SINGAPORE (July 3): The Singapore stock market was not the only market to see a spike in trading volume and value as the Covid-19 pandemic took the world by storm. The local derivatives market, too, experienced a similar situation.
According to statistics from the Singapore Exchange (SGX), the number of its derivatives contracts traded grew from 19.5 million contracts in January to 23.9 million contracts in February. The figure jumped to 32.9 million contracts in March. Compared to the same periods a year ago, all three months recorded a higher number of contracts traded.
Besides SGX, there are a handful of smaller derivatives exchanges with operations here. The Asia Pacific Exchange, backed by Chinese investors, did not provide figures for the first three months of the year. However, it notes that new clients have come on board recently to hedge their risks against the market volatility.
It points out that the volume of the APEX Crude Palm Oil Futures Contract (CPF) – its most actively traded product – grew to an average daily volume of 25,000 to 30,000 lots in May. This was up from 10,000 to 15,000 lots in April 2019 when it was launched.
Over-the-counter (OTC) derivatives, too, saw a surge. OCBC Securities says its OTC derivatives soared 168% in March compared to pre-Covid-19 volumes. The main underlying assets driving the increase in volume and value of OTC derivatives were gold, oil, foreign exchange (FX) and equity index, it notes. DBS Bank says the volumes of its corporate FX, regional OTC FX derivatives and regional OTC interest rate derivatives jumped 40%, 30% and 15%, respectively.
According to statistics from the Monetary Authority of Singapore (MAS), the total number and aggregate notional value of new OTC derivatives transactions leapt from 778,917 and US$18.01 trillion ($25.11 trillion) respectively in January, to 949,100 and US$18.43 trillion in March. This was despite a dip in both figures to 776,014 and US$17.78 trillion, respectively, in February. Compared to the same periods a year ago, all three months recorded higher total number and aggregate notional value of new OTC derivatives transactions.
Keeve Tan, head of futures and FX at OCBC Securities, says the industry-wide surge was due to a “sense of fear” in the markets. The CBOE Volatility Index (VIX), which is recognised as the “fear” index, hit 80 points on March 16 – a level not seen since the global financial crisis, he points out. Any value under 12 points denotes “little fear”, while those above 20 are “typical of a fearful market”, he says.
“Fear is certainly a major factor causing the increase in volume and value traded for the OTC and [exchange traded derivative] markets, as investors and speculators either seek safe haven assets in a flight-to-safety play, or look to ride on the increased volatility in the markets,” Tan tells The Edge Singapore.
Andrew Ng, head of treasury and markets at DBS Bank, says the increase in demand was driven by market uncertainty as Singapore implemented the “circuit breaker” measures and the US Federal Reserve cut interest rates to zero. As a result, investors hedged their risks to fend against uncertainty. The increase in demand was also driven by significant portfolio shifts as the US dollar rose, credit spreads widened and funding cost increased, he adds.
The big question now is whether the surge in derivatives trading volume and value can be sustained. Both trading volume and value figures of exchange traded derivatives have declined in April and May, according to SGX. OCBC’s trading volume of OTC derivatives has fallen in both months, though it is still 30% to 40% higher than pre-Covid-19 levels. DBS did not provide data. The MAS has yet to publish April and May data on OTC derivatives.
DBS’ Ng reckons the uptick in volumes is unlikely to be sustained as the real impact of the pandemic will take some time to unravel. “Caution continues to run through Asian markets and has been curtailing trading volumes as investors sit on the sidelines,” he tells The Edge Singapore.
While OCBC Securities’ Tan agrees, he notes that OCBC Securities has seen a 35% increase in the number of account openings by clients wanting to trade either exchange traded or OTC derivatives. With an impending recession, clients want to hedge their risks, he says. To that end, derivatives are increasingly becoming an important element of wealth management for many of his clients, he explains.
As such, new clients may eventually continue to be active post-Covid-19 and thus contribute to a sustained increase in volume and value of exchange traded and OTC derivatives, Tan says. “With each crisis, we notice that the public is becoming more informed of the various instruments and options they have to manage and grow their wealth. The current group of investors or traders we interact with certainly is a lot more sophisticated compared to those we see 10 years ago,” he says.
Still, how will SGX’s non-renewal of its MSCI contracts impact the derivatives market? On May 27, SGX announced that all its non-Singapore MSCI products will expire from February 2021 onwards. Only its MSCI Singapore futures and options will remain listed on SGX. At the same time, the Hong Kong Exchange (HKEX) – which is widely seen as a major rival to SGX – announced that it will offer 37 new products after signing an agreement with MSCI.
OCBC Securities’ Tan says an adverse impact on the local derivatives market is unlikely to happen. This is because the brokerage’s clients will still be able to access the same MSCI contracts through its platform on HKEX.
DBS’ Ng agrees. “In today’s world of electronic trading, the geographical location of contracts has little impact on traders. As such, there should be minimal impact on the development of Singapore’s OTC derivatives market,” he says.
