December 13, 2012 / 10:31 AM / in 5 years

Singapore's SGX eyes iron ore futures as US tightens OTC rules -sources

* SGX plans to launch iron ore futures in Jan -sources

* Move meant to keep U.S. clients amid Dodd-Frank reforms

* SGX says working to register with CFTC

By Manolo Serapio Jr

SINGAPORE, Dec 13 (Reuters) - The Singapore Exchange plans to introduce an iron ore futures contract next month in a bid to retain and attract more U.S. clients faced with tougher rules in trading over-the-counter (OTC) derivatives, industry sources said on Thursday.

The plan by SGX, which clears bulk of globally traded iron ore swaps, shows how exchanges outside the United States are trying to ensure Washington’s regulatory net over the world’s $640 trillion OTC market does not dent their U.S. client base.

“Although the U.S. clients remain a small part of SGX’s swaps business, I believe it wants to make the new product available to them so as not to lose market share,” said an industry source with knowledge of the plan.

The futures contract, which will also be cash-settled like the swaps, may be launched in late January.

“I think we are unlikely to see other clients based outside of the U.S. trading these futures contracts, as from my understanding, the swap and futures contracts will be fungible on the exchange so as not to create a two-tier market or split liquidity,” said another source.

“I guess brokers will still play an active role in the swaps contracts finding counterparties and matching prices, while futures trades will be block trades from the brokers.”

SGX declined to be specific about its future plans.

The bourse is working with regulators “to deliver innovative products to our customers from diverse regulatory regimes”, Michael Syn, head of derivatives at SGX, told Reuters in an email.

Syn reiterated that SGX is working to register with the U.S. Commodities and Futures Trading Commission as a derivatives clearing organisation, or DCO.

Under Washington’s Dodd-Frank Act, the CFTC requires all clearing houses that clear swaps for U.S. customers to be registered with the regulator as a DCO.

The reforms are aimed at preventing financial catastrophes in the OTC market - a huge, opaque market that is partly blamed for fuelling the 2008 global financial crisis.


There was concern the Dodd-Frank rules would push SGX’s U.S. clients to other exchanges, including the CME Group and Intercontinental Exchange, some of whom have adapted to the new regulations.

SGX, which clears over 90 percent of iron ore swaps traded globally, saw volume hit a record 17.7 million tonnes in September from less than 200,000 tonnes when it launched the service in April 2009.

But an increasing shift to futures from swaps would be a natural progression for iron ore whose pricing has rapidly evolved to spot-based from four decades of yearly-set contracts in less than two years, increasing the need for steelmakers to hedge prices.

China, the world’s top iron ore consumer, is itself looking at launching iron ore futures contracts through its Dalian Commodity Exchange after the country’s economic planner deemed that the time is ripe although a launch in the near term is unlikely.

The Intercontinental Exchange in October converted its swap contracts, including iron ore which it launched in late 2009, into futures contracts. The bourse said “customers sought the regulatory certainty of futures amid the continued evolution of new swap rules”.

The ICE iron ore swap futures contract is based on the Platts 62-percent iron ore index, and ICE is looking at launching other iron ore and steel contracts next year, said Jennifer Ilkiw, vice president for Asia Pacific at ICE.

“Futures are something everyone’s familiar with, they have been regulated for a long time and people understand them,” Ilkiw said.

“We’ve heard feedback from some traders that every time they want to do a swap trade they’ve got to do about 5-10 minutes of paperwork.”

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