Financial Technologies, an Indian company specialising in the establishment and operation of exchanges, has announced plans to set up a new commodities derivatives exchange in Singapore that will complement the over-the-counter trading of commodities that is already taking place in the city state.
The announcement comes only two weeks after a group of private individuals said that they will be setting up a commodities exchange in Hong Kong in the first quarter of 2009. In the words of the private group, the Hong Kong exchange will fill a gap that exists in that there are no commodities futures contracts available in the Asian time zone that meet the hedging needs both of the Chinese end-users of commodities and the global trading community.
With the announcement of a similar exchange in Singapore, however, it seems investors could well be spoilt for choice. Hong Kong and Singapore have been competing to become the preferred financial centre in this part of Asia for years and the fact that both hubs are now turning their attention to exchange-traded commodities contracts highlights how important commodities are for the growth of the region.
Financial Technologies’ CEO Jignesh Shah stresses that the primary functions of the new Singapore exchange will be price discovery and price risk management. However, aside from industry players using the futures and options contracts primarily as a hedging tool, the new exchange is also expected to attract financial investors who wish to trade the volatility in commodity prices, he told FinanceAsia in a telephone interview.
The plan is to offer trading in a wide range of commodities from day one. While the specific contracts have yet to be decided and will depend on feedback from the market between now and the launch, they will fall into five categories – basic metals, precious metals, energy, agriculture and exotics (which include things like freight rates and carbon credits) – with each category having at least one contract at launch, according to Shah. The exchange, called the Singapore Mercantile Exchange (SMX), will also offer trading in commodity indices and currency pairs.
This is a different approach than that taken by the Hong Kong Mercantile Exchange, which will start off with just one futures contract focusing on fuel oil and gradually expand its product offering from there. This approach makes sense when considering that the HKMEx is backed by oil trading company Titan Petrochemicals and that the main initiative for the exchange comes from Titan’s former deputy chairman, albeit with the support of several international investment banks, large Chinese enterprises and the Hong Kong government.
Financial Technologies comes at this from a different angle. The India-listed company has already set up seven exchanges in India and the Middle East – including its flagship Multi Commodity Exchange of India (MCX), which began trading in 2003, and the Dubai Gold & Commodities Exchange (DCG), which is the first commodity and currency derivatives bourse in the Middle East – and has a scalable electronic trading technology that can be applied quickly to a new market.
“Our earlier track record between announcement and going live is nine months, and we have achieved this not just once, but twice,” says Shah, who will assume the role of vice chairman for the new exchange. The plan is to have the SMX up and running in the first half of 2009, he adds.
Shah, who is known as an innovator of modern financial exchanges, says the timing is right for a commodities exchange because of the strong growth that is happening all over Asia. And Singapore has all the necessary ingredients that Financial Technologies look for when setting up a new exchange, including a legal framework, a regulatory framework and a banking framework and that are all “world class”.
“Singapore ranks among the top three international financial centres in the world today along with New York and London with an established trading and commodity hub, open economy, robust regulatory framework, a thriving port, business friendly environment and its geographical location – making it an ideal destination to host an international commodity derivatives exchange like SMX,” he says.
Financial Technologies will make a first phase investment of about S$50 million ($37 million) into the new exchange and at this stage it has no other partners. However, it does typically invite strategic partners “when the time is right”. The current shareholders of MCX, for example, include several Indian public and private sector banks as well as Fidelity, Citi, Merrill Lynch and NYSE-Euronext. The Indian exchange has also been considering a potential public listing.
But while the new exchange doesn’t have any financial backing at this stage, it does have the support of several high profile individuals, including Ang Swee Tian, a former president of the Singapore Stock Exchange who will become chairman of SMX. It has also set up an advisory board enlisting the services of prominent names like: Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange; and Myron Scholes, a Noble Memorial Prize Winner for the Black-Scholes options pricing model.
In a written comment, Melamed said he expects Asia to lead the growth in the commodities markets in the next few years. “Market participants around the world will benefit from price discovery of these commodities in Asia (and) the SMX will be a barometer for the dynamic demand-supply fundamentals in this region,” he said.
And just like the people behind the HKMEx did when they announced the launch of the new trading platform in Hong Kong, several of the parties involved with the SMX also stressed the importance of the new exchange for the local market as a trading hub.
In the words of Ang Swee Tian: “Financial markets and commodity markets are very tightly coupled. The new exchange will add to the stature of Singapore as a global financial centre and more investments will flow into Singapore as it becomes a one stop financial and trading hub.”
The establishment of SMX is subject to regulatory approvals from the Monetary Authority of Singapore, which the involved parties expect will be in place quite soon.
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