Asia continues to be the happening part of the

Transcription

1 Asia on the Horizon: A Tour of Derivatives Markets Across the Asia-Pacific Region By Nick Ronalds Asia continues to be the happening part of the world, now more than ever as Western economies struggle against the corrosive repercussions of the subprime debacle and stressed credit markets. Asian economies are hardly unaffected, of course, but so far at least they ve been more resistant to the chill affecting much of the Western hemisphere. 22 Futures Industry

2 Asia s futures and options markets reflect this divergence. While trading activity on the leading Western exchanges has slowed down, derivatives exchanges in Asia for the most part have been doing well, posting growth rates that range from healthy to eyepopping. Any major financial or commodity firm s business plan is likely to favor Asia, and the industry s resource allocations are less pinched there than elsewhere. While Asia holds promise and exciting opportunities, its diverse markets pose challenges. Each market has its own laws, regulations, rules, and conventions. The fragmentation means players have to struggle to keep up with developments and the rules of the game. Following is a countryby-country review of current trends in the major Asian futures and options markets, with the exception of Japan, which is covered in a separate article. China: Hushen Contract Stalls, Commodities Rocket The lead story in China is the story that wasn t: the long-ballyhooed stock index futures contract, China s first financial futures contract, continues to recede into the future. Simulated trading in the CSI 300 futures, also called the Hushen, has been going on for more than two years. All systems are go at the China Financial Futures Exchange, the Shanghai-based exchange that developed the contract. Market watchers hope a launch date might be announced on Sept. 8, CFFEX s second anniversary. Others, more pessimistic, say the launch will not occur until January. In the meantime, China s commodity futures have stolen the show. Propelled by the bull market in commodity prices, aggregate volume of China s three commodity futures exchanges soared by an extraordinary 148% in the first half by contract volume, and by 142%, or a total of 18 trillion yuan, measured by turnover value. All three exchanges now rank among the largest commodity futures exchanges in the world, even though the range of contracts is limited and no foreign access is allowed. (Note: volume statistics published in China are twice those cited here because buys and sells are summed. This does not affect percentage changes.) Leading the charge was the exchange that heretofore has been the smallest of the three the Zhengzhou Commodity Exchange, an agricultural futures exchange in central China. The amount of trading at ZCE in the first six months of 2008, compared to the first six months of 2007, exploded 284% by contract volume and an eye-popping 450% by turnover value. The ZCE s standout performer was its sugar futures contract, up by a factor of eight to almost eight million contracts in the first half of the year. Growing almost as fast was the Dalian Commodity Exchange, China s largest futures exchange, up 180% by contract volume and 381% by value. The DCE s leading performer was the two-year old soybean oil contract, which zoomed 288% by volume to almost 20 million contracts, 507% by value. Taking up the rear for a change was the Shanghai Futures Exchange, which fell from its customary lead position to third with a lower but still healthy growth rate of 23%. Most of its contracts actually did well. Zinc volume shot up from 2.1 million contracts last year to 14.4 million this year; copper and aluminum were up a solid 41% and 14%, respectively, by volume. The SHFE s aggregate volume was hurt, however, by a drop in last year s volume leader, rubber, which was off 31% to 16 million contracts. The SHFE s most exciting story was the gold futures contract launched in January. Initial bullish enthusiasm put the first few days volume at over 60,000 contracts a day. The pace slowed as gold prices came off their peak, but the contract still logged over 15,000 per day in the first half. The physically delivered gold contract, denominated in yuan, has a 5% daily price limit and a 7% margin requirement. To discourage speculation by individual investors, the exchange increased the size of the contract to 1,000 grams shortly before launch from 300 grams as originally proposed. Another successful new contract was the palm oil futures contract listed on the Dalian Commodity Exchange. The contract was launched last October and has been trading a respectable 14,000 to 15,000 contracts daily so far this year. The trading unit of one contract is 10 metric tons and the tick size is two yuan per metric ton. On the drawing board are managed commodity futures. Chinese regulators want to develop a domestic commodity futures funds industry to reduce the retail speculative share of the Chinese futures trading and to professionalize the market. No timetable or specifics have been announced but funds and the role of CTAs are under study by exchanges and regulators. Hong Kong: Here Come Commodities The lure of commodities has come to Hong Kong. Two separate initiatives to create a commodity futures market were announced this spring, adding a new dimension to Hong Kong s stature as a regional financial center. One initiative involves Hong Kong Exchanges and Clearing, the island s established securities and futures exchange. Recognizing the tremendous local interest in gold, HKEx has decided to reintroduce the trading of gold futures on Oct. 20. The 100 troy-ounce cash-settled contract will trade in U.S. dollars and will settle to the morning price fixing of the London Gold Market Fixing Limited. The other initiative is the formation of a brand new exchange for energy futures. The curtain went up at a press conference on June 25 with the announcement that the Hong Kong Mercantile Exchange plans to launch its first product, fuel oil futures, by early next year. Fuel oil futures already trade at the Shanghai Futures Exchange, but the SHFE s deliverable product is domestic oil that has already been imported and is subject to tariffs and domestic pricing restrictions. In contrast, the new exchange s contracts will call for delivery in bonded warehouses near Shenzhen, where the product can be either re-exported or sold to a Chinese distributor for internal development. The fledgling exchange s leadership says they hope to make their exchange a bridge between China and international energy markets, and say that other commodities, including gold, will eventually be added according to similar principles. Titan Petrochemicals, the Hong Konglisted subsidiary of a Singapore company, is spearheading the formation of the exchange and will retain the largest ownership share. Among the institutions that have expressed interest in becoming strategic partners are Barclays Capital, the Chinese conglomerate Citic Group, China Galaxy Financial Holdings, Merrill Lynch, Lehman Brothers, and others. Nasdaq OMX Group will develop the trading engine, while Patsystems and LCH.Clearnet will provide the front end and clearing systems, respectively. Meanwhile, HKEx hasn t stood still with regard to technological evolution and product innovation. After nearly a year of preparation, HKEx installed an upgraded OMX-supplied derivatives trading and clearing system in March. The exchange also began listing mini versions of its H-shares index futures contract September/October

3 and its single stock futures and options. The H-shares index is a cap-weighted index that tracks the performance of shares of major mainland-incorporated companies listed in Hong Kong. HKEx introduced a mini version of the contract in March, in part because the existing contract had just gotten too big after the four-year bull market since its 2003 launch. One Mini H-shares index futures is one-fifth the size of the big one. The mini single stock futures and options are also one-fifth the size of the big ones 100 shares of the underlying stock, compared with 500 shares for the existing contracts. India: New Rules Put a Brake on Growth While China s futures markets have been growing incredibly fast, they remain closed to the outside world, and for that reason many firms active in the Asia-Pacific region say there is more immediate opportunity in India, home to some of the largest derivatives markets in the Asia-Pacific region. Foreign brokers are allowed to set up shop in India and become members of the local exchanges, and many of the leading international firms are now doing a very active business executing and clearing derivatives trades on behalf of local and international clients, especially with respect to the equity index and single stock derivatives traded on the National Stock Exchange of India. On the other hand, India s political and regulatory environment continues to create issues for the derivatives business. After several years of extremely rapid growth, the commodity futures business has fallen victim to the worldwide tendency to blame futures for the painful increases in food and energy prices. In May, the Forward Markets Commission, India s primary regulator of commodity futures, bowed to political pressure and imposed a four-month ban on trading in futures on four agricultural commodities soybean oil, rubber, chickpeas and potatoes which had a combined daily turnover of some 12 billion rupees, or $288 million. This marked the second time that the government imposed a ban on selected agricultural futures. Early in 2007, trading in futures on rice, wheat, urad and tur was suspended in response to rising prices, and even though prices for those commodities have continued to rise, the ban has not been lifted. Not all was gloomy in the commodity futures landscape, however. The National Commodity and Derivatives Exchange, India s second largest commodity futures exchange, launched Certified Emission Reductions futures in April. The launch Top Asia-Pacific Derivatives Exchanges Ranked by number of futures and options contracts traded Rank Exchange Country Jan-Jun 2008 Jan-Jun 2007 Percent Change 1 Korea Exchange South Korea 1,172,737,823 1,441,134, % 2 National Stock Exchange of India India 234,274, ,621, % 3 Dalian Commodity Exchange China 136,691,559 50,999, % 4 Zhengzhou Commodity Exchange China 96,738,504 25,193, % 5 Osaka Securities Exchange Japan 73,735,461 45,830, % 6 Taiwan Futures Exchange Taiwan 65,736,401 54,394, % 7 Hong Kong Exchanges & Clearing China 51,617,889 33,503, % 8 Australian Securities Exchange * Australia 51,754,503 57,217, % 9 Shanghai Futures Exchange China 49,271,041 40,202, % 10 Multi Commodity Exchange of India India 40,022,192 33,803, % 11 Singapore Exchange Singapore 29,249,647 19,974, % 12 Tokyo Commodity Exchange Japan 21,087,184 23,056, % 13 Tokyo Stock Exchange Japan 17,220,567 15,686, % 14 Tokyo Financial Exchange Japan 14,714,057 23,038, % 15 National Commodity & Derivatives Exchange India 13,166,775 20,383, % 16 Tokyo Grain Exchange Japan 5,468,969 9,836, % 17 Malaysia Derivatives Exchange Berhad Malaysia 3,075,976 3,242, % 18 Central Japan Commodity Exchange Japan 2,030,641 3,544, % 19 New Zealand Futures Exchange New Zealand 746, , % 20 Kansai Commodities Exchange Japan 97,893 75, % Asia-Pacific Total 2,079,438,492 2,057,659, % * Includes Sydney Futures Exchange 24 Futures Industry

4 Top 40 Asia-Pacific Futures and Options Contracts Ranked by millions of contracts traded Rank Contract Country Sector Jan-Jun 2008 Jan-Jun 2007 % Change 1 Kospi 200 Options, KRX South Korea Equity Index 1, , % 2 S&P CNX Nifty Index Futures, NSE India Equity Index % 3 White Sugar Futures, ZCE China Agriculture % 4 Soybean Futures, DCE China Agriculture % 5 Taiex Options, Taifex Taiwan Equity Index % 6 Mini Nikkei 225 Futures, OSE Japan Equity Index % 7 S&P CNX Nifty Index Options, NSE India Equity Index % 8 Soy Meal Futures, DCE China Agriculture % 9 Corn Futures, DCE China Agriculture % 10 Kospi 200 Futures, KRX South Korea Equity Index % 11 Soy Oil Futures, DCE China Agriculture % 12 Nikkei 225 Futures, OSE Japan Equity Index % 13 Wheat Futures, ZCE China Agriculture % 14 Rubber Futures, SHFE China Agriculture % 15 Nikkei 225 Options, OSE Japan Equity Index % 16 3 Year Australia Treas. Bond Futures, SFE Australia Interest Rate % 17 Gold Futures, SHFE China Metals * 18 3 Month Euroyen Futures, TFX Japan Interest Rate % Bank Bill Futures, SFE Australia Interest Rate % 20 Nikkei 225 Futures, SGX Singapore Equity Index % 21 Hang Seng Index Futures, HKEx China Equity Index % 22 Topix Index Futures, TSE Japan Equity Index % 23 Crude Oil Futures, MCX India Energy % 24 Copper Futures, SHFE China Metals % 25 Gold Futures, Tocom Japan Metals % 26 MSCI Taiwan Index Futures, SGX Singapore Equity Index % 27 Taiex Futures, Taifex Taiwan Equity Index % 28 3 Year Korean Treas. Bond Futures, KRX South Korea Interest Rate % Year Australia Treas. Bond Futures, SFE Australia Interest Rate % 30 H-Shares Index Futures, HKEx China Equity Index % Year Japan Gov. Bond Futures, TSE Japan Interest Rate % 32 Copper Futures, MCX India Metals % 33 Gold Futures, MCX India Metals % 34 S&P CNX Nifty Index Futures, SGX Singapore Equity Index % 35 Silver Futures, MCX India Metals % 36 Silver M Futures, MCX India Metals % 37 Fuel Oil Futures, SHFE China Energy % 38 SPI 200 Futures, SFE Australia Equity Index % 39 Platinum Futures, Tocom Japan Metals % 40 Aluminum Futures, SHFE China Metals % * Began trading in January Futures Industry

5 makes NCDEX the first developing-country exchange to offer a futures contract on emissions. The contracts have been trading between 2,000 and 6,000 a month since their introduction. The commodity futures business also dodged a bullet with respect to the proposed tax on commodity futures transactions. In March, the government published its proposed budget plan for the next fiscal year, and one of its provisions called for a tax on the value of futures transactions. The local exchanges warned that the proposed tax would have raised transaction costs by as much as 800% and driven much of their business offshore, and with support from local and international brokers, they succeeded in persuading the government to drop the idea. Government regulations are also clamping down on the growth of trading in financial futures and options. Until the beginning of this year, the most convenient method for a foreign investor to join the bull market in Indian equities was through an offshore instrument called a participatory note. The use of those instruments were severely curtailed last fall, however, when the Securities and Exchange Board of India, the primary regulatory of India s securities exchanges, began implementing a series of restrictions to reduce the massive flow of foreign money into India s securities markets. Sebi also fretted that the anonymity of the PN market posed a risk. Sebi therefore sought to phase out the use of offshore instruments and encourage foreign investors to enter its markets more directly by registering with Sebi. Many foreign investors have indeed come onshore, but many others have switched instead to using an alternative, the India stock index futures contract traded in Singapore. Another hot regulatory issue is direct market access, defined as direct entry of orders by clients as opposed to direct access to the exchange. In April Sebi issued rules setting out the conditions for allowing DMA. Some players were initially concerned International Alliances The tidal wave of mergers and acquisitions among exchanges has been one of the most dramatic and conspicuous forces reshaping the listed derivatives industry in recent years. Though the big deals have all taken place in the West most prominently the CME-CBOT merger, Nasdaq s acquisition of OMX, and the NYSE-Euronext-Liffe combination Asian exchanges aren t just passive bystanders in this historic transformation. True, outright purchases on the CME/CBOT model have not happened. Instead the more typical pattern is the formation of alliances, in some cases with foreign partners. This appears to be more compatible with the varied and fragmented nature of markets and jurisdictions in this region. Given the rapid growth of Asian-Pacific trading volume, many of the larger Western exchanges are keenly interested in establishing a foothold in the region by buying one of the local exchanges. None of the foreign exchanges has been able to make a full-blown acquisition, however, and most observers do not believe this will happen, mainly because most Asian exchanges are viewed by their local governments as quasi-national institutions. This has not prevented foreign exchanges from buying small equity stakes in various Asian exchanges as a way to strengthen their presence in the region. For example, NYSE Euronext has bought 5% stakes in two Indian exchanges the National Stock Exchange and Multi Commodity Exchange. IntercontinentalExchange also bought a small stake in India s National Commodities and Derivatives Exchange. Some of these deals have involved two exchanges within the region, as when the Tokyo Stock Exchange bought 5% of Singapore s SGX, and both SGX and Deutsche Börse have each bought 5% of the Bombay Stock Exchange. Deals on that scale create a tangible interest in mutual success, and generally bring with them commitments to cooperate on technological developments, product innovation and marketing. One deal that has been discussed involves Bursa Malaysia. According to the exchange s chief executive officer, Datuk Yusli Mohamed Yusoff, the exchange is in discussions with the CME Group to list products on Globex, and possibly to sell an equity stake to the U.S. exchange. Yusli said at the company s annual meeting that Bursa Malaysia plans to become a hub for commodity trading in Southeast Asia and noted that its palm oil contract would find synergies with CME s grain and soybean oil contracts. What little consolidation has occurred has generally involved mergers of two exchanges within one country, as in the case of the Korea Stock Exchange s merger with the Korea Futures Exchange several years ago, and the more recent consolidation of the smaller commodity futures exchanges in Japan into the larger commodity futures exchanges. Taiwan seems to be headed in this direction with the pending so-called four-in-one combination that will bring together its futures, equity, and OTC markets with the Taiwan Depository and Clearing Corporation. In many cases, the alliances are purely commercial and do not involve any equity investments, as in the case of the Korea Exchange s plans to list its Kospi 200 stock index futures on CME Group s Globex platform. Many alliances also involve technology. For example, not long after NYSE Euronext announced a strategic partnership with the Tokyo Stock Exchange, TSE agreed to adopt Liffe Connect technology as the platform for its planned options market. Then there are the many memoranda of understanding signed by exchange leaders. Sometimes these agreements are little more than photo opportunities, but they can be a first step to more substantive cooperation down the road. Of course, not all deals are as sweet in the consumption as in the contemplation. An example of that was the Osaka Securities Exchange s sudden cancellation of its technology partnership with the International Securities Exchange. The plan, originally announced in February, was to use ISE technology to build a new market for options on Japanese stocks. OSE reversed course in July, saying it needed to focus its resources on upgrading the systems for its current flagship product, the Nikkei-225 futures, while at the same time developing the capability for individual equity options. The competitive threat from the TSE s partnership with NYSE Euronext is rumored to have been a factor in the OSE decision. Nick Ronalds September/October

6 because the requirement that brokers and exchanges audit client s DMA algorithms could be burdensome. If literally interpreted, such an audit requirement could have meant a new audit for every tweak in a line of code. In practice the audits have thus far been flexible enough to allay initial concerns. Sebi will do a review of the new rules and their effectiveness in November. Looking ahead, there is much discussion about creating a currency futures market. The Reserve Bank of India, the central bank, supports the introduction of currency futures to help Indian companies better manage currency risk exposures, and is working with Sebi to establish a regulatory framework for this market. In early August, a RBI-Sebi working group issued final guidelines for product design and market structure. The guidelines state that contracts have to be cash-settled in rupees and have a notional value of $1,000, and trading will be off-limits, at least initially, to foreign institutions. Several existing exchanges, including the NSE, the Bombay Stock Exchange and Multi Commodity Exchange, have expressed an interest in applying for permission to offer currency futures, and regulatory approval may come before the end of the summer. A new bond futures contract is now also in the pipeline. In early August, another official working group, this one appointed by the RBI, issued a report setting out detailed recommendations for creating a market for interest rate futures, starting with futures on 10-year government bonds. The study advocated loosening restrictions on participants and on short-selling to promote the contract s chances, and recommended allowing foreign participation but only up to a certain amount. A cash-settled fixed income contract listed earlier in the decade had failed, due to illiquidity in the cash market. Singapore: Pan-Asian Strategy Singapore continues to carve away at its niche as an Asian hub with a welcoming legal and regulatory environment and constant improvements in its technological infrastructure. In May SGX signed an agreement with Singapore Telecommunications to launch a Proximity Hosting Data Center, a technology that will provide traders with low latency access to SGX securities and derivatives markets. SGX says the new trading engine, which went live in August, cuts latency by 75% to less than a millisecond. SGX has also been shoring up its regional alliances via equity stakes and share swaps. It 28 Futures Industry owns 5% of the Bombay Stock Exchange and 20% of Philippine Dealing System Holdings, and it has a partnership with the Tokyo Stock Exchange, which acquired 5% of SGX in Seven global firms became clearing members of SGX over the past year, four joining the derivatives division. Most recently, SGX acquired the Singapore Commodity Exchange, known primarily as a center for rubber futures trading, and plans to roll out additional commodity products under the Sicom banner. This marks the exchange s second attempt at building a regional commodities exchange. Several years ago, it launched a joint venture with the Chicago Board of Trade called Jade, but that went awry when the Chicago Mercantile Exchange acquired the CBOT. SGX also offers a clearing service for over-the-counter trading in commodities. The service, called SGX AsiaClear, has been getting traction after just over two years in operation. AsiaClear provides the clearing and netting platform for OTC oil, commodity, and freight derivative deals. To use it a dealer must open an account with one of the 19 AsiaClear clearing members or one of the 25 supporting inter-dealer brokers. By June of this year volume had tripled to $3.8 billion year over year and the number of trading counterparty accounts had reached 221. Competition in Singapore started heating up with the inauguration in July of the Singapore Mercantile Exchange. The new exchange is a subsidiary of Financial Technologies Group of India, the company headed by Jignesh Shah that operates MCX, the Dubai Gold and Commodities Exchange and the Indian Energy Exchange. Its board of directors includes Ang Swee Tian, a former president of SGX. The exchange says it intends to create the first truly pan-asian platform for trading commodities, and plans to offer futures and options trading on precious metals, base metals, energy, agricultural commodities, currency pairs, carbon credits and commodity indices. No word yet on when these contracts will begin trading. Taiwan: Pushing to Globalize Taiwan s futures exchange, Taifex, has moved aggressively in recent months to adopt global standards and attract more professional global traders. Last fall the exchange rolled out SPAN, the industry standard margining methodology, for its clearing members and plans to offer SPAN for customers by the end of this year. Also over the past year Taifex added spread functionality to its trading system, which greatly simplified the rolling of positions at contract expiration, and allowed omnibus accounts, a critical improvement for global brokers. The exchange also obtained regulatory approvals from the Commodity Futures Trading Commission that allow Taifex member firms to market certain products directly to U.S. investors. Other marketfriendly reforms are to follow, including more liberal rules for introducing brokers, streamlined account-opening procedures, and rules to encourage managed futures. Taifex has scored some notable new product successes. The instant success of the Taifex gold contract, listed in January, showed that the Asian appetite for trading gold has yet to be sated. Two million contracts changed hands in the first half, making it one of the most successful new product launches anywhere in the world. The mini-taiex stock index futures contract, listed in April 2001, has now come into its own. It is now the exchange s third largest contract. Equally important, its growth has not cut into demand for the big Taiex contract, which has seen volume in the first half of 2008 grow 74% over the previous year. But the biggest boost for Taiwan s futures industry is likely to be legislation passed in July that authorizes a drastic reduction of the transaction tax, which is now at a trade-suffocating $6 per contract. Although the Ministry of Finance, which has the authority to set the tax, is unlikely to fix it at the lower limit, the expectation is that the rate will be lowered significantly. Finally, Taiwan is hoping to boost efficiency via local consolidation. The four-inone event, as it s being called there, will bring under one roof the stock exchange, the futures exchange, the Taiwan Depository and Clearing Corporation, and the GreTai Securities market, as its OTC market is known. Various press reports and comments by exchange officials also suggest that Taiwan is seeking a foreign investor for up to a quarter of the shares in the new exchange. Korea: Further Internationalization The Korea Exchange has lost its title as the world s largest derivatives exchange. In the volume rankings for the first half of 2008, it has fallen to third behind CME Group and Eurex, due mainly to a 19% decline in the trading of its flagship product, the Kospi 200 stock options contract. But that said, KRX is still a huge market with a very diverse set of participants. The Kospi 200 options contract remains the most actively traded derivatives contract in the world, and numerous market

7 makers and proprietary options traders based in Europe and North America have hooked up their trading engines to the exchange. According to KRX statistics, foreign traders accounted for 25% of the volume in its Kospi 200 index options during the first half of the year. Retail traders, which used to dominate this market, accounted for 38%, and domestic institutions the remaining 37%. Five years ago, foreign traders were responsible for less than 10% of the volume in Kospi 200 index options, and domestic retail traders were responsible for 58% of the volume. (See A New Day for Kofex in the May/June 2004 issue of Futures Industry.) That 25% market share held by foreign traders works out to about 284 million contracts traded in the first half of the year. In other words, the number of Kospi 200 index options being traded by foreign firms on the Korean exchange is actually larger than the entire index options business at Eurex, to give just one example of a major European options market. KRX has seen the light of globalization. Last October it signed an agreement with the CME Group to list its Kospi 200 futures contracts on the Globex platform for trading during overnight hours, when the local market is closed. The deal potentially will give KRX a global distribution network for its most actively traded futures contract, though not the much more popular Kospi 200 options. CME will match trades, but KRX will continue clearing and settling the products. CME is setting up a telecommunications hub in Seoul to support the linkage and trading on Globex is expected to start this fall, though no firm date has been set yet. KRX is having some success with its efforts to diversify its product range. Following their launch in May, single stock futures traded about 10,000 contracts in the first month, twice that in June, and about 28,000 in July. The KRX three-year Treasury bond contract, listed in 1999, has become one of the region s most actively traded interest rate contracts. With 7.9 million contracts traded in the first half, it ranks as the second largest futures contract based on government debt in Asia, behind Australia s three-year bond futures but ahead of Japan s JGB futures and Australia s 10-year bond futures. The KRX also launched a 10-year bond futures contract in May. So far volume has been thin. Australia: Appealing to Algo Australia s ASX is going after the highvolume algo traders, like so many exchanges. The parent of the Sydney Futures Exchange and the Australian Stock Exchange announced in July that it plans to implement a co-location hosting service in the fourth quarter, meaning that firms will be able to place their trading equipment in the same data center as the exchange s ITS match engine. The new service will allow firms to slash transmission times for market data and order messages to less than a millisecond. The service will not be available, however, for access to the separate match engine used by the SFE, which handles the SFE s wellestablished interest rate futures contracts Twelve firms have signed up as foundation subscribers for the new service. They include international brokers such as Fortis, JPMorgan, Merrill Lynch and UBS as well as proprietary trading firms and market makers such as Liquid Capital, Optiver, Tibra Trading and Timberhill. Separately, ASX completed a major restructuring of the SFE clearinghouse earlier this year. The clearinghouse implemented a new risk management methodology that more accurately captures concentration risk, and increased the size of its default fund through additional contributions from both member firms and the exchange itself. (See Clearing the Deck: SFE Targets Concentration Risk in the May/June issue of Futures Industry). The SFE also recently liberalized margin rules by eliminating a A$700 million limit on non-cash margin collateral. ASX is also looking to join the commodities boom with the introduction of futures on coal, one of Australia s main exports to the rest of the region. Although the exchange has formulated a detailed business plan and has the backing of major coal producers, consumers and banks, it faces direct competition from GlobalCoal, an electronic marketplace for coal which announced plans to list coal futures on the ICE Futures Europe platform. Both exchanges have said trading will start this year. OTC coal derivatives business hit the 1.2 billion metric ton mark last year, boosted by increasing standardization and automation among coal trading firms. Malaysia: Improved Access Bursa Malaysia is one of the smaller derivatives markets in Asia, with just over three million contracts traded in the first half of 2008, but it is one of the more open markets in the region. Roughly 40% of the volume in its flagship equity index futures and 20% of the volume in its palm oil futures come from outside Malaysia, and the exchange is working hard to meet international standards in trade execution. This spring the exchange took an important step toward making its Bursa Trade platform more accessible for electronic traders. In March the exchange introduced a direct market access program that allows customers to transmit orders directly to a newly installed gateway to its core matching engine, as opposed to the existing practices of sending orders to a sales desk at a local broker. The new system effectively cuts the order transmission time down to 10 to 20 milliseconds, according to local brokers, versus one to two minutes under the old approach. The new gateway is based on technology provided by NYSE Euronext and is designed to allow customers and member firms to access the gateway through a variety of connectivity solutions. At present the orders must be transmitted in the MMTP protocol used by Bursa Malaysia, but later this year the exchange plans to accept orders in the FIX 4.4 protocol, a standard message format used by many other exchanges around the world. Nine local brokers are now offering direct access to the exchange under the new program, and the exchange is hoping to attract some of the major independent software vendors to connect to the exchange as well. One key issue for the brokerage community is the potential risk in giving customers direct access to the exchange s trading platform. The exchange has built in risk filters to block trades that exceed certain limits, but brokerage firms worry that direct market access will allow customers to bypass their risk management systems, and therefore requires constant monitoring of customer positions and real-time transmission of trade information by the exchange. This is an issue that brokers and exchanges are wrestling with at many exchanges around the world, and very likely will become a more important issue in the Asia-Pacific region as more exchanges move towards allowing direct market access. Nick Ronalds is executive director of FIA Asia, the association formed by the Futures Industry Association to provide a forum for participants in the Asia-Pacific derivatives markets. Ronalds previously was a global marketing manager at ABN Amro Futures and UBS Securities. He also spent seven years in Tokyo in the 1980s and 1990s as a representative for the Chicago Mercantile Exchange and the Chicago Board of Trade. He has published numerous articles on futures and finance in a wide range of publications, and co-authored a chapter on Chinese commodity markets for Intelligent Commodity Investing published in Futures Industry

8 Growth and Diversity Asia s derivatives markets contain more than two dozen exchanges of varying size and scope. The map below shows the largest centers for derivatives trading in the region, based on the number of futures and options traded in the first half of September/October