OTC Derivatives and Trading Platforms in Singapore

Hua ZhangOTC Derivatives and Trading Platforms inSingaporeFebruary 2012

Content3 Executive Summary4 Regulatory Dynamics6 OTC Derivatives Market Size7 OTC FX Derivatives7 OTC FX Spot9 OTC FX Forwards9 OTC FX Options and NDF10 OTC FX Swaps12 OTC Participants12 OTC IR Participants12 OTC FX Participants15 Electronic Trading Level and Trading Platform16 IR and FX Trading Platform in Exchange17 E-Bond Platform18 MarkitSERV19 MFX Spot-On20 Conclusions22 Leveraging Celent’s Expertise22 Support for Financial Institutions22 Support for Vendors23 Related Celent Research

Regulation DynamicsThe regulators in Singapore OTC derivatives market are: MonetaryAuthority of Singapore (MAS) and Singapore Government Securities(SGS).SGX plans to become the multi-asset class clearing hub for OTC derivativesin Asia. Major regulation change in the near future will include:• The Singapore Exchange already offers central clearing forOTC commodity derivatives, and, as of November 2010, forinterest rate swaps.• Currently, regulators in major jurisdictions globally are lookingto require certain standardization of OTC settlement,contract terms, market conduct, and transparency. As such,we expect to see regulations being promulgated in the nextthree years on this front.– The operator of the city’s securities market began clearingstandardized interest rate swaps in Singapore dollars sinceearly 2011. It expects to add interest rate swaps in US dollars,British pounds, euros, and yen.• Regulation in Singapore has been instrumental in the growthof high frequency trading. The MAS has relaxed its positiontowards crossing networks, removing restrictions that currentlymean only orders of more than US$118,000 (S$150,000)can be crossed off-exchange, and that all off-exchange tradeshave to be reported back to the Singapore Exchange within10 minutes of execution. This should boost ATS and darkpool trading.The FX market in Singapore is wide open, including regulation and theparticipation of foreign institutions.• MAS has continued to drive the expansion in the FX derivativesmarket through liberalization. For example, in 2002, theMAS revised Notice 757 to allow nonresidents to transactfreely in SGD FX options without filing documentation on thepurpose of each transaction.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 4

• However, a few basic restrictions still apply to protect thecurrency from speculation. For example, banks’ lending tononresident financial institutions cannot exceed SGD 5 million(US$3.9 million) per entity.• Pursuant to the revised SGD policy under the MAS Notice1201, foreign securities dealers in Singapore are now deemedas residents. They will be able to obtain SGD funding tofinance their capital market activities in Singapore. They willalso be able to transact SGD financial derivative productswith other financial institutions in Singapore that are regulatedby MAS Notice 1201 or its equivalent.• To attract greater foreign interest, the MAS began internationalizingthe SGD in 1998, with foreign institutions allowedto issue SGD-denominated bonds. Singapore’s debt markethas grown to become an important source of financing forlocal and foreign corporations, international organizations,and governments.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 5

OTC Derivatives Market SizeSingapore is already a major trading hub, the eighth largest centre forOTC derivatives. The Singapore Monetary Authority has reported to theBank for International Settlements (BIS) that OTC derivatives turnoverin Singapore has fallen slightly in the last three years:• Move to exchange: Celent expects this to decline furtherbecause there will be greater buy side adoption of algorithmictrading and an increase in speeds once SGX Reach comesonline. It will make the market move more trading from OTCto exchanges.• Regulation change: The regulator will work with industry toincrease standardization in those products. According to theG20 agreement, Singapore Exchange will provide clearingservice for many derivatives products, such as NDF.Figure 1: OTC Derivatives Trading ValueOTC Derivatives, Notional ValueMarket Size (US$ tr)1816141210864202005 2006 2007 2008 2009 2010FX Interest Rate Equity Linked Commodities CDS OthersSource: MAS, Celent estimatesCopyright 2012 © Celent, a division of Oliver Wyman, Inc. 6

OTC FX DerivativesSingapore’s foreign exchange market continues to be dominated by FXswaps, followed by spot and outright forwards. The trading value ofOTC FX reached US$290 billion in 2010. FX swaps accounted for 57.3%of average daily turnover; spot and outright forwards accounted for34.3% and 8.4% of average daily turnover respectively.Figure 2: OTC FX Trading ValueOTC FX Trading Value(Total=US$290 billion in 2010)Currency swaps10%Foreignexchangeoptions7%Spot33%Foreignexchange swaps36%Outrightforwards14%Source: MASThe BIS survey results show that Singapore continues to hold its positionas one of the top five global centers for FX trading. The Singaporefinancial sector continues to enjoy good growth, registering a modest12% growth rate on the back of relatively robust Asian economicgrowth, increased fund management, and private banking activities inSingapore.• Regarding Singapore’s FX market, the major currencies dominatea large portion of the transactions. Transactionsinvolving the US dollar against the euro and yen contributedto 25.5% and 24.0% of the total foreign exchange trading volumerespectively.• The development of Singapore RMB market was very quick:Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 7

– The People’s Bank of China will specify one Chinese bankto provide clearing service for Singapore RMB clearing, andit will enable the Singapore banks to participate in the SingaporeRMB market easily.– The RMB deposit of ICBC Singapore branches increasedtenfold last year. Several foreign banks, such as HSBC (Singapore),and Singapore banks started RMB business inSingapore.OTC FX SpotSingapore’s economy is highly dependent on export and import ofgoods, making FX trading an important part of its economic growth.With its foreign exchange trading center ranking fourth in the world,the country’s population of less than 6 million can have the opportunityto engage in trading using the forex Singapore dollar. In a countrylike Singapore, the citizens can also participate in Forex Singaporetrading using the forex Singapore dollar as an investment.The growth rate of spot trading was only 2% during 2007–2010. TheUSD-related spot trading was the major trading, but the proportiondecreased from 79% to 75% in 2010. The proportion of SGD decreasedfrom 2.2% in 2007 to 1.1% in 2010, because other currencies increased.Figure 3: Spot Trading Value by CurrenciesSpot Daily Net Trading Value120100Trading value (US$ bn)8060402002007 2010 2013eSource: SFEMC8 Copyright 2012 © Celent, a division of Oliver Wyman, Inc.

OTC FX ForwardsThe SGD forward market is generally established. SGD runs on anexchange rate policy, so the forward market is reliant on FX movementsand volatility.• The market size has grown over the years as more opportunitieshave arisen from USD/SGD FX trading and interestrates swap hedging.• USD-related forward accounted for 96% of total forward tradingin 2007, and slightly decreased to 95% in 2010.• Institutions outside Singapore accounted for 87% of total FXforward trading in 2011.Figure 4: Outright Forwards Monthly Trading ValueForward Daily Net Trading Value6050Trading value (US$ bn)4030201002007 2010 2013eSource: SFEMCOTC FX Options and NDFSingapore dominates trading in non-Japan Asian NDFs. The INR NDF islargely concentrated in Singapore and Hong Kong, with small volumesbeing traded in the Middle East as well.The Indonesian rupiah NDF had its birth in early 2001. Deliverablerupiah forwards were actively traded offshore, mostly in Singapore,and nonresidents enjoyed easy access to rupiah funding.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 9

Figure 5: FX Options Monthly Trading ValueOption Daily Net Trading Value3530Trading value (US$ bn)25201510502007 2010 2013eSource: SFEMCOTC FX SwapsMAS has liberalized cross currency swaps to facilitate capital marketdevelopment in Singapore. However, the US$3.9 million FX swapsrestriction still applies. Cross-currency swaps should not be used byfinancial institutions in Singapore to circumvent the US$3.9 million FXswaps restriction. The FX swaps between the two overseas branchescannot be netted off.By currency, USD-related trading accounted for 96% in 2007, and 96% in2010, only a slight change. The second currency is EUR, whichaccounted for 1.5% and 0.7% in 2007 and 2010 respectively.10 Copyright 2012 © Celent, a division of Oliver Wyman, Inc.

Figure 6: Swap Monthly Trading ValueSwap Monthly Trading Value2,950Trading value (US$ bn)2,9002,8502,8002,7502,7002,6502,6002,5502,5002008 2011 2013eOthersEURSGDUSDSource: SFEMCCopyright 2012 © Celent, a division of Oliver Wyman, Inc. 11

OTC ParticipantsSingapore OTC market is quite open. In IR market, foreign participantsaccount for about 28% of total trading value; In the FX market, foreignparticipants account for about 84% of total trading value.OTC IR ParticipantsThe proportion of foreign institutions tapping the SGD debt marketremained stable at 28% in 2008, compared to 29% in 2007. Some ofthese issuers include the Export-Import Bank of Korea, Hong KongMortgage Corporation Limited, Malayan Banking Berhad, and StandardChartered Bank. Akin to 2007, European issuers continue to dominate,accounting for 45% of SGD debt issuance by foreign issuers in 2008.Figure 7: Bond Issuers in SingaporeBond Issuers in Singapore(Total=US$13.1 billion in 2010)Outrightforwards, 15%European issuers,13%Domestic issuers,72%Source: MASOTC FX ParticipantsThe major participants are: commercial banks, foreign exchange dealers,MAS, and other customers.• Commercial banks: foreign banks are much larger thandomestic banks by asset size and deposit size, and domesticbanks are always careful of FX trading. The trading value ofdomestic banks is much smaller than foreign banks.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 12

• Dealers: the dealers can only trade for bank customers, andcan not trade with their own capital.• MAS: MAS trade a lot of currencies, such as USD, EUR, JPY,and GBP, to manage the FX market.• Others: nonfinancial corporations and retail companies.• There are 11 FX clearing members: Barclays Bank, Citi Bank,UBS, DBS, DB, HSBC, OCBC, Standard Chartered, RBS, CreditSuisse, and UOB.Transactions among financial institutions accounted for 89.5% of dailyforeign exchange turnover in Singapore. The share of transactionsamong Singapore-based financial institutions was 16.6%.Figure 8: Foreign OTC FX Participants in SingaporeForeign FX Participants in Singapore(Total=US$290 billion in 2010)DomesticFinancialInstitutions, 17%Other, 11%Foreign FinancialInstitutions, 73%Source: MASCopyright 2012 © Celent, a division of Oliver Wyman, Inc. 13

For spot trading, foreign institutions accounted for the major trading,and the proportion reached 93%. For FX swaps, institutions outsideSingapore accounted for 88% of total trading.Figure 9: Inside/Outside FX CounterpartiesInside / Outside FX Counterparties3,000Trading value (US$ bn)2,5002,0001,5001,000500OutsideInside0SpotOutrightForwardsSwapsOptionsSource: SFEMC14 Copyright 2012 © Celent, a division of Oliver Wyman, Inc.

Electronic Trading Levels and TradingPlatformsIn Asia, Australia, Japan, Hong Kong, and Singapore are the mostautomated markets.• For IR derivatives, participation in e-platforms like Markitwireand DTCC for upfront confirmation is still relatively lowfor IRS and equity options, and the proportion of trades confirmvia e-platforms is about 10%.• For FX derivatives, the electronic trading level of SingaporeFX is very high. Participants trade on networks. Most of thetrades are connected by dealers.Figure 10: Electronic Trading Level in SingaporeElectronic Trading Level in Singapore70%60%50%40%30%20%10%0%CDS IR FX2010 2013eSource: Celent EstimatesThere are many trading platforms active in Singapore, such asMarkitSERV and E-Bond. Recently, SGX-ST started OTC trading service.Goldman Sachs, JPMorgan Chase, and Morgan Stanley were alsoexpected to launch their trading platforms in Singapore if regulationsmatch.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 15

Table 1: Trading PlatformsCompetitorSGX-STMarkitSERVCMEE-Bond (Bloomberg andMAS)DescriptionThe Singapore Exchange Securities Trading Ltd (SGX-ST) developedan automatic order matching system for bond trading called theBonds Quotation System.MarkitSERV, 50:50 owned by Markit and The DTCC (Depository Trust& Clearing Corporation), was launched in September 2009 with morethan 300 employees globally.MarkitSERV have an office in Singapore.CME’s Asia OTC clearing platform in Singapore, Clearport, standsready to clear FX contracts regardless of where the trades are executed.CME ClearPort (formerly NYMEX ClearPort) is a set of clearing servicesopen to OTC market participants.Developed for the Singapore Primary Dealer community on behalf ofthe MAS for Singapore Government Securities, Bloomberg E-Bondoffers a unique multidealer request for quote and anonymous quotationbulletin board, along with straight-through processing) featuresand real time market activity displays.Source: CelentIR and FX Exchange PlatformsSGX is Asia’s second largest listed bourse by market capitalisation.The Singapore Exchange Securities Trading Ltd (SGX-ST) developed anautomatic order matching system for bond trading called the BondsQuotation System. However, the trading of government securities andcorporate and statutory bonds in the secondary market is primarilyconducted on an over-the-counter (OTC) basis.• IR swap: SGX launched SGD IR swap clearing service inNovember 2010. During the last half year, the trading valuereached US$80 billion. According to the BIS survey, Singaporeis the second largest IR swap market.• Commodities: The Singapore Exchange already offers centralclearing for OTC commodity derivatives.• FX forward: In September 2011, Singapore Exchange offeredFX Forward clearing service.• NDF: SGX will offer the NDF clearing service for the followingcurrencies: RMB, IDR, INR, KRW, MYR, PHP, and NTD.• Current clearing members: Barclays Bank PLC, Citibank N.A.,Credit Suisse AG, DBS Bank Limited, Deutsche Bank AG,HSBC, Oversea-Chinese Banking Corporation Limited, TheRoyal Bank of Scotland plc, Standard Chartered Bank, andUnited Overseas Bank Limited.16 Copyright 2012 © Celent, a division of Oliver Wyman, Inc.

• Trends: SGX plans to become the multi-asset class clearinghub for OTC derivatives in Asia.– Over the next couple of years SGX will expand this to foreignexchange options, IRS in other currencies, NDS(nondeliverable swaps), CDS (Asian credit default swaps),indices, and Asian single-name CDSs.– SGX will actively explore linkages with other clearinghousesto develop clearing arrangements for the benefit ofour membership. These arrangements would allow membersto trade across geographies and hold collateral at asingle CCP of their choice. This will help avoid margin fragmentationand ensure cost-effective clearing capabilities.Figure 11: SGX Trends for OTC ClearingProduct LineRegional / GlobalMembershipStrategicPartnershipIR: SGD, G3 IRSFX: Asian NDFsCritical mass f rominitial membership:Local and globalbanksSt andalone Platf ormIR: Asian IRS, NDSFX: FX OptionsLi nkages with otherCCPs:To expand products& geographiesCDS: Asian Indices,Single NamesExpandedmembership:Regional / otherglobal banksMutual offsets:To minimize marginfragmentationSource: SGXE-Bond PlatformTo enhance price transparency and improve investor access to tradingactivity in Singapore government bonds and bills, the MonetaryAuthority of Singapore launched the E-Bond platform for SingaporeGovernment Securities (SGS) in July 2005.• Provider: the E-Bond platform, via Bloomberg ProfessionalService, allows global investors easy access to real time tradingvolume and price quotations by SGS primary dealers.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 17

• STP: It is a straight-through-processing electronic tradingplatform for SGS bonds and treasury bills.• Multidealer and anonymous: It offers SGS primary dealers amultidealer requests for quote feature and an anonymoustrading platform.• Trading volume: Celent estimates the trading volume wasmore than 20,000 trades and US$60 billion on Bloomberg E-Bond by the 11 Singapore primary dealer firms in 2010.• Major participants: ABN AMRO, Bank of America, Barclays,Citigroup, Credit Suisse, Deutsche Bank, DBS, HSBC, OCBC,Standard Chartered, and United Overseas Bank.MarkitSERVMarkitSERV, owned equally by Markit and The Depository Trust &Clearing Corporation (DTCC), was launched in September 2009 withmore than 300 employees globally. By integrating electronic allocation,trade confirmation, and portfolio reconciliation, MarkitSERV providesan end-to-end solution for post-trade transaction management ofcredit, interest rate, equity, and commodity derivatives. MarkitSERValso connects dealers and buy side institutions to central clearingcounterparties and trade repositories.• MarkitSERV provides a single gateway for OTC derivativetransaction processing globally. MarkitSERV also connectsdealers and their clients to CCPs, trade repositories, and thirdparty administrators.– With the addition of SGX, MarkitSERV is the only service tooffer direct connectivity to each of the major CCPs currentlyaccepting trades, more than any other platformexecuting or processing OTC derivative transactions.– MarkitSERV has established links to, LCH, Clearnet, CME,SGX, ICE Trust, Eurex, and IDCG for direct submission.• More than 70 dealers, 50 interdealer brokers, and 1,700 buyside institutions are already connected to MarkitSERV, whichhandled in excess of 8 million confirmations in 2010. Typicalcustomers include Development Bank of Singapore Ltd. andUnited Overseas Bank Ltd.18 Copyright 2012 © Celent, a division of Oliver Wyman, Inc.

MFX Spot-OnMFX Spot-On masterfully integrates MF Global’s advanced solutions inclearing and credit support with the cutting-edge electronic technologyof Currenex. This online trading platform effectively addresses theneeds of active professional traders, providing:• Automated System Trading: MFX facilitates algorithmic tradingfor clients by providing an application programminginterface for algorithmic connection functionality. Clientsthat have developed and host their own models can connectto MFX Spot-On using third party systems.Figure 12: Screenshot of MFX Spot-OnSource: MFX SingaporeCopyright 2012 © Celent, a division of Oliver Wyman, Inc. 19

ConclusionSingapore is already an important marketplace as the eighth largestcentre for OTC derivatives. To compare it to other areas:• Singapore has advanced financial infrastructure. At the sametime, Singapore is one of the major USD offshore markets,and very mature. Its financial infrastructure is better thanHong Kong’s. The economy, regulations, and supervision ofSingapore are better they are than Hong Kong.• Singapore has the largest number of headquarters of internationalcompanies. Singapore accounts for 5.6% of totaloverseas RMB settlement, and it is the second largest RMBmarket.• Singapore is the second largest FX market in Asia, behindJapan. The USD, JPY, EUR, and other currencies are veryactive in Singapore.Major trends in OTC derivatives trading in Singapore include thefollowing:• Singapore will develop simple RMB financial products first,and the major target will be helping Singapore corporationsdecrease the RMB foreign exchange cost.– Because the yield rate of offshore bonds is higher thanonshore bonds, the offshore RMB bond is still attractive.For example, the yield rate of offshore RMB bonds is 200bphigher than the onshore RMB bond.– The offshore RMB bond accounts for only 8% of total offshoreRMB deposit, so the offshore RMB bond will continuegrowing.– Hong Kong market is the major offshore RMB market, butthe proportion of Singapore is growing, and the situationmay change.• Celent continues to see a lot of players in the regional IRSmarkets, and Celent believe that the regional IRS markets arelikely to continue to grow in line with the rise of Asia as amajor market in the global economy.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 20

• The SGD forward market here is generally established. SGDruns on an exchange rate policy, so the forward market willbe highly reliant on the FX movements and volatilities. Themarket size has grown over the years as more opportunitieshave arisen from USD/SGD FX trading and interest ratesswap hedging.• The proportion of e-trading will continue increasing. Theelectronic trading rate of CDS, IR, and FX will reach 5%, 15%,and 61% respectively in 2013.• The Singapore regulation is quite open, and removing morebarriers for foreign institutions trading in Singapore market.• The major trading platform providers are: SGX-ST,MarkitSERV, CME, and E-Bond. Goldman Sachs, JPMorganChase, and Morgan Stanley were also expected to launchtheir trading platforms in Singapore if regulations match.• Exchange trends: SGX plans to become the multi-asset classclearing hub for OTC derivatives in Asia.– Over the next couple of years, SGX will expand this toforeign exchange options, IRS in other currencies, nondeliverableSwaps, Asian CDS, indices, and Asian singlenameCDSs.– SGX will explore linkages with other clearinghouses todevelop clearing arrangements for the benefit of the membership.These arrangements will allow members to tradeacross geographies and hold collateral at a single CCP oftheir choice. This will help avoid margin fragmentationand ensure cost-effective clearing capabilitiesCopyright 2012 © Celent, a division of Oliver Wyman, Inc. 21

Leveraging Celent’s ExpertiseIf you found this report valuable, you might consider engaging withCelent for custom analysis and research. Our collective experience andthe knowledge we gained while working on this report can help youstreamline the creation, refinement, or execution of your strategies.Support for Financial InstitutionsTypical projects we support related to banking systems include:Vendor short listing and selection. We perform discovery specific toyou and your business to better understand your unique needs. Wethen create and administer a custom RFI to selected vendors to assistyou in making rapid and accurate vendor choices.Business practice evaluations. We spend time evaluating your businessprocesses. Based on our knowledge of the market, we identifypotential process or technology constraints and provide clear insightsthat will help you implement industry best practices.IT and business strategy creation. We collect perspectives from yourexecutive team, your front line business and IT staff, and your customers.We then analyze your current position, institutional capabilities,and technology against your goals. If necessary, we help you reformulateyour technology and business plans to address short-term andlong-term needs.Support for VendorsWe provide services that help you refine your product and serviceofferings. Examples include:Product and service strategy evaluation. We help you assess your marketposition in terms of functionality, technology, and services. Ourstrategy workshops will help you target the right customers and mapyour offerings to their needs.Market messaging and collateral review. Based on our extensive experiencewith your potential clients, we assess your marketing and salesmaterials—including your website and any collateral.Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 22

Related Celent ResearchEMIR and OTC Derivatives Clearing in EuropeOctober 2011OTC Derivatives Clearing and the Buy Side in the US: Rough Ride AheadOctober 2011Operational Risk Management in OTC Derivatives in AsiaSeptember 2011High Frequency Trading: Looking to Asia for Succor?September 2011Commission Sharing Agreements in Asia: The Right Idea at the Right Time?September 2011Exchanges 2.0: The Evolution of Exchange Technology in Cash MarketsAugust 2010Optimizing the OTC Pricing and Valuation InfrastructureMay 2010OTC Derivatives Collateral Management: A Credit Risk Mitigation Technique RevisitedJune 2009OTC Derivatives and Structured Product Pricing Practices: Trends and TechnologyStrategies for the Coming Market ReformationMarch 2009Copyright 2012 © Celent, a division of Oliver Wyman, Inc. 23

24 Copyright 2012 © Celent, a division of Oliver Wyman, Inc.

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