Asia has become the world’s leading region by volume traded on its derivatives exchanges, but the region is still dominated by two players and competitors will need to innovate to stay alive, finds a new report. 

The combined volume on Asian derivatives exchanges rose 26% in 2009, hitting 6.3 billion contracts, according to a study by the consulting company Celent entitled Derivatives Trading in Asia: Struggle for Regional Supremacy.  

That growth ensured that Asia replaced North America as the foremost region in the first quarter of this year after running a close second for the previous two years.  

“Asian derivatives exchanges have laid down the marker for their global counterparts,” Anshuman Jaswal, the Bangalore-based consultant who wrote the study, said.  

“It is important for them to build upon their recent success by enhancing their product range, adopting better technology and increasing cross-listings of derivatives products.” 

As of the first quarter this year, Asia accounted for 38% of global derivatives volume, compared with 33% for North America, 20% for Europe, 7% for Latin America and 2% for the rest of the world.  

The Korea Exchange is by far the most successful not only in Asia but worldwide, with volume of 3.1 billion derivatives contracts in 2009. That means it makes up almost 50% of Asia’s total. 

It is the world’s leading exchange for stock-index options, a product category that is only gaining in popularity as the market for exchange-traded funds (ETFs) booms. 

But the derivatives exchanges in India and China are growing fast, cutting into the Korean dominance, Celent notes. 

Conversely, volume is shrinking on Japan’s three main markets for derivatives – the Osaka Securities Exchange, Tokyo Financial Exchange and Tokyo Stock Exchange – which may lead to consolidation. 

The Japanese government has already suggested that those three exchanges merge with a fourth, smaller player: the Tokyo Commodities Exchange.  

But such a move will be tough to push through because each exchange has a separate ownership structure, and the government has no stake or hold over any of them. 

“Such an exchange would be large by global standards, but doubts would continue about the overall competitiveness of the Japanese derivatives industry,” Jaswal writes, suggesting that the Tokyo Stock Exchange and the Tokyo Commodities Exchange may need to change their business models.  

In terms of volume, the National Stock Exchange of India is the only other significant player in Asia after the Korea Exchange, with annual volume of 918.5 million contracts.  

It has benefitted from a change in its product range over recent years. Currency futures are now the leading product category of the NSE, a remarkable feat given that they were only introduced in fiscal 2010.  

Index options are its second-biggest product category, followed by index futures and finally single-stock futures.  

No other derivatives exchange comes close in terms of volume, with the Osaka Securities Exchange next at 166 million contracts last year. The derivates exchanges in Taiwan, Hong Kong, Australia, Singapore and Malaysia all have smaller volumes. 

Celent suggests that those exchanges need to forge intra-regional partnerships, with the Singapore Exchange seeing some success listing index futures from markets such as India, Japan and Taiwan.  

But newcomers such as the China Financial Futures Exchange are likely to continue to grow, and perhaps gain market share. To sustain derivatives volume, exchanges will have to improve their technology, expand their range of services and gain regional and global trade flows through partnerships, Celent states. 

“Asian exchanges are competing for the same flow of foreign investment,” Jaswal states. “The regulatory evolution in China and India, which had been slow to open up to foreign firms, is a clear sign that the competition for regional as well as global dominance has started.”