SGX axes gold futures contract as trading grinds to a halt

Singapore

THE Singapore Exchange (SGX) has quietly pulled its gold futures contract, citing low trading interest, even as physical gold trading activity in the country rose in recent years.

The contract's large size was more suited for large players like banks, which have largely exited the sector as their balance sheets come under scrutiny, said industry players.

In a circular on Monday seen by The Business Times, the SGX said it would suspend trading in the gold contract with immediate effect due to the absence of trading interest, and that the contract would be made dormant on Mar 19.

An SGX spokesperson confirmed the move. "This suspension is part of our ongoing review of our contracts, as we align our resources and engagement efforts with market demand and client needs," she said.

The exchange's gold contract was launched in Oct 2014 to much fanfare, as Singapore moved to develop itself as a gold trading hub following a removal of the goods and services tax (GST) on precious metals in Oct 2012.

The 25-kilobar gold contract - the result of collaboration between the exchange, International Enterprise (IE) Singapore, Singapore Bullion Market Association (SBMA) and the World Gold Council - was aimed at the wholesale market, with the hope that banks, private banks and jewellery makers would eventually use it.

Some 150 lots were traded in each of 2014 and 2015, albeit with low open interest, which is the number of daily outstanding contracts. Trading volume dwindled to seven lots in 2016 and zero last year.

Market players, some of whom did not know about the development until contacted by BT, say the cessation of the contract will not have any impact on the market since there was no one trading it. The way the contract was designed did not suit market needs, partly because expected changes in the gold market had not taken place, they add.

For one thing, the 25-kilogramme size was too large. "There are very few people who deal in that size on a continuous basis outside of the refineries and their direct clients," said Thomas McMahon, CEO of wholesale gold dealer Dillon Gage Asia.

At current gold prices, each contract would cost about S$1.4 million. "That makes it very expensive. Whereas if you look at the one-kilo contract (on other exchanges), it's much more scalable, it's more bite-sized," he added. "And that's where liquidity pools have a tendency to congregate."

The contract's settlement and delivery cycle of two days (T+2) was also too long, according to Brian Lan, managing director at gold dealer GoldSilver Central.

The physical gold trade in Southeast Asia is a "cash and carry" business, he said. "If people want to buy kilobars, they expect to make payment and receive the goods immediately. That is how competitive the trade is."

Furthermore, the contract was introduced at a time when global banks, forced by more stringent regulations around their balance sheets, exited the commodities sector including gold.

"As a result, they pulled out of the market at the same time that SGX was trying to build a contract that was very commercial and bank-facing - sort of a catch-22 (situation)," said Mr McMahon.

SGX had faced a tough fight in the race to become the pricing benchmark for kilobars - the more prevalent form of bullion in Asia compared to the 400-ounce bars in London. Others such as Shanghai Gold Exchange, CME Group, Intercontinental Exchange (ICE) and more recently Hong Kong Exchange have also launched kilobar contracts with mixed success.

SBMA chief executive Albert Cheng, who was involved in the creation of the contract, told BT that the contract was created to ride on an expected push by regulators for over-the-counter (OTC) gold trading into the exchange-traded market for greater transparency.

This occurred against the backdrop of benchmark manipulation scandals in the interest rate and foreign exchange markets.

"But over the years, two things had not happened," he said. Firstly, the regulators did not push the OTC market onto exchanges as expected.

Secondly, the OTC market was more efficient than the exchange-traded one, including having transactions settled more quickly and costing less, and therefore served the hedging needs of market participants well.

"But we hope that if the market situation changes again, and if there's enough traction, we can always revive it," he said. "Since we've designed the structure and the system, to revive it is not an issue."

SGX said any potential re-launch would be contingent on market demand and client needs.

IE Singapore trade promotion group director Amreeta Eng said establishing a liquid exchange-traded contract "is a long-term process and requires several factors to be in place".

"The efforts by SGX and industry for the gold contract are commendable and we need such industry-led initiatives as we further build Singapore as a global trading hub."

The sector has nevertheless seen progress, she said, pointing to the 55.6 per cent increase in total imports and exports of gold from Singapore from 474 tonnes in 2012 to 738 tonnes in 2017.

Concurring, GoldSilver's Mr Lan said the Singapore gold market has become more active since GST on precious metals was lifted, though activity has shifted from financial institutions to consumers and businesses.

"There's still a market need for gold especially in Southeast Asia, so it's a good opportunity for businesses like us to be able to fill this void," he said.