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From Our Man In Boca, Tom Groenfeldt: Asia’s Booming Middle Class Will Require More From Exchanges

Date 15/03/2013

Asia is set to boom with 525 million people in the middle class now and 1.7 billion expected to enter it within a few years.

Its markets remain highly fragmented, said Rama Pillai, deputy head of sales and clients at the Singapore Exchange (SGX), which is building its business on the closed borders, unconvertible currencies and lack of instruments to trade, hedge and manage risk across Asia.

“We continue to grow and thrive because of the complexity across Asia,” said Pillai who predicted it would be at least 10 to 15 years before Asia gets harmonized in its regulation and capital is allowed to move freely.

“That means  enough time for my son to join the exchange and play this role, and perhaps his son as well,” added Pillai, who was attending his 18th FIA Boca. “The fact is that Asia is so diverse and complex across the region, yet people need to find value and capital needs to find homes.”

Both he and Magnus Bocker, the CEO of SGX seemed ready to help by providing contracts providing exposure to Japan, Indonesia, China and Thailand.

So when Maria Bartiromo, the CNBC anchor popularly known as the Money Honey, asked Bocker, to lead off the Exchanges CEO panel with a discussion of the sluggish markets, he was ready.

“We had a record February, our best month ever,” he said. “Last year we were up 10-12 percent. I don’t know how to answer your question, but you probably have a few other guys here who could help you out.”

He sees tremendous growth across assets. Commodities by themselves will see tremendous growth as Asia develops into a giant market with 3.5 billion people in 20 years.

“That will create a lot of opportunities in financial services. Can we have the capabilities and skill sets for all asset classes? The challenge is not to find the growth but to find the way to handle it with the right staff, technology and partnerships. We need partnerships to grasp all this growth.’

SGX is a large off-shore market for Chinese futures - tripling its volumes last year and penetration is still small, he said.

“We are the London of Asia,” he added, presumably laying claim to the heritage and reputations of major failed banks like RBS or the heavily fined LIBOR manipulators and money launderers. SGX seeks to provide a single exchange that can offer investors exposure to India, Japan, China and Southeast Asia. For a simplified way to trade Asia equity derivatives, come to Singapore, he suggested.

China A shares contracts tripled last year in volume and open interest -- 16 percent of the open interest in the China A-50 market is on SGQ. They recently started a Nikkei options which is strong, Bocker said.

The Asian market has been changing in the last several years, market participants said. Pillai at SGX said that when it started 29 years ago, almost all of its clients were coming from the West to access Asia.

“Over the last three to four years we have seen significant  amount of flow coming from Asia.”

Balasubramaniam Venkataramani, chief business officer for BSE in India, said that Asia with one third of the world’s population is where the growth in financial services will come from.

“This is a huge population that needs to be taken care of.” The Indian market is moving from socialism to capitalism, he added, but it is open to foreign financial firms who often come in through tax havens. Inside India are 600 million people who could invest; the country now has 35 investment management companies, he added.

Although American and European regulators worry that major financial firms will move operations to Asia in a regulatory arbitrage strategy, Asians don’t seem to want them.

“None of us that are operating well functioning markets want to be attractors of regulatory arbitrage,” said one panelist. “It is not sustainable and most clients wouldn’t want to stick with it in a well functioning marketplace.”

In some areas of regulation like individual client fund segregation, India and China are models for the west, said Jason Scott, managing director and head of listed derivatives, APAC, for Deutsche Bank.

Pillai thinks China will play a big role in financial services.

“China as a marketplace is doing a lot more to access liquidity and trading across regions and around the world. We see flows coming out of China, whether retail or institutional, across all asset classes.”

Scott said China will align its equity markets because it has to get away from markets that operate like casinos.

“Once they have dropped these barriers, then the world indices will include China’s stock market at its full weighting. That will move it from 11th in the world to the  top four, so all the fund managers who track those indices will have to trade in the Chinese market. The diversity of investors will stabilize the very volatile market and then they will need the derivatives to trade on. As a result, there won't be just one index futures, but sector futures, and exchanges outside China will launch new futures on the various sectors. It will become a deep and liquid equity index markets  over the next five to seven years.”