UPDATE 1-Stung by penny stock scandal, Singapore Exchange bets on derivatives

Wed Jan 22, 2014 5:58am EST

* Net profit S$75m vs forecast of S$75.2m

* Revenue from derivatives up 16 pct

* Securities revenue down 13 pct

By Anshuman Daga and Manolo Serapio Jr

SINGAPORE, Jan 22 (Reuters) - Singapore Exchange Ltd reported its weakest quarterly profit in more than a year on Wednesday after a penny stock scandal hammered stock trading volumes, with revenue from its derivatives business outstripping securities for the first time.

Since taking over as CEO four years ago, Magnus Bocker has spearheaded the launch of new financial and commodity derivatives to make Singapore a regional gateway in Asia.

But the demise of its SGX mini metals contracts, and lower volumes for its iron ore swaps since China launched a competing product, could be a warning sign for its big bet on derivatives as major international exchanges muscle into its home turf.

Revenue from share trading and other listed-securities was 13 percent lower than a year ago, while derivatives jumped 16 percent, underlining the bourse's increasingly diverse business mix.

"On the securities side we had a very tough and challenging quarter," said Bocker during a briefing on the earnings.

SGX reported net profit of S$75 million in its second-quarter ending Dec. 30, down 2 percent from a year ago. That came just below the S$75.2 million average forecast of eight analysts surveyed by Reuters.

To diversify from cash equities, SGX has been putting an increasing focus on commodities and contracts that track Asian stock indices including the Nikkei 225 and China's FTSE A50.

"China A50 is the growth engine in equities and iron ore in commodities," Bocker said.

Iron ore accounted for 90 percent of all commodities derivatives cleared by the exchange in 2013. The success of the contracts - volumes more than doubled last year - helped propel its total derivatives segment to 32 percent of the firm's total revenue in its second quarter, from 28 percent a year ago.

It shows the potential of a steel contract SGX plans to launch.

But it also highlights the dangers. From a high of 23.3 million tonnes in July, volumes fell to around 18 million tonnes a month in October to December after the Dalian Commodity Exchange launched a China-based iron ore futures contact.

"I think it will be very difficult for any other exchange to get into iron ore derivatives clearing because SGX is well established in the Asia region," said Jamie Pearce, head of SSY Futures in Singapore.

Pearce said a similar success for a planned hot-rolled coil steel contact will hinge on Chinese participation.

"The reason iron ore swaps is a success is because there is good participation from the Chinese. The HRC's success relies on whether it gets participation from the Chinese, otherwise it will likely remain a marginal market."

There are already liquid steel futures on the Shanghai Futures Exchange. While these and iron ore are not easily accessible to those outside the country, creating an opportunity for a player like SGX, China is looking to open up its markets.

SGX is trying to carve out a niche for itself in commodities that do not put it in direct competition with established contracts, but that could become increasingly difficult as other exchanges look to a region that is providing the bulk of growth in physical commodities trade.

Atlanta-based Intercontinental Exchange Group, which runs the Brent oil futures benchmark, is buying the Singapore Mercantile Exchange, while top U.S. futures market operator CME Group is looking at its upcoming European exchange as a proxy for an Asian exchange.

The Hong Kong and Exchanges Clearing Ltd bought the London Metal Exchange in 2012 to expand beyond equities, and scored its first victory when SGX last week canned a competing LME mini metals contract that had failed to attract much volume.

A unit of Deutsche Boerse said last week it bought a 52 percent stake in Cleartrade Exchange, the Singapore-based commodity derivatives bourse.

SLOWING SHARE TRADING

A penny stock scandal in Singapore that saw three stocks crash spectacularly, after huge run-ups had turned them briefly into billion-dollar firms, has knocked securities daily average value to its lowest in five years in the three months to December.

To reduce volatility, SGX said it will bring in circuit breakers for its securities market from Feb. 24.

The bourse is struggling to boost trading volume and attract high-profile listings, while Hong Kong is poised to win a slew of big-money IPOs this year.

SGX has also been hampered by a lack of depth in equity markets across Southeast Asia, with large companies not keen to list beyond their home markets.