Acquiring full control of BidFX will enable SGX to unlock vast potential of FX OTC market

ABOUT seven years ago, the Singapore Exchange (SGX) was not in the foreign exchange (FX) futures space.

In fact, when it decided to launch its Indian Rupee futures in November 2013, it was late to the game - six years behind the incumbent Dubai Gold and Commodity Exchange (DGCX) where monthly volumes hovered around US$30 billion. Fast forward to present day, SGX has more than 60 per cent market share of the Indian Rupee offshore futures contract - a tool which offshore investors can use to manage currency risks associated with their exposure to the Indian market.

Similarly, when it launched its offshore Chinese Renminbi futures (CNH) a year after the Indian Rupee contract, SGX was two years behind the Hong Kong Exchanges and Clearing Market (HKEx) and the Chicago Mercantile Exchange (CME). Today, SGX has a dominant 80-plus per cent share of the listed futures market for CNH.

Being late has never held back SGX. In June, its total volume for FX futures stood at 2.19 million contracts, with a notional value of US$120 billion. Year-to-date, trading volume for SGX USD/CNH futures has exceeded US$531 billion.

In a short span of time, the new kid on the block has vaulted over its rivals to become Asia's largest FX exchange. But there is no resting on its laurels and SGX has continued to innovate and expand its portfolio of products to meet clients' demand for risk management tools.

Led by chief executive officer Loh Boon Chye, SGX has been busy diversifying the past years in a bid to be a multi-asset exchange, offering FX, commodities and fixed-income as well. FX is soon expected to be "as meaningful as equity-index derivatives", Mr Loh has said.

The recent US$128 million acquisition of the remaining 80 per cent stake in BidFX - a trading venue used by hedge funds and banks - may be small in the mergers and acquistion world of stock exchanges, but is nonetheless a significant move in SGX's game plan to offer global investors a transparent, margin-efficient and well-regulated marketplace to manage seamlessly their Asian currency risks.

The acquisition may herald the start of an overhaul that should reduce the group's reliance on domestic stocks and futures that track blue-chip equities in Japan, China, India and Taiwan.

The potential is huge. According to BIS Triennial Central Bank Survey 2019, the FX market is the largest financial market in the world, with average daily turnover in the over-the-counter (OTC) market amounting to US$6.6 trillion by traded volume. In comparison, the size of the exchange-traded FX derivatives market is only about 2 per cent of the OTC market. Here lies the opportunity for SGX to expand into the much larger global OTC market.

BidFX is strong in the OTC space. Its clients include asset managers, hedge funds and banks that trade bilaterally on the OTC market.

Cutting edge technology

Come September 2021, when tougher rules surrounding off-exchange derivatives kick in under the uncleared margin rule as part of Basel 3 reforms, bilateral OTC trades for big hedge funds and banks are going to be very costly. The new rules are expected to encourage them to switch to cheaper alternatives such as cleared futures. The magnitude of savings can be huge if one looks at the potential risks involved in OTC trading.

With its cutting edge technology - which includes pre-trade predictive models, in-trade benchmarking and post-trade synopses - BidFX will be the platform that propels SGX's reach beyond FX futures into the global FX OTC market, where the bulk of the transactions take place.

BidFX also provides SGX the trading platform for its various product suite, including SGX FlexC futures - an innovative product that mimics bilateral trading in the OTC market, but offers a more effective way of mitigating counterparty credit risk within a regulated environment.

The possibilities are opening up now for SGX leveraging its BidFX investment. It can be the bridge between the formal exchange and that of the more popularly used OTC market, offering the best of both - flexibility of OTC market and transparency of a formal exchange.

SGX will be able to execute plans to develop more innovative products and hybrid ones that combine the OTC and the futures markets.

While many of its partnerships and acquisitions may not seem to have immediate impact on SGX, its "bolt-on" acquisitions as Citi calls them - such as BidFX and a 93 per cent stake in Scientific Beta for 186 million euros - are additive to and can enhance SGX's core business as well as drive its strategic priorities which is to be one of multi-asset, multi-purpose and borderless.