In the space of a few weeks, Loh Boon Chye, chief executive of the Singapore Exchange, has seen dramatic evidence of the fierce competition between Asia’s stock exchanges — but also signs that his strategy to address those rivalries and build a broader business is paying off.
In May, SGX shares suffered their worst one-day fall in 10 years when its agreement with index publisher MSCI to provide a variety of derivatives and options products was not renewed.
Instead, MSCI shifted the business to Hong Kong’s HKEX Group — exposing a gap in Singapore’s financial markets and potentially hitting SGX ‘s annual profits next year by 10% to 15%.
But SGX’s latest earnings news has been better, with a 21% rise in annual profits, on revenues up 16%. To the satisfaction of SGX, all its business units — including the data, connectivity and indexes, as well as the equities segments — reported double digit growth.
Equities, the business of trading shares in companies listed on the exchange, remains the core of most exchange businesses. But SGX’s Loh wants to dispel the idea that company listings should be the measure of a bourse.
“Global investors today expect much more of an exchange than just a listings platform,” the CEO told Nikkei Asian Review in an interview. Loh is leading a strategy to boost his bourse’s profile as a multi-asset exchange, by focusing on growing business segments outside of initial public offerings.
Financial markets across Asia are fighting hard for business.
HKEX has a guiding vision through 2021 to position itself as a “one-stop shop” for China and Asian exposures — with its MSCI deal forming a big piece of the puzzle. The Shanghai Stock Exchange aims to satisfy regional interest in tech stocks with its year-old STAR Market, which was created to offer China’s rising tech firms an alternative to the U.S. Nasdaq market.
Even SGX’s immediate neighbor, Bursa Malaysia, has seen interest heat up. Rubber glove maker Top Glove’s stock price more than doubled from May to August as the coronavirus pandemic spurred demand for its products.
While acknowledging that competition among Asia’s exchanges is heating up, Loh said his company has focused on improving the scope of its products and services — not on what rivals are up to.
“We never build any businesses or platform based on not [expecting] competition. More important is what kind of service offerings we do,” he said. “Robustness and reliability in working with [our] partners is important.”
Loh late last year spoke about a five-year plan to double the share of SGX’s revenue that comes from business segments like fixed income, currencies and commodities, along with market data, index calculation and connectivity services. These currently account for about a quarter of revenues.
“We will further strengthen our leading position in equities, FX and commodities. We continue to build deep, quality, round-the-clock liquidity and focus on developing solutions for customers across asset classes,” Loh said.
Still, there is no doubt that the split with MSCI — which will take effect in February — was a setback. SGX’s stock price, which plunged 12% in the wake of the development in late May, has not fully recovered.
Since then SGX has announced a flurry of deals to signal an intent to refresh its product line-up.
One is the $128 million deal to fully acquire foreign exchange derivatives marketplace BidFX, which allows the bourse to sink its teeth into the global FX over-the-counter market, where $6.6 trillion was traded daily last year.
According to a survey in 2019 by the Bank of International Settlements, Singapore held 7.6% of global FX OTC turnover, with the U.K. firmly commanding the lion’s share with 43.1%.
Jefferies analyst Krishna Guha told Nikkei that SGX’s BidFX acquisition should allow it to generate an estimated 35 million Singapore dollars ($25.5 million) in additional annual revenue from commissions, assuming things go well.
“That factor will depend on … overall trade growth, overall investment costs, investments in financial instruments, and volatility of the market,” he said.
HKEX is also preparing to muscle in on another part of the Singapore bourse’s turf: trading in futures of China-listed stocks — so-called A-shares. Singapore is the only overseas exchange where A-share futures are traded, but HKEX is awaiting regulatory approval to launch its own products.
In response, SGX has moved to expand its own futures offerings. In July, it introduced a futures contract on the FTSE Taiwan RIC Capped Index, adding to a pool that includes contracts on the FTSE China A50, Japan’s Nikkei 225 and India’s Nifty 50 Index.
Named the SGX FTSE Taiwan Index Futures, the latest addition gives investors exposure to large and mid-capitalization Taiwanese stocks and goes head-to-head with the HKEX MSCI Taiwan Index Futures. SCX said total turnover topped $1.5 billion in the first week.
Jefferies’ Guha rated the index’s introduction a positive for SGX, noting that it covered nearly 80% of Taiwan’s listed market capitalization, helping to fill the gap in Singapore with MSCI’s offerings migrating to Hong Kong.
“There is growing concern about how SGX will be able to substitute the loss of revenue from a reduced license arrangement with MSCI. This development should help to substitute the MSCI TW futures,” he said in a report.
Beyond the futures business SGX has also teamed up with Nasdaq, announcing a pact in July to streamline the procedures for U.S. listed companies to make secondary listings in Singapore. It potentially opens a route for more technology companies to raise funds in Singapore.
“We are clearly expanding in many different areas,” SGX’s Loh told Nikkei. “You have seen how we expanded overseas, working with more partners, and that’s just how we feel that we are very international.”
Despite the attempts to diversify its income streams, many observers still watch the crop of new listings on SGX as a bellwether for the bourse’s attractiveness in Asia. Currently, about 40% of listed companies and over 80% of listed bonds originate from outside Singapore.
The bourse’s last IPO, on its secondary Catalist board, was of local healthcare player Singapore Paincare Holdings in late July. The company’s market capitalization after listing was around S$36 million.
SGX has struggled in attracting listings over the years. From 2009 to 2019, 279 companies listed on the bourse, 60% of them local. There were 302 delistings of both Singapore and foreign companies over the same period. According to Deloitte, IPOs in Singapore have raised S$11.5 billion since the start of 2016.
“So far this year, there has been 15 de-listings and seven IPOs, so the trend of de-listings exceeding listings has continued,” Mak Yuen Teen, associate professor of accounting at the National University of Singapore Business School, told Nikkei.
SGX is failing to attract quality companies with robust corporate governance standards, according to Mak, who believes poor corporate governance at public companies in Singapore has led to the erosion of investor confidence in the quality of listed firms.
He said that has made it difficult for the Singapore bourse to position itself an exchange of choice in Asia.
“We (the Singapore markets) were always too concerned about rules being too tough, scaring away companies — well, we have scared away investors and we are not attracting good companies,” Mak said. “I talk to regional fund managers. They tell me there are not many investible companies here. Retail investors … have lost confidence after one too many scandals with no ability to seek redress and lack of regulatory enforcement.”
SGX has acknowledged the issue. This month its regulatory arm, SGX RegCo, proposed a new enforcement framework to beef up accountability, and is seeking feedback on it from stakeholders.
The framework seeks additional powers for RegCo, requiring an issuer under investigation to seek approval before directors can be appointed or re-appointed to its board.
Directors under investigation would similarly be subject to SGX RegCo’s approval prior to their appointment or re-appointment to the board of an issuer. Tan Boon Gin, SGX RegCo’s head, said the framework will enhance market clarity and confidence in the long run.
“SGX RegCo is acutely aware of the perception that few public enforcement actions have taken place in recent years. We are proposing to widen the scope of direct disciplinary actions available to us so as to speed up the disciplinary process,” Tan said in a statement.
Additional reporting by Narayanan Somasundaram in Hong Kong
This article was first published on Nikkei Asian Review.