The Singapore Exchange is committed to becoming a multi-asset exchange. CEO Boon Chye Loh explains to Danielle Myles how that strategy is taking shape.
For many exchange operators, a sluggish global initial public offering (IPO) market and regional slowdown in securities trading could spell serious trouble. For Singapore Exchange (SGX), however, the downturn in public equity markets only serves to validate its mission to become a truly multi-asset exchange within the next five to 10 years.
It is a strategy SGX is pursuing wholeheartedly. Over a period of just 12 months, the south-east Asian bourse has launched the first electronic trading platform for Asian bonds, acquired the world’s oldest freight trading exchange and kick-started the process to allow companies with dual-class share structures to go public.
The push beyond SGX’s bread-and-butter businesses – equities, equity derivatives and commodity derivatives – began under former CEO Magnus Böcker. But it has taken on a new dimension since Boon Chye Loh took the helm in July 2015, after nearly 15 years leading Deutsche Bank’s and then Bank of America Merrill Lynch’s global markets businesses in Asia. Mr Loh’s ability to see things from a user’s perspective, coupled with his experience across many asset classes, plays no small part in the repositioning of the exchange.
“I truly believe in the multi-asset strategy of SGX as I’ve seen capital markets in Asia change from a pure bank lending market two-and-a-half decades ago to today’s securities market across the region, albeit it could do with more depth and liquidity. And I see that evolution continuing,” says Mr Loh.
Baltic acquisition
A pillar of SGX’s diversification is its purchase of the London-based Baltic Exchange, which shipping firms use to trade freight derivatives. Agreed in August 2016 and expected to complete by December, it is a strategic acquisition that makes sense on many levels. Because Singapore is a global shipping hub, the purchase will boost SGX’s share of the freight derivatives clearing market, and it complements SGX’s fast-growing commodities futures and options business.
It also gives SGX control of the Baltic’s huge family of shipping indices at a time when it is trying to enlarge its own relatively small suite of indices. From this perspective, the business case seems strong. Indices are a vital part of Asia’s large bespoke structured notes market as well as its growing exchange-traded funds (ETF) industry. Yet regulators have heavily scrutinised benchmarks since the foreign exchange and Libor rigging scandals, which has placed a premium on independence.
“For the banks producing these products, we want to be able to provide them with a neutral platform on which they can calculate the indices,” says Mr Loh. “As an extension of that, I want to use the capability to help issuers or asset managers launch bespoke ETFs as and when they have demand for their own client base.” This is already bearing fruit: in October SGX’s work with fund manager Phillip Capital Management led to the launch the first ETF-tracking Asia-Pacific real-estate investment trusts (REITs).
Bond e-trading
Regarding fixed income, SGX is in the vanguard of tackling the liquidity shortage in corporate bond markets. In December 2015 it launched Bond Pro, the first over-the-counter trading venue dedicated to Asian bonds. These securities can, of course, be bought and sold on the numerous electronic trading (e-trading) platforms that have sprung up in Europe and the US since the onslaught of reforms that make it increasingly expensive for bank dealers to make markets in credit products. However, regional banks and asset managers were calling for a local solution. SGX responded by working with them to create an e-trading platform that best suits their needs.
The result is a venue that offers multiple trading protocols including the traditional request-for-quote model used in voice trading, and dark pool functionality that allows counterparties to conduct large trades without risking information leakage and the market moving against them. It also offers numerous ways to connect to the platform, which makes it compatible with a relatively large number of users’ existing order management systems.
Initially Bond Pro was restricted to G3 bonds (those denominated in dollars, euros or Japanese yen) but it has since been expanded to include Singapore dollars and Chinese renminbi. While it is still early days, take-up is growing. “There’s been quite a lot of buy-side interest, and also a modest number of regional and global dealers signing up too,” says Mr Loh. “It will take some time, as we’ve seen in Europe, but the direction of travel is encouraging.”
Dual-class debate
SGX made headlines in August when its listing advisory committee voted to allow companies with dual-class ordinary share structures to float on the exchange. This ownership structure, which grants more voting rights to certain share classes, is popular among founders who want to take their business public, but retain control without needing to own a controlling stake. There are many examples in the US (including Facebook, Google and Alibaba), but also many critics who claim that over-riding the traditional one-share one-vote principle impinges on shareholder rights.
Non-conventional share structures have a troubled past in Asia. English football club Manchester United ceased talks with SGX and then listed on the New York Stock Exchange with a dual-class structure in 2012 after it became clear that the arrangement was banned in Singapore. Last year the Hong Kong Stock Exchange’s (HKEx's) plans to allow dual-class structures were rejected by the city-state’s securities regulator.
Mr Loh rejects suggestions that SGX’s move to allow dual-class shares is an attempt to lure listing candidates away from its regional rival HKEx. Instead, he says, it was triggered by a recent amendment to Singapore’s Companies Act which recognises the structure for the first time. Before SGX can allow these companies to list, it must conduct a public consultation, a process it hopes to begin by the end of 2016.
It is an example of Mr Loh’s philosophy that exchanges must embrace the full range of funding options available to businesses. “We believe this is just one of the structures which, in the ever-changing capital markets landscape, companies will require,” he says. “It’s not a means just to try to attract listings. It’s a structure we think some companies need in their overall arsenal for their fundraising needs.”
SGX’s holistic approach is not limited to the public markets. Through its joint venture with local incubator Clearbridge Accelerator and its funding grants to capital-raising platform CapBridge, SGX supports start-ups and small and medium-sized enterprises that are not yet ready for a public listing. SGX’s strategy also recognises that the growing number of companies from elsewhere in the region looking to expand across borders need a variety of tools – from equity raising to hedging – and that SGX is not their only option.
“The hub-and-spoke model remains relevant,” says Mr Loh. “But given the growth in this part of the world – across economies, population, trade and local capital markets – it’s increasingly relevant to be a vibrant node in a regional network for raising capital.”
Meeting challenges
Supporting the region’s development is not the only benefit to flow from becoming a multi-asset exchange. It will also diversify SGX’s revenue base. Its first-quarter 2016-17 earnings, released in October, showed a 16% drop in net profit and a 13% decline in revenue compared with a year earlier. Its securities trading and clearing revenues were down 16%. SGX is trying to boost trading by increasing the profile of its listed companies through research and investor education, and working with issuers on roadshows.
In addition to lacklustre secondary markets, SGX has suffered a number of trading outages over the past few years, most recently in July 2015 when it was forced to close for a full afternoon. Mr Loh confirms that the problem was not related to the quality of the trading engine and that the hardware that caused the failure has been replaced. Since then SGX has launched a working group to improve the exchange’s operational resiliency.
SGX has not escaped the global slowdown in IPOs, but volumes have picked up recently. Between January and October 2016, listings on SGX raised S$2.3bn ($1.66bn), nearly four times more than the S$593m raised throughout the whole of 2015. Mr Loh is doing everything he can to turn this into a long-term trend.
“We recognise we need to have more IPOs, and we’ve decided to build on our strengths,” he says. “We are further strengthening our REITs platform while concurrently focusing on consumer, technology and healthcare as they have withstood the macro environment better than other sectors, and we have a successful listing track record to show.” If Mr Loh’s first 18 months as CEO are any indication, that track record could soon extend far beyond its equities business.
