Reimagining Risk

  • Global investors have to factor in a growing list of uncertainties

  • Innovations such as DLCs can help investors capture short-term market opportunities

  • Choosing a clearing house with high “skin in the game” reduces counterparty risk

Capitalizing on opportunities in a volatile market

Deharmonization and deglobalization are the two biggest risks facing global markets. As a result, institutional investors today have to factor in a growing list of uncertainties, ranging from rising anti-globalization, trade wars, technological disruption and much more.

The big question for investors seeking to manage their risk and returns is: how can they capitalize on opportunities in the midst of a challenging external environment?

As a multi-asset international exchange, innovation is in our DNA, whether it is facilitating our client’s growth or helping them navigate risk by adapting both our products and platforms.

Janice Kan, head of markets, equities at Singapore Exchange (SGX)
Navigating risk with SGX.

In Asia, unmatched single-point access to emerging opportunities is perhaps the most important factor for investors seeking to tap the region’s growth story. Since pioneering the Nikkei 225 Index Futures contract more than 30 years ago, SGX’s offering of equity-index derivatives today cover 99% of Asia by GDP. With Emerging Asia in particular leading world economic growth, the exchange is strengthening its focus on building access to markets such as China, India and Southeast Asia.

Rising investor interest in Chinese equities, alongside a global shift toward passive investing, has spurred demand for SGX’s risk-management tools such as its FTSE China A50 and MSCI Net Total Return (NTR) Index Futures contracts. The MSCI NTR, which provides an exchange-listed solution to over-the-counter equity index swaps in the region, now includes 23 contracts providing pan-Emerging Asia as well as single-country access.

We have seen tremendous growth of both the China Free and EM Asia contracts listed on SGX, with respective open interest of $3.7bn (243% YoY, Q2’19) and $8.3bn (345% YoY, Q2’19).

Laura Hudson, a London-based spokesperson for MSCI

By working with index providers like MSCI, SGX is able to help clients manage risk by identifying gaps in the market. The exchange also worked with FTSE Russell in 2006 to open China’s equity markets to international investors, when it recognized that portfolio managers were keen on increasing exposure to the world’s second-largest economy. In 2015, it launched its own index business, SGX Index Edge, to create customized index solutions for issuers, asset managers and investors in Asia.

SGX equity index futures: notional traded volume in FY2019
FTSE China A50
Nikkei 225
Nifty 50
MSCI Taiwan
MSCI Singapore

Today’s investors also have to take into account market volatility, with wildcards from trade tension to central bank moves, which have resulted in big swings in the equity markets. With the likelihood of three quarter-point reductions by the Federal Reserve before the end of the year, and economists forecasting potential multiple cuts in 2020, investors need innovative strategies to weather the storm.

Daily Leverage Certificates (DLCs)

1st in Asia

Innovations such as daily leverage certificates (DLCs) offer investors the opportunity to hedge their portfolios against short-term market downturns and on this front, SGX teamed up with French bank Societe Generale to develop and list the structured product – a first in Asia.

76 DLCs

Societe Generale launched the first single-stock DLCs in Asia on SGX in 2017 and in the following year, it expanded that product suite which now consists of 76 DLCs.

DLCs are proving to be an increasing investment vehicle of growing popularity for investors looking to capture short-term market opportunities. Since the launch, DLCs have already traded close to S$5 billion. Outstanding value has already reached S$18 million since June, which has increased more than six times compared to last year.

Alvin Li, vice president of listed distribution sales at Societe Generale

As a clearing house, SGX is also well-placed to reduce counterparty risk and ensure a robust and stable marketplace. In terms of its own contribution to its clearing fund, the exchange boasts a 25% “skin in the game” – significantly higher than that of central counterparties in the U.S. and Europe – bringing confidence to the ecosystem.

Navigating today’s “risk on, risk off” environment is one of the hallmarks of SGX which operates the largest international futures market as well as the longest trading hours in Asia, from the region’s only AAA-rated jurisdiction.

In addition, its deep liquidity and extensive suite of risk-management tools makes it a unique destination for global investors looking to grow with Asia.

This page was paid for by Singapore Exchange. The editorial staff of CNBC had no role in the creation of this page.