Single stock derivatives set for year-end debut
SGX eyeing spike in hedging, trading, arbitraging chances
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SGX eyeing spike in hedging, trading, arbitraging chances
By CHOW PENN NEE
12 September 2008
THE Singapore Exchange will soon be launching single stock derivative products, reiterated SGX executive vice-president and head of market development Chew Sutat yesterday.
SGX first announced the launch of these products late last year. He added: ‘We hope this will allow for greater hedging, trading and arbitraging opportunities in our domestic market.’
BT understands that the products will be unveiled by year-end.
Single stock derivatives will be written on single underlying stocks listed on the exchange and will enable investors to buy into the stocks at an agreed price on that day.
Equity derivatives currently available to local investors are futures on the Straits Times and Morgan Stanley Capital International Singapore indices, as well as structured warrants on individual stocks and various indices.
Mr Chew noted that derivatives have been blamed for triggering crises such as the Asian financial crisis of 1997, the 1987 US stock market crash, as well as the recent commodity price spirals in oil and food prices.
Derivatives have a bad name due to their potential for over-leveraging and concentration of risks within the financial system that are especially vulnerable to a sudden evaporation of market liquidity. The consequent potential for messy unwinding of positions, add to this stigma, he said.
The size of the global derivatives market and the lack of understanding of derivatives among the mainstream media have exacerbated its ‘villainous image’, he pointed out.
The global derivatives market stood at US$677 trillion at end-2007,according to Bank for International Settlements data. Mr Chew said that this is nearly 14 times more than the world GDP, and nearly seven times larger than the value of the global stock and bond market value.
But, on the flip side, derivatives facilitate risk transfer, enabling corporates and financial institutions to hedge against changes in such things as raw material prices, and exchange and interest rates.
Additionally, he said, rather than distorting prices, derivatives actually play a central role in price discovery. ‘They allow investors to take short positions and to engage in arbitrage, thereby reducing the mis-pricing of assets.
‘By providing better information, derivatives can help promote greater liquidity and efficiency in the underlying cash or physical markets.’
These positive attributes of derivatives need to be promoted and encouraged, not restrained, he said.
Equity futures markets play an important role in reducing risks associated with changes in price, by enabling investors to hedge their positions.
With an expanded role in derivatives trading and clearing, exchanges have a role in helping to bring this class of instruments further into the mainstream of financial markets, he said.