Green light for Singapore's third derivatives exchange

Singapore

AFTER two years of intense preparation, Chinese-backed Asia Pacific Exchange Pte Ltd (Apex) has finally obtained the green light from the Monetary Authority of Singapore (MAS) to operate the city-state's third derivatives exchange and a clearing house after the Singapore Exchange and Intercontinental Exchange (ICE).

The set up of Apex will propel Singapore - already Asia's top commodities trading hub - to play a significant role as Asia's price discovery centre, offering risk management hedging in derivatives and benchmark references for agriculture, energy and metals going forward, Apex's top honchos tell The Business Times.

Currently, while Asia is the world's largest consumer of a range of commodities from iron ore to soybeans, the region remains a price-taker, and does not call the shots in the prices of the raw materials it needs. Prices are fixed in Western markets, like London Metals Exchange (LME) and CME Group.

"We believe that as the economies and population of Asia grow, the centre of gravity for global trading in commodities and financial instruments will shift to the region,'' Apex's founder and chief executive officer, Eugene Zhu Yuchen, said.

Mr Zhu - widely known as one of the pioneering founders of China's futures market and previously helming the Dalian Commodity Exchange and the China Financial Futures Exchange - cited an example in soybeans, a product it may launch at a later date.

"Soybeans are mainly produced in South America, in Brazil and Argentina. China is a big buyer, importing 100 million tonnes a year. Yet, there is no price discovery centre in Brazil and Argentina and China has no benchmark. They are determined in CME," he said.

"Our ambition in Apex is to be an exchange that will be the Asian centre for price benchmarks to be referenced by global market participants."

So confident is Mr Zhu that he relocated with his team from China to Singapore in 2016, with this sole mission in mind. With a headcount of more than 60 people in Singapore, Mr Zhu has roped in Lim Hwee Hua, who was formerly a Singapore Minister in the Prime Minister's Office and the Second Minister for Finance and Transport, to chair Apex's board.

MAS' approval given to Apex on Feb 23, 2018, comes a month after Deutsche Boerse AG, Europe's largest exchange operator, called quits on its ambition for a futures venue in Singapore, citing investors' preference to trade popular instruments like Stoxx futures in its home German market.

Apex aims to launch trading in May, starting with its first contract, a US dollar-denominated physically-delivered palm olein futures. Palm olein is a liquid form of palm oil used in cooking and baking. It intends to offer futures and options contracts covering commodity and financial derivatives products, including agriculture, energy, petrochemical, metal, interest rates and stock indices at a later stage.

Mr Zhu who owns 51 per cent of Apex, said Singapore was a natural location for derivatives trading given its developed OTC market, trading hub, good infrastructure and well-regulated financial sector.

"About 80 per cent of the world's largest commodities houses have presence in Singapore. This makes Singapore very compelling," he said.

Singapore has emerged as the physical beachhead for exchanges looking to launch derivatives products in Asia, partly because of its relatively low tax regime and its English-based legal system as well as extremely low political risk, compared with competing Asian financial centres such as Hong Kong.

"Asia's problem is that while India, China, Japan and South Korea have developed futures, they are all domestic-centric. With its open economy, Singapore is most ideal," Mr Zhu explained.

On concerns that Apex will pose competition to incumbents SGX and ICE, Mrs Lim said roles will be complementary :"The potential market is very huge. We are not launching products that are the exact replicas of SGX and ICE."

Also, experience in most countries showed that whenever competition was introduced, it generated buzz and increased market volumes all round because of arbitrage opportunities. In fact, Apex's palm olein contract, when launched, will complement Bursa Malaysia Derivatives Exchange's crude palm oil futures contract and Dalian Commodity Exchange's RBD palm olein futures contract. It will provide additional avenues for inter-market hedging opportunities for edible oil hedgers and traders. Mr Zhu added that Apex is open to collaborating and linking up with other bourses.

Other major shareholders of Apex include CEFC China Energy (CEFC) and Xinhu Group (Xinhu), both with a 20 per cent stake each. CEFC is one of China's biggest conglomerates with core businesses in energy (oil & gas) and financial services, while Xinhu is a pioneer Futures Commission Merchant in the Chinese futures market and has since expanded to fintech, financial services and real estate development.