ICE turns up heat on Singapore commodity markets

[SINGAPORE] Singapore's growing status as a commodities trading hub has drawn global heavyweight IntercontinentalExchange Group Inc (ICE), which will fork out US$150 million to acquire commodities market operator Singapore Mercantile Exchange (SMX).

The move could present a new competitive dynamic for Singapore Exchange (SGX) but the commodities futures market has been and remains a challenge for all domestic players, observers said.

US-based ICE has agreed to buy SMX and its unit, SMX Clearing Corp, from Financial Technologies (India) Limited, or FTIL. The deal is expected to close by the end of 2013, subject to regulatory approvals.

The acquisition will give ICE, which also owns NYSE Euronext, a quick boost to its Singapore presence without having to run the full regulatory gauntlet.

"The acquisition of SMX represents an important step in ICE's growth trajectory as we look to expand our customer base and markets in Asia by establishing a local exchange and clearing presence," ICE chief strategy officer David Goone said in a statement. "In recent years, Asia-based trading activity in our benchmark energy and interest rate products has been rising as the region increases in importance in global markets."

SMX offers 17 types of contracts, including black pepper futures and gold futures linked to Indian gold prices.

Since opening trading in August 2010, SMX has seen turnover climb steadily, with US$71 billion of traded contracts in 2012. But both SMX and SMX Clearing have struggled to turn a profit, posting losses in the year ended March 2013, according to FTIL's latest annual report.

SMX is considered a very small player in Singapore, and several analysts told The Business Times that they did not know enough about it to comment.

But the lack of attention paid to SMX suggests that it was not seen as a major competitor for SGX, which posted $30.9 million profit from its derivatives business in the quarter ended September 2013.

Even though ICE's entrance could present a more powerful rival for SGX, the competition for SGX on the derivatives front is already global in nature.

SMX's persistent losses suggest that it is not so easy to create a vibrant and profitable commodities derivatives market in Singapore, CIMB analyst Kenneth Ng said.

Both SMX and SGX "have been trying to grow their commodity business", Mr Ng said.

"By and large, SGX's derivatives business is still largely driven by the index futures," he said. "They've been talking about growing commodity contracts for a while, oil palm, energy and the like, but those things have not really taken off so much."

The challenge is that commodities contracts are traded on a global basis, and incumbents tend to enjoy strong momentum that makes it difficult for newcomers to draw business, Mr Ng said.

Following the acquisition, ICE expects to move SMX and SMX Clearing to ICE's trading and clearing platforms.

With SMX, ICE will also be able to offer regional hedging opportunities to market participants.

ICE said it would continue to base SMX in Singapore with an independent board of directors, but told The Business Times that decisions on management changes have not been made yet.

The SMX acquisition comes as FTIL is facing pressure in India after regulators there shut down its National Spot Exchange on charges of allowing illegal trades. FTIL said it would use the proceeds of the sale to pay down debt.