SGX touts benefits of planned RMB platform
Singapore Exchange expects recent and planned product launches to help establish the city state as the third offshore renminbi centre, after Hong Kong and Taiwan.
The next major move will be the launch of an RMB-Singapore dollar equity trading facility later this year, which SGX argues will be more flexible than Hong Kong's 'dual-tranche, dual-counter' (DTDC) mechanism.
SGX chief executive Magnus Bocker has said that the bourse will roll out the platform before the year-end, which will allow investors to trade and settle RMB-denominated securities in both renminbi and Singapore dollars.
In addition to cementing the Lion City’s position as an offshore RMB trading centre, the facility will also help the internationalisation of the Chinese currency, Michael Syn, head of derivatives at SGX, tells AsianInvestor, adding that he expects the dual-currency trading mechanism to be particularly attractive to smaller brokers, as foreign exchange pricing is less readily available to them than their larger peers.
SGX initially said in June last year that it was ready to list, quote, trade, clear and settle securities denominated in renminbi. Issuers listing RMB securities can choose to offer dual-currency trading, allowing investors to trade them in renminbi or Singapore dollars.
The exchange declined to explain why it hadn’t launched the dual-currency platform previously, given that it was ready to provide such services by mid-last year.
Dual-currency trading is not new to the region – Hong Kong Exchanges and Clearing (HKEx) has been offering 'dual-tranche, dual-counter' (DTDC) models for nearly a year. HKEx has one RMB-denominated equity DTDC model and four RMB exchange-traded funds, says Bryan Chan, head of the bourse’s RMB products task force.
However, Syn argues that SGX’s dual-currency offering will offer more flexibility and offset potential market risks that could occur from the HKEx DTDC model.
Under HKEx’s dual-tranche mechanism, investors who buy RMB securities and then sell them in dollars have four positions: the RMB and dollar FX positions, a long RMB-denominated share tranche and short dollar-denominated share tranche.
As an investor must wait until “a point when he can unwind each of these counters, the market risks related to each of these two counters can diverge”, Syn says. There are also liquidity concerns in the case of dual-tranche splits, which mean an investor may not be able to trade the securities immediately.
Syn argues that if traders are using a single tranche, SGX's current mechanism, investors will have full liquidity and can trade at the desired quoted price. He also claims that having a single tranche of securities tradable in two currencies means that, in theory, when the underlying securities of the two currencies are the same, their legal, economic and market risk should be similar.
HKEx’s Chan refutes Syn’s argument, however, saying that as long as investors have enough stock in the exchange’s settlement and central depository, securities traded across the four tranches can be converted and traded in real time.
Hong Kong’s total securities market volume far exceeds Singapore’s. HKEx recorded turnover for May of HK$1.26 trillion ($162.6 billion) compared to SGX’s S$37.3 billion ($29.2 billion) – but this has not dampened the Singapore bourse’s desire to compete for a substantial chunk of offshore renminbi business.
In addition to the planned dual-currency platform, SGX launched an RMB bond depository service last month. Offshore RMB bond issuance has already started in Singapore, with HSBC Holdings and Standard Chartered issuing a combined total of Rmb1.5 billion ($245 million) in bonds in late May. United Overseas Bank soon followed, with issuance of Rmb500 million on June 24, according to media reports.
SGX has also signed a memorandum of understanding (MoU) with the China Financial Futures Exchange, in April. The bourses are to collaborate on developing a derivatives market linking the two countries.
And SGX says it is the first exchange to offer offshore futures contracts tracking China’s domestic stock market via the FTSE China A50 Index.