SGX hit by loss of most MSCI contracts to HKEx

Singapore

SINGAPORE Exchange shares were mauled on Wednesday on news that the Hong Kong bourse has struck a deal for a suite of MSCI equity indexes leading to an initial 37 futures and options contracts similar to those offered on SGX.

In an interview with The Business Times (BT), SGX chief executive officer Loh Boon Chye shared that management has estimated a "conservative impact" of 10-15 per cent on FY21 net profit on a pro forma basis, without adjusting for mitigating actions.

SGX said it would discontinue its MSCI equity index futures and options contracts, save for those under MSCI Singapore, when their licence agreements expire in February next year. This raised questions on whether other suites within SGX's derivatives portfolio are also vulnerable.

MSCI contracts, excluding the Singapore ones, account for about 15 per cent of SGX's equity derivatives daily average volume (DAV) and about 12 per cent of the total derivatives DAV. MSCI Taiwan was the largest contributor at 9 per cent.

The Hong Kong Exchanges and Clearing's (HKEx) deal, seen as a coup by some, throws into sharp focus the ongoing battle to offer global investors hedging tools to manage their risk and exposure to Asia.

HKEx chief executive Charles Li said international and Asia-focused products were a "key missing part of the puzzle" for the exchange.

The new contracts, which are subject to regulatory approval, come slightly over a year after HKEx signed an agreement with the New York-based index publisher to offer futures contracts on the MSCI China A Index, a potential rival to SGX FTSE China A50 Index Futures when they get the regulatory go-ahead.

The shocking end to a 23-year relationship with MSCI sent SGX shares careening down their steepest daily fall in more than 16 years when trading halt was lifted at 12:45pm on Wednesday. SGX opened gap down at S$8.90, before closing at S$8.75, down S$1.15, or 11.62 per cent. HKEx hit an intraday high of HK$277.20, before settling at HK$272.80, up 40 HK cents, or 0.15 per cent.

On SGX management's estimated impact on FY21 earnings, Robert Kong, an analyst with Citi Research, said the 10-15 per cent impact assumes the MSCI suite of contracts is excluded for a full year.

"In reality because SGX's FY21 financial year runs from July 2020 to June 2021 the FY21 financial year will still have 7 months of MSCI contract trading, and the full impact will only be seen in FY2022,'' Mr Kong said.

SGX's Mr Loh said it intends to refresh and grow its suite of pan-Asian access products in a new direction.

"It is the way we see the direction of the operating environment. SGX will have more choices for financial market participants. We are widening our multi asset strategy to different forms of investing, and we will do that in phases,'' he said.

Mr Loh, who has doggedly pitched his vision of a multi-asset, multi-purpose and borderless exchange over the past four years, believes global interest rates will stay low and active investing will continue to play a role as it gets harder to generate returns.

"We can offer extra avenues of investing into Asian markets. Investors will not only turn to SGX's liquid contracts tied to big economies, but will also need passive low cost solutions that take into account thematic and idiosyncratic country risk-returns,'' he said.

Gabriel Sacks, Asian Equities investment director at Aberdeen Standard Investments, said: "This looks to be a blow to SGX's leading position as a one-stop shop for derivatives trading in Asia with a likely 12 per cent impact on earnings on a financial year basis.

"And this comes on top of the potential competition from HKEx on the China A share (A50) futures contracts, which most market participants see as inevitable and represent the biggest portion of its derivatives volumes. That said, there are few details regarding the termination of SGX's agreement with MSCI."

Elizabeth Kwik, Asian Equities investment manager at Aberdeen Standard Investments, believes that HKEx will be able to execute and monetise the new products.

"Once launched, the 37 contracts are likely to boost HKEx's flows and revenues, with the largest contributors coming from the MSCI China and Taiwan related contracts."

Ms Kwik said the potential boost to derivative trading volumes would not only increase HKEx's revenues but would also help it diversify away from its main cash equities business.

"While the exact extent of the lift to revenue and earnings is yet to be determined, anticipation of this potential upside, along with recent news of American Depository Receipts (ADRs) choosing to list in Hong Kong, is likely to be positive for its share price over the short term. It also affirms the view that Hong Kong still holds a unique position relative to mainland exchanges,'' she said.

Mr Kong said investors would question whether other suites within SGX's derivatives portfolio are also vulnerable, as seen in the past with the Nifty suite, which offers India exposure.

Also, the threat from HKEx's plans to launch the MSCI China A Futures continues to loom even though the date has not been set and regulatory pushback seems high. SGX FTSE China A50 contributes around 36 per cent of SGX's total derivative volumes.

Mr Kong said: "SGX historically has been considered a strong cash flow generator and dividend play. With SGX's multi-asset strategy including bolt-on acquisitions and most recently taking on of balance sheet debt for the first time, the SGX dividend policy going forward will be keenly watched."

SGX has said it remains committed to a sustainable and growing dividend.