Singapore Exchange Limited - Phillip Securities 2017-11-21: SEHK’s Entry Into Iron Ore Derivatives Is Not A Threat

Singapore Exchange Limited - Phillip Securities 2017-11-21: SEHK’s Entry Into Iron Ore Derivatives Is Not A Threat SINGAPORE EXCHANGE LIMITED S68.SI

Singapore Exchange Limited - SEHK’s Entry Into Iron Ore Derivatives Is Not A Threat

  • Singapore Exchange - SGX has a more comprehensive offering of coking coal futures and FFA that allows downstream steel industry participants to manage upstream volatility.
  • SGX’s block market is open to inter-dealer brokers and clearing members.
  • SGX has strong iron ore OTC trading activities and long dated open interests which are critical for ample liquidity, competitive bid-ask spread and pricing discovery.
  • Stock Exchange of HongKong - SEHK’s iron ore trading platform appears to target financial setups who use screen based tools to trade iron ore futures.
  • Maintain Accumulate with unchanged TP of S$8.31 based on 23.9x historical 5-year average PE ratio.



What’s in the News? 

  • SEHK has begun offering trading in Iron Ore Futures contracts as Iron Ore prices experience higher volatility.


Key advantages of SGX 


SGX’s block market is open to IDBs and clearing members. 

  • IDBs facilitate OTC trading which make up 90% of all iron ore transactions on SGX. But unlike SGX, SEHK’s block market is open only to its clearing members which limits SEHK’s engagement with the IDBs.
  • IDBs are a crucial part of the ecosystem and many IDBs are based in Singapore.

Strong OTC trading activities and long dated open interests are critical for ample liquidity, competitive bid-ask spread and pricing discovery. 

  • This is evidenced from the SGX’s long dated iron ore open interests stretching up to December 2020. SGX has a maximum contract months of 4 calendar years and the open interests’ forward curve stretches out to c.3 calendar years from November 2017. 
  • In contrast, SEHK has a maximum contract months of 2 calendar years but their open interests’ forward curve only stretches out to 2 contract months.

SGX’s overnight session allows US and Europe clients to continue clearing after Asian hours. 

  • SEHK’s trading runs from 9 am to 4.30pm and the 2nd session runs from 5.15pm to 1am. SGX’s trading session from 7.25am to 8pm with an overnight session that runs through 4.45am. The overnight session volume accounts for approximately 20% of total volumes.


What do we think? 

  • SGX will remain a dominant venue for iron ore trading because of its well-entrenched position in offering a comprehensive range of iron ore related bulk products. The creation of the iron ore complex that includes coking coal and FFA was built over time and could not be simply pieced together to function as a “plug and play” platform. 
  • Recall that in our report on the acquisition of the Baltic Exchange in September 2016, we believed that the synergies between FFA and iron ore were remote as global trade was weak. But on hindsight, the purchase of the Baltic Exchange was an early stage strategy to create a credible product that would stack well with the iron ore ecosystem and enhance SGX’s competitive moat. So we believe that SGX’s insights in this area of the derivatives business places it ahead of its competitors. 
  • We also think that SEHK’s strategy to engage market participants through clearing members using screen based tools and trading fee waivers would appeal to price-taking market participants but that would be insufficient to create a robust market place.


Investment Actions 

  • Maintain Accumulate with unchanged TP of S$8.31 (previous TP S$8.39) based on 23.9x. This pegs SGX to its historical 5-year average PE ratio.




Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2017-11-21
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 8.310 Same 8.310



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