks have to make a conscious effort to move their people, support services and infrastructure to Singapore and, once invested here, it wouldn’t be a trivial decision to move somewhere else.
“Singapore is also friendly for many of the global FX players in terms of language and tax.”
Given growth in Asian currency pairs and the favourable policies of the Singapore government towards FX trading, Ward at NEX Markets also expects Singapore not only to maintain its status but to continue to grow over the longer term.
However, R5’s Vollemaere cautions that the country faces notable competition from Shanghai during the next five years as the RMB market continues to open up and draw more FX business into China’s financial hub.
“When we set up R5-SHCH Connect, we saw – and continue to see – at first hand the appetite for western banks to trade with banks in China, as even a regional Chinese bank may have 10 million customers,” he says.
“This demonstrates how attractive Shanghai is as a trading centre, something that will only increase in the future.”