Hit by penny stock scandal, SGX tries to diversify into derivatives

Singapore Exchange, set to report its weakest profit in more than a year after a penny stock scandal hammered trading volumes, is placing a big bet on an increasingly crowded derivatives market.

The demise of SGX mini metals contracts, and lower volumes for its iron ore swaps since China launched a competing product, could be a warning sign for its ambitions as major international exchanges muscle into its home turf.

Since taking over as chief executive four years ago, Magnus Bocker has spearheaded the launch of new financial and commodity derivatives to make Singapore a regional gateway in Asia.

To diversify from cash equities, SGX has been putting an increasing focus on contracts that track Asian stock indices including the Nikkei 225 and China’s FTSE A50.

“They have done a decent job. They have focused on an area they have little bit more control over,” said CLSA analyst Marcus Liu, referring to SGX’s introduction of derivatives contracts.

Iron ore accounted for 90 per cent of all commodities derivatives cleared by the exchange last year. The success of the contracts – volumes more than doubled last year – helped propel its total derivatives segment to 28 per cent of the firm’s total revenue in financial year last year, from 21 per cent in 2010.

It also shows the potential of a steel contract SGX plans to launch.