"Confluence, Convergence, Connectivity" - Remarks by Mr Bernard Wee, Executive Director, Monetary Authority of Singapore, at the 10th annual Asia Derivatives Conference on 4 December 2014
Walt Lukken, President and CEO, FIA
Bill Herder – President, FIA Asia
Ng Kok Song – distinguished speaker
Ladies and gentlemen
1 It is my pleasure to be here at the 10th annual Asia Derivatives Conference in Singapore.
2 FIA has put together a very rich programme over these three days, covering financial and commodity derivatives, cross-border issues and regulations. It is quite telling, and a sign of the times, that a futures industry association is organising a conference on OTC derivatives. Since this is the 10th anniversary of the conference, I thought it would be useful to try to make sense of how the derivatives market has changed in the last 10 years. And I hope to leave you with three thoughts – Confluence, Convergence, and Connectivity – which I believe will continue to shape the industry for the next 10 years.
3 We are at a confluence of three near/medium-term developments:
4 First, financial and commodity markets are entering a period of heightened volatility, as economic conditions and monetary policy are diverging in major economies. The US and UK are expected to grow more strongly than the Euro area and Japan, so monetary policies are going to be pulling in different directions. How this will affect Asia remains to be seen, but some financial market volatility seems inevitable. We have seen some volatility rising already in commodities markets these two weeks.
5 Second, demand for risk management is rising in Asia. China, India and ASEAN have spurred derivatives trading on international and regional exchanges. We are seeing two things happen as a result. On the one hand, international derivatives exchanges like the Inter Continental Exchange and Eurex are growing their presence in Asia through Singapore. On the other hand, domestic exchanges are also growing. Today, the world’s 2nd, 3rd and 5th largest financial and commodities markets, by the number of contracts traded, are in China – in Dalian, Shanghai and Zhengzhou. China’s own liberalisation has given birth to the Shanghai International Energy Exchange in the FTZ, which targets the international investor base.
6 Third, OTC derivatives market reforms have reached a key juncture in major markets. The FSB reported last month that member jurisdictions’ adoption of legislation is nearing completion. The greatest progress in implementation has been in higher capital requirements for non-centrally cleared derivatives and trade reporting. These are now at least partially effective in more than three-quarters of member jurisdictions. Central clearing is also proceeding well, and encouraging trading on electronic platforms and exchanges will continue to be in members’ workplans.
7 In short, economic realities are driving market demand for more Asia-centric and capital efficient risk management instruments, and the new supply of these new instruments needs to meet new international standards on transparency and safety.
8 Amidst these three near/medium-term developments are three longer-term convergences that we are seeing in derivatives markets.
9 First, there has been convergence between futures and forwards, where “futurisation” is spurring the next wave of product innovation: Exchange of Futures for Physical, Exchange of Futures for Risk, and Exchange of Options for Options. Not only can exchanges offer substantial regulatory relief through cross-product margining, they also offer products that are optimised for new derivatives regulations. In Asia, SGX was amongst the first to launch a comprehensive suite of exchange traded Asian currency futures and the first to list a wholesale 25 kilobar gold contract. Another example can be seen in the development of swap futures in the commodity derivatives market, where derivatives are bilaterally negotiated over the counter but cleared as futures.
10 Second, there has been convergence between exchanges and OTC markets. On the one hand, OTC markets already have well-developed post-trade infrastructure like data provision, margining and collateral management. But Dodd-Frank and MiFid are pushing them towards trading on electronic platforms and exchanges. Exchanges such as ICE, CME and SGX were quick to launch commodities swap futures in response to client demand. And while we’re on exchanges, they are also starting to provide post-trade services like data provision, index construction, clearing and collateral management. For instance, ASX and SGX have launched OTC derivatives clearing houses and partnered with Clearstream on collateral management. The clearing houses are also joining in: LCH.Clearnet began offering block futures for all commodity swaps.
11 Third, there has been a convergence between the financial and commodity derivatives exchanges. Whereas exchanges used to specialise solely in either type of derivative in the past, today we see more comprehensive product suites. For example, the CME Group today is the result of a merger among the Chicago Mercantile Exchange, Chicago Board of Trade (both financial exchanges), the New York Mercantile Exchange and Commodity Exchange (both commodities exchanges). Meanwhile, the Inter Continental Exchange was an energy exchange that expanded to financial derivatives after acquiring NYSE Liffe. Indeed, even traditional cash equities exchanges like SGX and the Japan Exchange Group, a merger of Tokyo Stock Exchange and Osaka Exchange, are building capabilities in derivatives contracts.
12 These three convergences mean that there is a wealth of opportunities out there for both exchanges and OTC players across asset classes yet.
13 If we take these three convergences to their natural conclusion, three questions arise: are derivatives market growing as quickly as exchanges are seizing the opportunities, how can new opportunities be created, and how can scale synergies be reaped?
14 The answer lies in connectivity. The global marketplace is not only growing bigger, it is more connected than ever. Links within Asia are multiplying. In Singapore, SGX has forged ties with Chinese exchanges such as Shanghai Futures Exchange and Dalian Commodity Exchange for product development. In ASEAN, the exchanges are developing further post-trade integration to reduce transaction costs and risks. This would further increase regional trading as the exchanges become more connected. These links serve to broaden each exchange’s exposure within ASEAN and spur volumes in the long run, facilitating investors’ risk management needs. ICE and Eurex’s Asian footprint in Singapore will also connect global members to participate in the region’s growth. The robust growth in Asia’s derivatives market presents strong opportunities for both international and regional players.
15 These are all exciting developments that have been shaping the global landscape, and we are all here to discuss them today. You have the CEOs of exchanges and many subject experts here today, and I wish all of you a lively exchange of ideas and thoughts.
16 Have a great conference