* CME could benefit from regulation
* SGX cleared record iron ore volumes of 17.7 mln in Sep.
* SGX says intends to register with the CFTC
By Silvia Antonioli and Manolo Serapio Jr
LONDON/SINGAPORE, Nov 2 New regulation is likely
to deter U.S. investors in iron ore swaps from using the
Singapore Exchange, the leading clearer of the product,
scattering business to other exchanges and reducing liquidity in
this fledgling market.
This could be concerning for the young but fast-growing iron
ore derivatives market which has only recently started to
attract more U.S.-based hedge funds.
U.S. regulator The Commodity Futures Trading Commission
(CFTC) has taken the position that all clearing houses that
clear swaps for U.S. customers must be registered with the CFTC
as designated clearing organisation (DCO).
As the Singapore Exchange (SGX) has not registered, the CFTC
advised that U.S. customers were not permitted to add any new
positions on SGX AsiaClear, starting from Oct. 15 2012, brokers
Brokerage Newedge told its employees about this prohibition,
in an email seen by Reuters.
"U.S. customers will not be permitted to add any new
positions on SGX AsiaClear; however, such customers will be able
to maintain or liquidate existing positions entered into prior
to October 15, 2012," Newedge's compliance notice said.
"This prohibition relates to all U.S. customers of Newedge,
regardless of the affiliate in which such customers are booked."
Contacted by Reuters several times the CFTC was not
available for comment and Newedge declined to confirm the
content of the email or to comment its subject.
"SGX intends to be a Derivatives Clearing Organisation
registered with the CFTC... We are working with the relevant
regulators to complete this as soon as possible," a spokeswoman
for SGX said.
"The CFTC has meanwhile said it is granting no-action relief
to SGX iron ore swaps clearing customers for current positions
held with the SGX derivatives clearing house, and will not
require our customers to liquidate their positions. We continue
to be in discussions with the CFTC with the intention of
delivering to our customers, products relevant to the post
Market players estimated U.S. customers currently account
for about 10 percent of the iron ore swaps volumes cleared by
the SGX but some among them, especially the banks, have
UK-registered entities which are not affected by the CFTC
The customers affected are mainly U.S.-registered trading
houses and funds, they said.
SWAP THE EXCHANGE
SGX began offering clearing services for iron ore swaps in
April 2009 and volumes hit a record high of 17.7 million tonnes
a month in September this year.
The Asian exchange currently clears over 90 percent of the
global iron ore swaps trade but other clearers who offer iron
ore contracts and are already registered as a DCO could benefit
from this regulatory development.
Among them is the U.S.-based CME group, which had
already gained relevance as a major iron ore options clearer in
the last few months.
A UK-based broker said at least 2 of its U.S. customers have
already advised they will not open new positions on SGX and will
use instead the CME services.
Whether all the other U.S. customers will follow suit is
still not clear.
"No one is sure how to interpret this stuff. We are not
quite as aggressive with our interpretation as Newedge was but I
am not comfortable at all with the situation," a source at a
"It's definitely a worry. This is a bigger issue obviously
than just iron ore and a lot of people have just no idea of what
is coming in the U.S. I think this could affect some liquidity
(on SGX) and the Chinese don't trade on the CME. It's not good."
Some brokers though think the impact of the regulation will
not be quite as dramatic now that liquidity has increased in
iron ore swaps market, and others say they will continue to
operate with U.S. customers on SGX.
"The pool of liquidity on SGX is large enough that I should
think U.S. customers should make a genuine effort to ultimately
go back to it rather than switch their volumes to CME," a
Singapore-based broker said.