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Morningstar | The Development of Unique Derivatives Products Is Key to SGX's Competitive Position

Singapore Exchange is a fully integrated financial exchange offering listing, trading, settlement, and clearing of equities, fixed-income securities, and derivatives. Foreign companies make up 40% of total equity listings, while its equity index-related derivatives volume largely comprises contracts from foreign markets. In our view, the expansion of derivatives products is the key earnings drivers going forward, as will the preservation of its competitive advantages. We believe the exchange benefits from its favorable location as a gateway for regional trades. Singapore is a trade-driven economy with low tax rates, a strong legal framework, and stable currency and regulatory regimes. These positive attributes, along with well-developed infrastructure, have led multinational corporations to establish their Asian presence in this city-state.We see a bright future for Singapore Exchange's derivative business, relative to its equity business. While the exchange has had some success in attracting larger equity listings, lower trading volume in its equity business relative to regional exchanges remains a difficult barrier to overcome. Mega-listings are likely to choose larger exchanges such as wide-moat-rated Hong Kong Exchanges and Clearing, as investors and companies prefer a market with deeper trading volume. Similar to global exchanges, equity volume is more reliant on investor sentiment. Strong growth in derivatives volume has provided diversity and balance to group earnings. Derivatives volume is more dependent on market volatility, with market participants also using the instrument to hedge risks.We believe expansion of its derivatives product offerings will be the main growth driver for Singapore Exchange. This includes currencies, commodities and freight-related derivatives. We remain upbeat on the company's long-term outlook, as the exchange is committed to developing new derivatives products and maintaining a technological edge by investing heavily in IT market infrastructure in trading platforms and data centers. The exchange also added sales offices internationally to market its derivatives products.