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SINGAPORE, Jan 22 (Reuters) - Singapore Exchange Ltd , set to report its weakest profit in more than a year after a penny stock scandal hammered trading volumes, is placing a big bet on an increasingly crowded derivatives market.
The demise of 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 ambitions as major international exchanges muscle into its home turf.
The exchange is set to report second-quarter net profit of S$75.2 million ($58.94 million) on Wednesday, down 1.4 percent from a year ago, according to a Reuters poll of eight analysts.
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.
To diversify from cash equities, SGX has been putting an increasing focus on contracts that track Asian stock indices including the Nikkei 225 and China's FTSE A50.
"They have done a decent job. They have focused on an area they have little bit more control over," said CLSA analyst Marcus Liu, referring to SGX's introduction of derivatives contracts.
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 28 percent of the firm's total revenue in financial year 2013, from 21 percent in 2010.
It also shows the potential of a steel contract SGX plans to launch.
But it also shows 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.
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.
"What we're offering is the ability to take away concerns about fungibility and clearing and to make you able to trade with anyone in the world," Michael Syn, head of derivatives at SGX, said in November.
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 average daily turnover in the three months to December to its lowest in five years.
The average equities turnover at Southeast Asia's largest bourse fell to S$1 billion a day in the three months to December, while turnover velocity, a key gauge of market activity, fell to 35 percent to the lowest since SGX started reporting the data in 2009.
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.
"I would have to see a big uptick in sentiment before I change my view on it," said Liu who has an "underperform" rating on SGX.
"Despite a greater proportion of revenue from the derivatives side, I still think that the overall driver for the company is still the equities side."