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Asia overtakes US on derivatives trading

Credit derivatives | Asia overtakes US on derivatives trading Anthony Harrington

Yet another sign of the irresistible shift of economic power from west to east came in the third quarter of 2010 when, for the first time ever, the volume of derivatives trading in Asia-Pacific surpassed that done in North America.  

In a fairly obvious kind of way, this was predictable. With so much growth happening in Asia, the demand for commodities is huge and anyone buying in bulk materials from around the world is going to do some futures pricing. Asian exchanges have been doing a roaring trade in futures and speculative derivatives trading on the back of that is inevitable. Many would say that speculative trading is not just inevitable but desirable, since it helps to generate plenty of liquidity in the derivatives markets. If it creates pricing anomalies in specific commodities – gold being an obvious case in point – that goes with the territory, and speculators get burned, just like everyone else when markets correct themselves.

So while the west and developed markets have been witness to bankers blowing their feet off with dodgy derivatives trades, and have heard Warren Buffet famously calling derivatives “financial weapons of mass destruction”, in emerging markets they are seen as very much a growth enabler, and every country wants as large a slice of this particular pie as they can get. Japan has been stung into action and is revamping its ossified trading rules which had stifled the country’s derivatives industry, while Singapore and other emerging market financial hubs are doing everything they can to boost their capabilities in this area.

The turning point began in August. According to the industry analytics site, Fincad, 764 million derivatives contracts were traded in Asia in August, as against just over 780 million each in Europe and North America. However, the Asia Pacific derivatives markets experienced year on year growth of 35%, while the two traditionally dominant derivatives markets are growing at just 6% a year. On that performance, the dominance of the Asia derivatives market in terms of scale was inevitable.

With this rate of growth, it follows that country specific markets are booming. Speaking at the Futures Industry Association (FIA) Asia Derivatives Conference, Ng Nam Sin, Assistant Managing Director of the Monetary Authority of Singapore (MAS), the country’s central bank, pointed out to his audience that the total assets under management by the Singapore financial services sector grew by 40% through 2009, to US$861 billion. The Singapore economy is on track to achieve a growth rate of 13% to 15% in 2010 while according to the BIS (Bank for International Settlements) Singapore now ranks as the fourth largest FX centre globally, and the sixth largest OTC interest rate derivatives centre. The country is Asia’s largest commodities trading hub for both physical and futures trading, accounting for more than 50% of Asian volumes.

According to Ng Nam Sin, the global derivatives market, which combines futures and options volumes and obviously includes Asia, North America and Europe, trades derivatives on some 76 exchanges worldwide. Futures and options volumes across all these exchanges rose 32% year on year, from June 2009 to June 2010, taking total volumes above pre-crisis growth levels of 30%, last seen in 2007. In this growth spurt, Asia Pacific and Latin America led the way, he says.

"Derivatives as a risk management tool have played an important role in supporting economic growth. It facilitates risk management, investments and enhances asset management capabilities, be it in trade or commodities."

He points out that the Singapore Exchange recently announced the upcoming launch of Asia’s first central clearing platform for OTC financial derivatives, putting it in line with the kinds of changes being inspired by the Dodd Frank Act in the US. The first derivatives to be cleared will be US dollar and Singapore dollar interest rate swaps. Major international and local banks have already applied to be clearing members of SGX CCP, he says.

At the same time any growing industry needs to look to the competency pool or talent pool available to it. MAS is working closely with the derivatives industry and with training institutes to ensure that the region has the talent it needs. Developed markets are going to have to look to their laurels if they want to keep up….

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Tags: credit derivatives , currency swaps , derivatives , interest rate derivatives , interest rate swaps , MAS , Monetary Authority of Singapore (MAS) , Singapore
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  1. mohammedm says:
    Thu Dec 02 07:42:15 GMT 2010

    The government debt is out of control, and President Obama's next concept to regain solid financial footing is to put a two-year government pay freeze into effect. It is projected that this move will save the United States $28 billion within five years and $60 billion over the next decade. This would impact all civilian federal employees, however active military could be excluded.

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