The Singapore Exchange's €186m acquisition of smart beta index firm Scientific Beta aims to strengthen the exchange’s research-based index design capabilities as well as broadening the range of index products and client base.

Following the acquisition of a 93% stake in Scientific Beta for €186m in cash (S$280m) to expand and accelerate the growth of the exchange’s data, connectivity and indices (DCI) business, SRP spoke to Simon Karaban (pictured), head of index services at the Singapore Exchange, about SGX’s plans and challenges ahead.

“We had a very busy start in 2020 beyond the acquisition of the Scientific Beta business on the back of a positive 2019,” says Karaban, adding that the exchange had invested heavily in infrastructure and technology-driven solutions to improve SGX Index Edge’s offering.

“To adequately build that offering more broadly beyond the technology element, we needed to acquire content and not any kind of content but best-in-class content from a thought leadership perspective. We wanted content within an area of innovation that would allow us to progress from being a technology-based solution to having a different dimension as a solution for multiple market participants in the area of factor investing, which is a clear motivation behind SGX’s acquisition of Scientific Beta.”

Why is SGX going the smart beta route?

Simon Karaban: Factor investing remains an area of focus for us. We don’t believe in competing with incumbent benchmark providers in the marketplace. Existing index providers continue to dominate across markets with their broad-based market cap indices because they’re very entrenched across the OTC, derivatives and risk management ecosystem. That makes their indices very efficient, liquid and cost-effective to trade.

We are working with a manufacturer in Europe to develop a new decrement index

We do not intend to compete with that. We see more opportunities with systematic and quantitative driven strategies as well as with factor investing via high end buyside channels globally which are increasingly shifting towards a factor-based approach for their investment solutions instead of pure market beta.

Do you think factor-based indices will increase their market share as underlyings in the structured products market?

Simon Karaban: With the run away success of the equity markets over the last 12 months there is a degree of caution in the market and some indices and structures can provide the defensive approach sought by some investors.

We expect implementation of risk control strategies and factor-based strategies that can provide a defensive tilt to investors.

Do you see scope around custom and optimised indices for structured products?

Simon Karaban: We are already working with a manufacturer in Europe to develop a new decrement index to cover not just markets in Europe but also specific strategies and themes around ESG specific risk. This is an area where we see investor appetite. These indices are adjusted by applying synthetic dividend and provide a more appealing profile for end investors, especially among European investors in autocallable structures.

Since the launch of the UN Sustainable Development Goals, we see an increasing focus on specific ESG aspects from investors and issuers alike. One theme at the forefront of developments in the financial markets is ‘climate change’ and the risks associated which need to be managed but we also see a number of sub-themes that are derived from that.

France has always been a market for innovation around structured products

Diversity, inclusion and governance are also coming to the fore and are driving demand. Some of these metrics can work well with factors generally and can be a source of alpha so we see opportunities there too, especially around emerging markets. However, most of the attention remains around climate related themes.

What’s SGX plan to position itself and increase its footprint in the European market?

Simon Karaban: We are positioning SGX as a global index provider. The acquisition of Scientific Beta which has an established profile in Europe will help our cause in demonstrating that we are more than an Asian index provider.

There are several markets in Europe where we think our indices can have an appeal. France has always been a market for innovation around structured products and given our approach to deliver technology and data driven bespoke solutions, we think our platform will lend itself well to a lot of the innovation taking place in that market. Beyond France, and in spite of Brexit, we see the UK and London as a natural equity derivatives hub going forward and we will continue to focus our efforts there too.

The new Benchmark Regulation has increased requirements around the administration and calculation of indices. Can SGX capitalise on this?

Simon Karaban: We see partnerships as a very interesting way to leverage our capabilities and help other players with their indexing efforts. Our platform is very well placed to offer calculation solutions across markets and asset classes and is one of the pillars of our strategy in Europe.

We are actually doing a lot of work as a calculating agent in Asia Pacific and most recently in Europe across various exchange-traded underlyings as well as OTC instruments. Given the flexibility of our platform and our track-record as an index provider we can calculate highly complex and highly engineered strategies developed by investment banks.

The market has moved from payoff innovation to underlying innovation. Are there any concerns around standards and the development of complex index strategies?

Simon Karaban: There has been a significant proliferation of a variety of indices and product issuers are always striving to innovate. This has put pressure on index providers to respond to that demand and innovate themselves which means they have to go beyond the conventional to remain relevant in the marketplace and make sure they continue to grow.

Competing purely on the basis of cost and price with the view to be disruptive does not necessarily equate to quality and integrity

We don’t see any concerns provided that innovation remains linked to strong research and that indices are developed in a credible and well-governed fashion. While I mention the flexibility of our platform, we come from a heavily regulated and transparent exchange environment where good governance is standard practice.

What is SGX’s edge in the European market?

Simon Karaban: We’re the only Asian index provider with presence in Europe, and we have a long record in the structured products market too. We see the flexibility we offer through our technology as one of our main USPs. We also have an open architecture approach related to data and research data, and we can operate in a very agile manner and respond to client needs a lot faster than most of our competitors.

There’s always challenges and areas were competition is high with new players coming in. Competing purely on the basis of cost and price with the view to be disruptive does not necessarily equate to quality and integrity. We are not taking a short-term view about our index business and our long-term plan is to deliver quality to clients as otherwise your clients will vote with their feet.

What's next for 2020?

Simon Karaban: Given our recent acquisition of Scientific Beta, our plan is to start working with our new partner to find ways in which we can add value to each other and develop solutions for end investors, more narrowly around our indices but also more broadly from an exchange perspective.

We will also continue to focus our efforts in building out our SGX Index Edge brand and profile in Europe by developing custom index solutions around specific themes we think will resonate with investors as they look for differentiation.