Singapore raises stakes in exchange battle

In a keynote policy address this week, Singapore's Deputy Prime Minister and Monetary Authority chief Lee Hsien Loong threw down the gauntlet.

The Stock Exchange of Singapore (SES) and Singapore International Monetary Exchange (Simex) will be merged, liberalised, and together mount an accelerated regionalisation drive.

Singapore has fast become one of the world's top currency hubs, behind only London, New York and Tokyo.

Now it wants to do the same on the equities and derivatives front.

Manu Bhaskaran, managing director and group head of research at SG Securities, said: "They do pose a risk. They have shown from past experience that they can be quick to develop a competitive edge."

Hugh Peyman, managing director at Dresdner Kleinwort Benson in Singapore, said: "They are very determined."

The London International Financial Futures and Options Exchange (Liffe) made the mistake of being too slow at taking Deutsche Terminborse's (DTB) modernisation challenge seriously and has regretted it.

The Hong Kong stock and futures exchanges would be wise not to do the same with Singapore's bourses breathing down their necks.

Singapore has long made noises about wanting to challenge Hong Kong and Tokyo to become the pre-eminent equities and derivatives hub in the Asian time zone in the new millennium. But few have really taken the hype seriously before and some key figures in Hong Kong still do not.

Fung Chi-kin, Hong Kong's legislator for the financial services sector, said: "The stock market in Singapore is so small, it would be hard for it to be a threat to the Hong Kong stock market."

Chu Chung-tin, honorary chairman of the Hong Kong Stockbrokers' Association, said: "Hong Kong has a lot of international investors, while Singapore stock and futures markets are mainly traded by investors from Southeast Asia."

Singapore has made no secret of its grand ambitions and spent the past year busily making preparations for a great leap forward through what Mr Lee describes as a series of "thunderclap" finance-sector reforms.

Last week's announcement by Simex of plans to relaunch a Hong Kong equity futures contract jolted the SAR into defensive action.

The Hong Kong Futures Exchange (HKFE) has broken with Hong Kong's traditional laissez-faire approach by threatening to block information vendor Reuters from providing real-time price data to Morgan Stanley Capital International (MSCI), which produces the index on which the Simex product would be based.

The HKFE has also decided to cut the initial margin for its own product based on the Hang Seng Index, as well as to extend its trading hours to combat the threat from Singapore.

Simex's Nikkei-225 futures and options contracts and Japanese government bond futures have seen massive growth over the past year and have begun undermining Japan's own Osaka futures exchange.

Its MSCI Taiwan Stock Index Futures saw a staggering 270 per cent growth in turnover year on year. Simex's eurodollar futures and euroyen options have also recorded strong growth.

A Thai stock index futures contract was launched last week and a host of other regional products are planned, including the Hong Kong futures contract, much to the HKFE's ire.

While Hong Kong can always tap on and service the huge mainland corporate market as an avenue to expand bourses, Singapore has to go poaching abroad because of its local market's limited size.

Singapore's Mr Lee said: "It therefore needs to take bold innovative steps to break through to a higher growth trajectory."

Both the SES and Simex have done well despite the regional crisis.

Trading volume on the SES has held up despite the removal of Malaysian over-the-counter shares from Central Limit Order Book International. SES turnover still badly lags behind Hong Kong, though plans announced this week to liberalise broking commissions and free up membership to all should make it more competitive.

On Simex, volumes on most key contracts have been at record highs.

Mr Lee said: "In a static environment, both would probably hold their own when the economy picks up and the region recovers. But exchanges worldwide are finding themselves in an increasingly globalised and competitive environment."

Leading United States and European equity and derivatives exchanges have been competing furiously to link into international networks, to combine liquidity pools, lower trading costs, and become dominant players.

Almost daily there have been reports of exchanges linking up in London, Frankfurt, Paris, New York and Chicago. Equity and derivatives exchanges are merging to develop complementary products, provide more integrated facilities and share overheads.

Examples include the Deutsche Borse, Paris Bourse, Amsterdam Stock Exchange and Stockholm Stock Exchange. Mostly recently, Nasdaq bought the American and Philadelphia stock exchanges to acquire new capabilities in equity-related derivative products.

Meanwhile, electronic trading systems are rapidly replacing traditional trading floors. The DTB has wrested supremacy in trading German bonds back from Liffe because Liffe was slow to abandon open outcry for electronic trading.

Liffe has responded by announcing a restructuring to reduce operational costs by half and is opening the way for partnerships with other exchanges and financial institutions, following DTB's lead.

Bourses are also facing increasing competition from information providers, like Bloomberg and Reuters which provide trading services on their screens. Longer-term, non-financial companies like Microsoft, with its global distribution Internet network, may enter the fray.

Mr Lee said: "The gap between the exchanges in the premier league and the rest is widening. Those which cannot keep up will be marginalised into servicing their limited national catchments, and risk seeing even their traditionally protected markets being eroded."

These trends have not yet affected Asia in full force.

Mr Lee said: "This gives us a window of opportunity to act swiftly, in order to capture the first-mover advantage, and build ourselves up into the premier exchange in the region."

Access to most Asian equities exchanges is still far from open, Singapore included, and many still have non-negotiable broker commissions.

Consequently, Asia has some of the highest all-in trading costs in the world.

Singapore is guilty itself of having one of the highest stockbroking commissions in the world thanks to its closed-shop policy that has historically served its members well. This will be eased out by January 2002.

The SES and Simex will be demutualised, privatised, merged and publicly listed within the next five years to boost competitiveness. Up to 50-60 per cent of shares in the new joint holding company will be sold to new investors, be they local or foreign.

Mr Lee said: "We need to attract a critical mass of global investors by opening access widely to international brokers and other market participants.

"We also need more competition, to bring trading costs down through greater efficiency and innovation."

THE PLAN

• SES and Simex to be no longer owned by members.
• Both exchanges to be merged into a privately held stock company by late next year.
• Existing SES and Simex members to be given shares in the new entity.
• SES's 33 members will get S$6 million (about HK$28.59 million) worth of shares each in new entity. Simex members will get $115,000 worth of shares for each Simex share owned, and $170,000 for each seat.
• Remaining shares to be sold off.
• Proceeds of sale to go into financial-sector development fund.
• Open access to all brokers, local and foreign, to be phased in by January 2002.
• New entity to be publicly listed in about five years.

INTERIM MEASURES

• SES and Simex to initially stay as separate entities under the combined exchange.
• Trading will continue as normal.
• Exchanges clearing processes to initially remain separate
  
  Published in the South China Morning Post. Nov 6, 1998