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Asia is Heating Up Derivatives Market (March 23, 2005)

Location: Shanghai
Author: Ellen J. Silverman
Date: Wednesday, March 23, 2005

Recent performances of some Asian exchanges have been on the upswing lately.

Last year, the Taiwan Futures Exchange saw year-on-year trading volume soar by 103 percent, a performance that, judging by volumes reached so far this year, should be the same this year. The National Stock Exchange of India grew by 74 percent while the Tokyo International Financial Futures Exchange increased the number of its contracts traded by 60 percent.

Hsieh Fu Hua, chief executive of the Singapore Exchange, says: "In the past two years we've seen much more activity right acrossAsia in every domestic market. In that period many countries have caught up with Singapore ." While domestic investors have driven explosive growth in some markets, there is a growing recognition of the need to accommodate foreign investors if exchanges are to survive in a large geographic region with emerging derivatives markets. Domestic and foreign hedge funds and proprietary traders are opening offices rapidly in the region to gain access to new asset classes. Laurent Cunin, managing director of the Tokyo branch of broker Fimat, says: "People need to invest the additional money that they continue to raise and, with more markets liberalizing and opening up, there will be more opportunities for arbitrage within Asia ."

While participation by foreign investors on the Taiwan Futures Exchange accounts for only 5 percent of volume, the exchange recently submitted to regulators a feasibility study on how to open up financial futures to foreigners. Currently, foreigners can only use futures as hedging instruments for cash deposits used to trade Taiwanese equities.

In Japan , financial futures are well developed but commodity futures have largely been shut off to foreigners. In May, a new law comes into effect allowing common clearing among the country's six commodity futures exchanges. Nick Garrow, product management director at Patsystems, a UK-based trading software specialist that derives 20 per cent of its revenues from Asia, says: "This is key to attracting foreign brokers. You had a door closed before because of credit risk."

Last week, Barclays became the second foreign broker on the Tokyo Commodity Exchange, after Fimat last year. Mitch Fulscher, a Tokyo-based consultant, says: "It's a new ball game in Japan and there's a lot of interest in foreign firms coming in." In a sign of growing foreign broker activity in Asia, he is working on setting up an Asian affiliate of the US Futures Industry Association and plans to hold an inaugural conference in Beijing this year.

For US and European exchanges, Asia is a chance to increase distribution of their products. Exchanges also hope to list products traded on Asian exchanges on their own exchanges although that is a long way off, especially in the case of China . Although progress in developing Asian derivatives markets may not be as rapid as it appears because Asia is still pre-occupied with equity markets and regulators remain nervous about derivatives because they are relatively new. Mr. Hua of SGX explains, "Securities markets are still regarded as the primary market because it's about capital formation. Risk transfer in Asia is clearly needed but not fully understood." Co-operation between exchanges could help in developing derivatives markets but the marked cultural and linguistic differences within the region, and the lack of a common currency, could prove to be significant barriers.

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