SGX FTSE Taiwan Index Futures start trading on Monday

THE opening bell for the SGX FTSE Taiwan Index Futures (TWN) is set to ring for the first time on Monday morning at 8.45am. The July TWN contracts will trade through until July 30, not before longer term traders roll their long or short positions into the August TWN contract. The TWN contracts provide exposure to the movements of the underlying FTSE Taiwan RIC Capped Index.

Present initial margins require US$2,310 for one Long or Short position in the TWN. Assuming an underlying Index level of say 1,085, one single TWN contract provides equivalent FTSE Taiwan RIC Capped Index exposure of US$43,400. The rub of the risk-to-return of futures means this initial margining provides leveraged exposure to both the beneficial and adverse movements of a much larger position. Hence, futures trading is for sophisticated investors and individual investors who are qualified to trade Specified Investment Products (more information at onlineeducation.sgx.com).

With 95 constituents, the FTSE Taiwan RIC Capped Index is part of the group of FTSE Global RIC Capped Indexes that maintain a quarterly implemented capping methodology.

The quarterly capping reduces the concentration of the index to its largest constituents and aims to adhere to the Regulated Investment Company (RIC) concentration requirements for US registered funds.

At each quarterly rebalance, no more than 20 per cent of the index's weight may be allocated to a single constituent, and the sum of the weights of all constituents representing more than 4.5 per cent of the index should not exceed 48 per cent of the total index weight.

The capping methodology produces a more diversified index, and qualifies the Index for CFTC certification as a non-narrow based index, a prerequisite for broad participation in the TWN contract.

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The quarterly capping also means that as of the end of June, Taiwan Semiconductor Manufacturing Co (TSMC) accounted for 19.5 per cent of the FTSE Taiwan RIC Capped Index, while accounting for 35.8 per cent of the FTSE Taiwan Index. With a market capitalisation of more than S$430 billion, TSMC is among the world's 15 largest stocks by market value. Nevertheless, the daily close prices of the FTSE Taiwan RIC Capped Index and FTSE Taiwan Index were 99.3 per cent correlated over the past five years. Moreover, the daily moves of the FTSE Taiwan RIC Capped Index and the Taiwan Stock Exchange Weighted Index were 99.5 per cent correlated.

Just as TSMC is an index heavyweight, manufacturing of electronic parts, predominately integrated circuits, have been the driver of Taiwan's broader manufacturing output and industrial production over the past six months.

Hon Hai Precision Industry Co is the second largest constituent of the FTSE Taiwan RIC Capped Index with a 6.2 per cent weight at the end of June. All in all, 26 of the 95 constituents with a 38.6 per cent weight represented the technology sector as of the end of June.

While generating a Return-to-Risk Ratio of 0.4, doubling that of the FTSE Asia Pacific Index at 0.2 for the three years ending June 30, the FTSE Taiwan RIC Capped Index saw more volatility than the regional benchmark. From the outset, the SGX FTSE Taiwan Index Futures will assist both hedgers looking to reduce exposure to Taiwan market volatility, and traders looking for equity index derivatives with a past propensity to swing. Traders will also be able pair the TWN futures with other Asia Pacific Equity Index futures, focusing the trade exposure to the potential performance differential between the two indices.

The TWN contract has the support of several market makers and liquidity providers to ensure traders will see adequate liquidity and tight bid and offer spreads.

For more information on the contract, visit sgx.com/derivatives/products