The Singapore Exchange (SGX) recently made headlines by becoming the first exchange in Asia to offer trading in “structured certificates.” These financial instruments, issued by a third party, are based on underlying assets and depend on the performance of those assets for their returns. While this move is seen as a positive development for SGX, it remains to be seen whether it will significantly benefit the exchange or boost its trading volumes.
It is still too early to determine the level of demand for these specific securities. Thilan Wickramasinghe, Maybank’s head of research in Singapore, acknowledges that it will take time to gauge investors’ appetite for various names in this market. The SGX has introduced structured certificates linked to tech names, Hong Kong names, U.S. names, and Japanese names. However, the broader market’s response to these offerings is yet to be determined.
Despite the uncertainty, the SGX has seen increased interest from both issuers and distributors keen to incorporate structured certificates into their offerings. Serene Cai, SGX’s head of securities trading, believes this is a positive development that expands the range of investment options available to the market. It also counters the perception of SGX as a “boring” and “unexciting” exchange, which has sometimes been referred to as a “zombie” bourse due to its thin trading volumes.
Even before the COVID-19 pandemic, the SGX faced challenges with more delistings than listings. In 2022, there were 302 delistings compared to only 279 listings from 2009 to 2019. The IPO market in Singapore has experienced a slow year, with listings worth only $18.6 million thus far. These figures put the SGX on track to have its worst showing since 2011. In light of these trends, SGX’s initiatives to broaden its equity-linked product base, including structured certificates, could drive incremental market interest.
According to Wickramasinghe, structured certificates are unlikely to have a material impact on SGX’s earnings in the near term. However, they could provide investors with exposure to underlying securities in other markets, offering easier and more convenient access through SGX. Michael Syn, senior managing director and head of equities at SGX, shares this sentiment and expresses confidence in the market’s development as more structured certificates are listed. One of the key advantages of listing these certificates is transparency, which offers daily pricing and easier liquidation of positions compared to over-the-counter trading.
Adam Reynolds, Asia-Pacific CEO from Saxo Markets, highlights the challenges and differences between listed certificates and over-the-counter (OTC) trading. In the OTC model, structured products are typically distributed to high-net worth clients by private banks, with embedded fees for the creator and distributor. With listed certificates, fees are paid solely to the creator. This difference could potentially disadvantage the growth of the listed certificate market compared to the OTC market distributed through private banks.
While structured certificates have gained popularity in Europe due to investors’ yield-focused approach, the Asian market has primarily offered them in OTC form through private banks to accredited investors. Listing structured certificates on exchanges, such as SGX, expands the distribution perimeter and allows a broader range of investors to access these products. Singapore’s status as a wealth management center and the market’s sophistication further supports the demand for yield-enhanced products, particularly in a market environment with stagnant equities.
Some structured certificates, including the one offered by SGX, come with an autocall feature, making them yield enhancement certificates. These certificates expire after a set time, guaranteeing investors a fixed coupon rate or return. For investors who anticipate range-bound markets, where capital gains are limited, the coupon rate becomes an attractive feature. If the stock price declines, investors are delivered the shares when the certificate expires, allowing them to hold the shares at the current market value.
The SGX’s offering of structured certificates marks a significant development for the exchange. While the demand and impact on trading volumes remain uncertain, there is increasing interest from issuers and distributors. SGX’s initiative to broaden its equity-linked product base reflects a strategy aimed at attracting incremental market interest and overcoming its history of delistings and low IPO numbers. The success of structured certificates will require the collective effort of all involved stakeholders, and challenges related to fees and differences compared to OTC trading must be navigated. However, with Singapore’s position as a wealth management center and the appetite for yield-enhanced products, the prospects for structured certificates in Asia appear promising.
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