The Asian stock market is trying European-style trading to reinvent itself

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TOPSHOT – People pass by as the city skyline is seen in a pond left over from an earlier rain in Singapore on February 8, 2022. (Photo by Roslan RAHMAN/AFP) (Photo by ROSLAN RAHMAN /AFP via Getty Images)

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The Singapore Exchange has become the first exchange in Asia to offer trading in “structured certificates” – but analysts say it is unclear whether the new offerings will benefit SGX significantly or will they increase his trading volumes.

Structured certificates are financial instruments issued by a third party, which are based on an underlying asset – their return depends on the performance of the asset, which could be a single stock or an equity index.

It is still “too early to say whether there will be demand for the particular securities introduced,” said Thilan Wickramasinghe, Maybank’s head of research in Singapore.

Singapore began offering listed structured certificates on August 30, with its first issue linked to the Hong Kong-listed shares of a Chinese tech giant Alibaba Group Holding.

“We think this market will take several months… to find out what investors want for different names,” Michael Syn, senior managing director and head of equities at the SGX told CNBC’s “Street Signs” in late August.

“So, there are technical names, Hong Kong names, US names, Japanese names. I think there are a lot of possibilities. But the first ones, I think, are mostly attractive.”

Serene Cai, SGX’s head of securities trading, told CNBC on Tuesday that since its launch a month ago, the exchange has seen “increased interest from both issuers and distributors who want to use this product.” included in their offers.”

SGX sees this as a positive development, she said, as this widens the range of investment options available in the market.

Will it revive SGX?

The SGX is sometimes considered “boring” and “uninteresting.” It was once even called a “zombie” bourse because of its thin trading volumes.

In 2022, there were more listings than IPOs on the exchange.

Even before the pandemic, the exchange saw more listings than listings. From 2009 to 2019, there were 302 delistings, and only 279 companies were listed, according to the finance minister at the time, Tharman Shanmugratnam.

Singapore’s IPO market has seen listings worth just $18.6 million so far this year, putting it on track for its worst showing since 2011, according to aggregator Inside Venture Capital.

SGX’s move to expand its equity-related product base “could spur increased interest in the market,” including offering depository receipts and structured certificates, Wickramasinghe told CNBC.

Singapore Exchange's head of equities explains why it is the first in Asia to list structured certificates

“This will give investors a wider choice of market and thematic exposure, beyond what was previously available,” he said. “We have seen success in the SGX derivatives business where exposure to a wide variety of -experience and underlying asset classes offered in the Asian time zone.”

In the short term, structured securities are unlikely to have a significant impact on SGX earnings, he said, but they could be exposed to underlying securities in other markets, with easier and more convenient access through SGX , Wickramasinghe said.

Still older

Speaking to CNBC in late August, Syn said he is confident the market will develop and mature as the SGX lists more of these structured certificates.

One of the benefits of listing structured certificates is transparency, Syn said. There are daily prices with listed certificates and investors can liquidate their positions if they wish – which is more difficult when the certificates are in an “over the counter” position.

But it will take “big efforts from everyone involved to grow this market in the short term,” Adam Reynolds, CEO of Asia-Pacific from Saxo Markets told CNBC.

According to Reynolds, under the OTC distribution model, structured products are typically distributed to high net worth clients by private banks, and would include embedded fees for the originator, as well as fees for the bank or the distributor.

However, with registered certificates, he said fees would still be paid to the creator but no fees would be paid to the distributor. “This could disadvantage the growth of the registered certificate market [compared to] OTC market distributed through the private banks.”

Why Asia?

Structured certificates are more popular in Europe, because investors are “largely, yield-focused,” Syn told CNBC.

The structured certificate market in Asia is “very dynamic,” but until now, it was only available OTC and from private banks to accredited investors, he said.

“The difference with listing it on the exchange is that it comes with a wider distribution margin, meaning you don’t have to be a private bank client, or an accredited investor,” Syn said. .

In addition, he said Singapore’s status as a wealth management center means investors are more sophisticated and there is a “huge appetite” for yield-enhanced products.

Syn noted, “In the current market environment, yields are up, default rates are up, the curves are flat, dividends aren’t going anywhere. So any type of enhanced yield product for range trading is very popular with investors. .”

How do they work?

Some structured certificates, such as the one offered by SGX, are designed with a self-call feature, and it is a yield-enhancing certificate that means it expires after a certain period of time and loads -an investment whose certificates are guaranteed to have a fixed coupon rate, or return, at maturity.

For example, if a structured certificate comes with a 10% coupon, an investor who buys the certificate will receive a 10% return at expiration, even if the stock’s value goes up by more than 10%.

“So it’s a trade to believe it won’t go up more than 10%, but as a result getting some sort of guaranteed return at the end of the period,” Syn told CNBC.

This works well if an investor expects markets to be range bound, as the coupon is likely to exceed the capital gains.

If the stock price goes south, the shares are delivered to the investor when the structured certificate expires and the investor keeps the shares at the current market value.

Therefore, Syn explained that investors must think that they want to buy the stock before buying the structured certificate: “You didn’t think it was going too high, you are willing to collect a coupon . But if it goes. down, there the trunk is yours.”

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