Asia exchange of the year: SGX

Singapore exchange powers forward in LNG and seals the deal on major freight market acquisition

Lily Chia, Singapore Exchange

Energy Risk Asia Awards 2016

It has been a busy 12 months for the energy and power business at Singapore Exchange (SGX). Its November acquisition of London's Baltic Exchange gives it a more-than-40% share of a key freight derivatives market; it is pushing ahead with the electricity futures market it was first to launch in Asia; and it also has its eyes on the prize offered by the growing market for liquefied natural gas (LNG) trading, where 60% of global demand is driven by China, Japan, Korea and Taiwan.

Making the most of the LNG opportunity has required some innovation. In a market typically dominated by long-term contracts linked to oil prices, traders have welcomed SGX's October 2015 launch of a new spot price index for LNG, the Singapore Sling (Singapore SGX LNG Index Group), which was followed by cash-settled Sling swaps and futures in January this year.

"In terms of transparency, SGX is using a very good methodology. And we have confidence that its benchmark price is the actual market price," says one Asia-based commodity trader. "The benefit comes in terms of SGX's assessment and transparency." Sling is based on LNG price assessments provided by 24 physical market players including producers, consumers and traders

There are other LNG benchmarks in the region, though, such as those offered by price-reporting agencies (PRAs). Lily Chia, head of oil, power and gas at SGX, argues the exchange has a number of advantages. "It remains to be seen which index will emerge as the LNG benchmark for Asia, but our value proposition is a strong one: being an exchange sets us apart from some of the PRAs in that we have an open platform that has the potential for continuous price discovery, even intra-day," she says. "That's something PRAs, due to their pricing model, currently do not provide."

SGX subsidiary, the Energy Market Company, already operates a spot power market and it has also launched the Gas Trading Board this year. In a market typically dominated by long-term supply contracts, this secondary trading platform will enable market participants to meet shorter-term natural gas requirements and provide more insight into physical gas price movements.

More recently, SGX has expanded its LNG offering further by adding a second index, the North Asia Sling, aimed at markets in Japan, Korea, Taiwan and China, which account for more than 60% of global LNG demand, according to the International Gas Union's 2016 World LNG Report. "It was based on demand from the market to have a [North Asia] destination price and it started in September 2016," Chia says. "We are slowly developing the data series and at the appropriate time – most likely in the first half of next year – we will introduce swaps and futures on the index."

We are slowly developing the data series and at the appropriate time – most likely in the first half of next year – we will introduce swaps and futures on the index  Lily Chia, SGX

SGX has also been developing a second electricity futures contract for launch in the first half of 2017, subject to regulatory approval. It is a monthly contract designed to enable more precise hedging, according to Chia. "It will be an interesting addition to our existing quarterly contract, playing a complementary role," she says.

The exchange created Asia's first electricity futures market in June 2015. While the market is still small and currently offers only one contract, it has experienced steady growth since launch. Within a year, total trading volumes had reached two million megawatt hours (MWh), and the second quarter of 2016 saw a new quarterly high of 658,000MWh traded, up 75% on the previous quarter and 156,000MWh more than the previous record high set in the fourth quarter of 2015. As of October 2016, total trading volumes since June 2015 had reached 2,447 lots (2,684 gigawatt hours), which is roughly 4% of the underlying physical market, according to SGX. "We will continue to grow that market by encouraging more participants to become familiar with the use of electricity futures," Chia says.

Freight has been another key area of growth over the past year for SGX. Following what Chia calls a "transformational year" in 2015, during which SGX's global market share of dry bulk freight derivatives rose from 4% to more than 30%, it increased its market share further to more than 40% during the first half of this year. "This growth has been the result of ongoing marketing and continual client engagement. And of course it has been helped by our recent acquisition of the Baltic Exchange," Chia says. The acquisition of the London-based global maritime organisation, first floated in May 2016, was completed on November 8, 2016 and will lead to the creation of new Asia-focused benchmarks, according to SGX.

"This signifies a very important strategic initiative by essentially joining two key maritime hubs – the UK and Singapore. It complements our existing product offering and we see quite a significant value in this acquisition." Chia concludes: "The hard work to come will be to realise all of this potential and so we are full steam ahead to achieve that."