The Singapore Stock Exchange (SGX) saw record trading in May with the traded value for structured warrants climbing to S$751m. Turnover was up 57% from April 2016 and up 116% from May 2015, making it the highest structured warrant turnover month since November 2011. SRP spoke to Geoff Howie (pictured), director of equities & fixed income at the SGX, about how to grow the country's structured warrants market and SGX's plans going forward.
Structured warrants traded value reached a high of S$751m in May 2016 (daily average $36m) with a peak of $52 million on both 17 and 25 May, a 57% m-o-m and 116% y-o-y increase. Why are structured warrants so popular among Singaporean investors?
As a product structured warrants are popular among Singapore investors because they provide a relatively cheap means to access the day to day swings of several indices like the Hang Seng Index, the STI or FTSE A50 or to Singapore and HK single stocks. Warrants offer investors with an alternative avenue to participate in the price performance of an underlying asset at a fraction of the underlying asset price, which is one of the key reasons for the success. As you would be aware, the higher the volatility of the index the more activity in the warrants, for that reason we see a lot of activity in warrants based on the Hang Seng Index as compared to the less volatile Singapore's Straits Times Index.
At the same time, the risks involved with trading warrants is much higher. In addition to taking the opportunity to highlight the market risks, leverage and limited lifespan factors in our regular educational forums, Singapore has guidelines to enhance safeguards for retail investors. These guidelines mean that brokers must assess if investors have the relevant knowledge and experience before they can invest in our structured warrants. So before individual investors in Singapore can trade the structured warrants, they either have to complete a customer account review with their respective broker or investors may directly assess their qualifications to trade and enhance their product understanding through an SGX hosted online education program.
Are there any restrictions around the use of underlying?
SGX-ST listing rules require the underlying securities to be listed or quoted on an acceptable stock exchange, with certain market capitalisation or paid-up capital requirement. Stock indices like STI and HSI or a basket of securities are also acceptable. Normal licensing agreements would naturally have to be in place.
What other areas do you think have potential for growth?
SGX is always interested in looking to offer more warrant underlyings (indices or stocks) or new innovative products. SGX furthermore sees potential in expanding the current ETFs product shelf by listing more local and regional ETFs as well as expand into leveraged and inverse ETFs which have been quite successful in the region.
Aside of the listed market, what other products are in demand from retail investors? How do warrants complement the issuance of traditional buy-and-hold structured products?
In Singapore we see retail interest in Regular Share Savings plans currently offered by four banks. These plans are convenient ways to invest in the market as they are fully automated, benefits from dollar cost averaging and has a compounding effect. Furthermore CFDs have remained popular as well although there are no public statistics available.
How do you see the domestic structured products evolving?
SGX has seen sizeable volumes growth over the past months and expects this growth to grow interest from other traders or new traders in the future. This could also result in new warrant underlyings like other international indices or sectors or new types of leveraged products. Warrants are derivatives products of which pricing is impacted by volatility, time decay etc, items that need proper understanding of the product. The success of CFDs indicate however that there is also sizeable market interest in delta one products that exactly mirror the change in the underlying share price.
What are your plans going forward?
SGX aims to continue building our structured products range by both expanding the product shelf as well as growing investor education by means of trading courses and events. Furthermore we have just launched new tools new and unique structured warrant tools are now live on our website. On top of the warrant screener, the following functionalities have also been added: warrant calculator, warrant terms, compare warrants, and position builder (unique in market and not offered by any of the issuers).
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