PHILIPPINES AND THE DERIVATIVES MARKET I. History of the Philippine Derivatives Market
Philippine universal and commercial banks had been engaged in derivatives transactions like foreign currency forwards and foreign currency swaps since the early 1980s. The Manila International Futures Exchange (MIFE) was established in 1985 and functioned as the Phili ppine’s main commodity and derivatives market. The MIFE initially offered sugar and soybean futures contracts and then expanded to coffee and copra. All products were domestically produced. The first financial futures contract to be traded in 1990 was on Philippine treasury bills. Futures trading volume soared from 100,000 contracts annually to more than 1 million contracts. Foreign Foreign currencies were also traded. The MIFE was regulated and controlled by SEC. It was closed down in 1997 due to governance issues including fraud and irregularities irregularities done by brokers and officials of the exchange. In 2005, the Philippine Dealing and Exchange Corp (PDEx) started as a centralized infrastructure for trading securities which ensures price discovery, transparency and investor protection. By 2008, it has been granted by the Securities and Exchange Commission a self-regulatory organization (SRO) status in the Inter-Dealer market, Inter-Professional Inter-Professional Market and coverage of all its members in all markets within the PDEx Trading Systems. In 2008, the BSP replaced its dealer approval process with a list of generally authorized derivatives markets activities, applicable to all universal and commercial banks, to open up the derivatives market encouraged domestic businesses to consider derivatives as a risk management tool. Also in 2008, Philippine Stock Exchange and the Philippine Dealing System Holdings Corporation entered into an agreement to develop a local derivatives exchange. II. Governing authorities and regulations
RA 8799 or the Securities Regulation Code is the law that governs the use of financial securities in the Philippines. Under the code, the Securities and Exchange Commission (SEC) is the body that will enforce the law and shall have the powers and functions provided by it. The powers of the SEC are as follows: to formulate policies and recommendations on issues concerning the securities market, advice Congress and other government agencies on the securities market, and propose legislation; prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance and supervision on the compliance of such rules, regulations and orders; and impose sanctions for the violation of the same. The Implementing Rules and Regulations of the Securities Regulation Code make specific mention of derivatives with regard to the registration of securities for public offerings and for brokers engaging in derivatives trading. However, the Philippines currently has no trading platform for derivatives and most derivative transactions involve OTC derivatives offered by banks and embedded derivatives. Since banks are most often the counterparties of derivatives, regulation has mostly been done by the Bangko Sentral ng Pilipinas (BSP). The BSP regulates the financial derivatives activities of banks operating in the Philippines. It has posted several guidelines for banks and other market participants to participate in the financial derivatives market. BSP Circular 594 states which derivatives activities banks can engage in. The circular makes a distinction between between an end-user, a broker and a dealer, the roles that a market participant can take in a
derivatives transaction. According to Circular 594, universal and commercial banks can act as a dealer for the following instruments without the need of BSP approval: (i) foreign exchange (FX) forwards, FX swaps, currency swaps and similar financial futures with tenors up to 3 years and (ii) interest rate swaps, forward rate agreements and similar financial futures with tenors up to 10 years. Both universal and commercial banks are also allowed to offer other more complex derivatives or hedging instruments provided that they have licenses to do so. There are four types of additional derivatives authority issued by the BSP, these are Type 1 - Expanded Dealer Authority, Type 2 - Limited Dealer Authority, Type 3 - Limited User Authority and Type 4 - Special Broker Authority. The Type 1 authority allows a universal or commercial bank to transact in any financial derivative in any capacity. The Type 2 authority allows a universal or commercial bank to act as a dealer in specific derivative products with a specific underlying. The Type 3 authority allows any bank to transact as an end-user in specific derivative products with a specific underlying. The Type 4 authority allows a bank, other than a universal or commercial bank, to facilitate a transaction between a dealer bank and other counterparties. Currently, the BSP has given 17 banks additional derivatives authority. Of the 17 banks, only ANZ Banking Group, Citibank N.A., Deutsche Bank AG, HSBC Ltd. Philippines, ING Bank, Standard Chartered Bank, and JP Morgan Chase Bank have Type 1 authority. Aside from the authority to transact in derivatives, the BSP also posed guidelines for the following areas for it to monitor and regulate the derivatives market: (a) Risk Management (b) Client Sustainability (c) Responsibilities of banks with Hedging facilities (d) Sales and Marketing (e) Board of Directors and Senior Management and (f) Disclosures. Risk management regulations are focused on ensuring that banks have the capacity to manage the risks arising from derivatives activities including the hedging strategies offered to clients. Banks should also have the ability to sustain its trading activities given the volatility in market prices. For client sustainability, BSP ensures that a bank has derivatives that are appropriate for client’s hedging needs and information are available for them to choose their desired hedging products or services. Banks should also be aware of their responsibilities on hedging facilities. These responsibilities include thorough understanding on the nature of each transaction, meeting clients’ needs and objectives as well as transparency on information which are relevant to products/services being offered. In terms of disclosure, banks are expected to make the clients aware on the hedging products that they offer for the client to make a sound decision. The minimum disclosure requirement is that must be in writing and the client must sign to confirm receipt and understanding (such as FX rate, risks, benefits etc.). Hedging strategies are important in the derivatives market and its advantages include price volatility protection, forecasting edge and operational efficiency. However, such strategies also have disadvantages such as the cost and uncertainty of inflows; which is why each bank is responsible for handling its personnel dedicated to derivative transactions. Banks should be accountable for its sales and marketing personnel and make sure that they are knowledgeable about the derivatives being offered. The Board of Directors and senior management are also liable for any misleading and false acts made by the sales and marketing personnel. III. Operational Aspects of the Derivatives Market
Derivatives, other than those that are issued by banks and others that are exempted from registration under the code, are required to be registered with the SEC before they could be issued or sold to end-
users. For example, stock warrants and employee stock options must be registered with the SEC before they could be issued. Aside from freestanding derivatives, many companies use derivatives embedded in other financial instruments to mitigate the risks of its host contracts. For example, equity conversion and/or prepayment options are usually inserted in debt/bond contracts to give the holder an option to control the risks associated with the debt/bond contract. All derivatives transactions made by banks are done over the counter given the absence of a local exchange. Forwards are transacted using telephone, brokers, or treasury systems. Foreign exchange forward transactions are covered by Masters Agreement while Interest Rate Swaps are covered by agreements on a per transaction basis. Settlement is usually communicated through phone calls or via emails. Payments are done thr ough managers’ checks, checking/savings or nostro accounts or banks’ demand deposit accounts (DDA) with BSP. IV. Current Status of Financial Derivatives Market
Although lagging in East Asia, there has been a continuous growth in the derivatives market in the Philippines. Appendix 1 shows the growth trend in the volume of derivatives transactions in the country. Total contracts outstanding in the Philippine derivatives market amounted to US$65 billion in December 31, 2009. The total notional amount of stand-alone derivatives transacted by universal and commercial banks as of June 2010 stood at PHP3.76 trillion, growth of 86% compared to its level in June 2008, according to prudential data collected by BSP. Total over-the-counter derivatives transactions between the PHP and the USD climbed sharply, to US$433m in April 2007, from US$101m in April 2004, according to a survey by the Bank of International Settlements. The BSP said in its Balance of Payments Report of the BSP for 1Q2012, as shown in Appendix 2, that financial derivatives trading had a net gain of US$59 million in the said time period. This is visibly lower than US$895 million net gains registered during 1Q2011 due to increased volatility in the exchange rate and floating rate that significantly reduced the gains in forward transactions. Appendix 3 shows that instruments used in Philippine derivatives transactions are relatively simple. The
persistence of foreign exchange risk leads to the heavy use of foreign exchange derivatives. Corporate foreign exchange hedging, which ensures cash flow sufficiency in the short-term, is generally traded with little or no leverage. Another reason is the relatively liquid and active FX spot market. FX forwards are priced based on rates implied by FX swap transactions of the yield curve. There is also regular trading activities for seagull and collar options and other relatively vanilla structures. The relatively small volume of interest rate derivatives can be attributed to the undeveloped fixed income market. This is also because corporates rely on the local currency bond markets, which leads to little offshore exposure, and thus, little need for cross currency interest rate hedges. There has been a steady increase in commodities-related hedging activity driven by growth in the Philippines extractive industries, such as metal, oil and gas exploration, and bulk soft commodity exports, although notional volumes remain relatively low. A factor that keeps participants away from more complex derivative instruments is that most of such instruments do not qualify for hedge accounting which could result to possible exposure from mark to market requirements. However, this also leads to a conservative approach for market participants and decreases the incentives for speculation, which in turn support stability in the market.
The BSP supports this conservative approach. Circular 594 states that legitimate economic uses of derivatives include, but are not limited to, ‘hedging, proprietary trading, managing capital or funding costs, obtaining indirect exposures to desired market factors, investment, yield-enhancement, and/or altering the risk- reward profile of a particular item or an entire balance sheet.’ In December 2012, the BSP announced that local banks must limit their NDF transactions to 20 percent of their capital while foreign bank branches are given a higher 100-percent limit. Also, banks without Type 2 derivatives license to hold NDF contracts would need to close out their NDF positions. This is a pre-emptive measure to discourage those who use NDFs for speculative purposes which could be destabilizing should market conditions reverse quickly. This is in response to suspicions of speculations as the PHP continues to appreciate due to increasing capital flows as investors move away from other markets in search for better yields. But as this new capital can just as freely and quickly flow out of the country, the BSP has to safeguard against abrupt reversals that can threaten the real economy. In February 2013, NDF holdings have dropped to US$3 billion from their 2010 peak of US$15 billion due to the new cap. Foreign Exchange Derivatives
The standard objective of all regulations on FX derivatives is to protect the local currency from speculation and risk of losses due to fluctuations in exchange rates. Therefore, hedging strategies and requirements are extremely important in foreign exchange trades. BSP manages floating exchange rate in the FX derivatives market to control and regulate speculative activities. Liquidity for both spot and forward markets are quite low leading to instability of the FX derivatives market. That is why the BSP focuses on managing foreign exchange so that foreign currency may freely bought and sold in PHP. There are no posted regulations to prohibit exporters selling their USD directly to importers or private investors. FX regulations closely monitor bank transactions and the nature of each transaction. In a nutshell, banks may buy foreign currency without the prior approval from BSP or any required documentation which makes it difficult for the regulatory bodies to control all the foreign exchange transaction in the derivatives market. Interest Rate Swaps
There is no established offshore interest rate swap (IRS) yet in the Philippines but there is cross currency swap (CCS) trade even though liquidity is quite low. An onshore IRS was launched in foreign banks such as Deutsche Bank, HSBC, Standard Chartered, Citibank, and JP Morgan on August 2003. The market is still illiquid with trading volume of around PHP200 million per week and bid/ask spread of around 50-70 basis points. By the end of 2004, improvements were evident because of the local banks which joined the market. Stabilized and Local Growth of Derivatives Market
Since the regulatory bodies lowered restrictions of banks to enter in derivatives market, market participants (both corporates and end users) are only required to report hedge books to the BSP. Banks and counterparties are becoming more comfortable on entering derivatives transactions given the increasing exposure of Philippine economy and the continuous growth of overall income and GDP. Turnover in the local debt market has also increased significantly which triggered the growth of domestic interest rate swap activities in the Philippines. The BSP has also consolidated regulatory measures and encourages local participants to take advantage of the ‘liberalized’ regulations. This is to increase efficiency in the derivatives market and to drive global competitiveness. Encouraging more local participants may also result in the adaptability of volatilities of interest rates and risks (such as in FX platforms).
V. Comparative Statistics
Goswami and Sharma (2011) observed that derivatives markets in emerging Asia are largely underdeveloped because they face some of the more generic impediments such as transaction taxes, lack of liquidity in cash bond markets, and weak operational infrastructure. Most derivatives in Asia are transacted in the OTC market. Interest rate swap markets in India, Korea, Malaysia, and Singapore are more developed. The development of onshore foreign exchange swap markets in some Asian countries has been limited by capital controls and restrictions on non-residents. While foreign exchange swap activity is quite substantial in Hong Kong SAR and Singapore, it remains very low in other countries. Forward market activity is generally not well developed either. Restrictions on obtaining local currency by foreign investors have led to the development of sizeable and liquid non-deliverable forward markets, notably for China, India, and Korea. On the other hand, all foreign exchange transactions involving the Singapore dollar and the Hong Kong dollar take place in deliverable onshore markets as these countries do not have any restrictions. The derivatives markets outside Hong Kong SAR and Singapore largely have a domestic focus and are not as well developed, with a few exceptions. Exchange-traded interest rate futures are mainly present in Hong Kong SAR, Korea, Malaysia, and Singapore. The government bond futures market in Korea is one of the most liquid derivatives markets in emerging Asia. Exchange-traded and OTC derivative markets elsewhere in the region are relatively small and undeveloped. The Triennial Central Bank Survey on foreign exchange and derivatives market activity in April 2010 conducted by the Bank for International Settlements shows the following geographical distribution of global interest rate derivatives turnover in selected Asian countries. Table 1 – Daily Averages in April, in billions of US dollars Country
1998
2001
2004
2007
2010
-
-
-
-
1.521
Chinese Taipei
0.116
0.108
1.538
1.463
1.571
Hong Kong SAR
2.436
2.641
11.257
17.291
18.457
India
-
0.109
0.750
3.395
3.498
Indonesia
-
0.004
0.022
0.071
0.004
Japan
31.623
15.730
30.863
76.357
89.923
Korea
0.007
0.082
0.869
5.386
10.691
Malaysia
0.001
0.005
0.058
0.137
1.001
-
-
0.015
0.004
1.094
5.333
3.189
8.600
57.410
77.882
-
0.008
0.096
0.386
0.702
China
Philippines Singapore Thailand
As of 2010, Japan has the largest market with average daily turnover of USD 89.9 billion followed by Singapore with average daily turnover of USD 77.9 billion. Third largest is Hong Kong SAR with USD 18.5
billion average daily turnover. The Philippines has higher daily turnover of USD1.1 billion compared to Malaysia (USD 1.0 billion), Thailand (USD 0.7 billion) and Indonesia (USD 4 million). In the survey on hedging markets in Asia by Hohensee and Lee, they noted that many Asian currency and interest rate derivatives markets are still in the very early stages of development while others boast a relatively broad range of derivative products. Hong Kong SAR and Singapore have the most advanced derivatives markets with the least regulation. They also included a summary of Asian interest rate swap (IRS) and cross-currency swap (CCS) terms sourced from the DB Global Markets Research which is in Appendix 4. The following characteristics of the Philippine IRS and CCS were noted:
Tenor of the IRS and CCS was the same as other market but was shorter (one to five years) compared to Hong Kong and Singapore which range from one to ten years. IRS Trading size of Php 50 million and CCS Trading size of USD 3 to 4 million were the smallest in the Asian markets. The IRS bid-ask spread of 50-70 basis points was significantly higher compared to other markets that range from 2 to 15 basis points only. The CCS bid-ask spread of 60 to 110 basis points was significantly higher compared to other Asian markets with bid-ask spread ranging from 2 to 10 basis points. The IRS daily volume at Php 50 million was also the smallest compared to other markets while the CCS daily volume was volatile.
Based on the Emerging Derivative Markets in Asia March 2006 report, there are five main derivatives products traded in Asian markets. These are foreign exchange products, interest rate derivatives, equity derivatives, commodity derivatives and credit derivatives.
Foreign exchange products for major currencies are traded in Tokyo, Singapore and Hong Kong. As of 2006, the combined Asian FX markets are large with turnover accounting for one third of the worldwide markets. For interest rate derivatives, Tokyo and Singapore are the two dominant locations that are trading mostly JPY and US$ swaps (OTC) and futures (ETD). In 2006, the interest rate derivatives in Asia are smaller and account for less than 5% of world markets with stagnating trend in OTC markets and a migration towards ETD markets. The equity derivatives have witnessed the most rapid growth and they are mostly ETD markets with Korea, India and Hong Kong showing the most impressive expansion in 2006. In 2006, over 44% of worldwide ETD equity turnover is taking place on Asian exchanges. Index futures as well as options are the most widely traded products with large participation of institutional investors and significant foreign participation. Commodity derivatives account for less than 10% of turnover on the exchanges in 2006. Soybean futures contract at the Dalian Commodity Exchange is the third largest derivatives contract across Asia (among the world’s 20 largest derivatives contracts). In addition, wheat, rubber, gold, and oil futures are large and are mostly traded on Chinese or Japanese specialist commodity exchanges. Credit derivatives are among the fastest growing products, especially credit default swaps that account for half of this OTC market. It is estimated that 10% of the worldwide $6 trillion credit derivative market is located in Asia, mostly in Tokyo and Hong Kong.
Hong Kong
Hong Kong’s derivatives market is one of the largest emerging market derivatives market. Hong Kong’s derivatives market includes stock futures and options, index futures and options and derivatives warrants. In 2007, the volume of futures and options traded reached 88 million contracts. In addition, Hong Kong’s derivative warrants market was one of the most active in the world with turnover of USD 600 billion in 2007. In 2010, its OTC foreign exchange daily turnover was USD 194 billion and the highest in Asian emerging markets. On the other hand, its OTC interest rate derivatives turnover was USD 18 billion and ranks second to Singapore in Asian emerging markets.
Korea Koreas has one of the largest emerging market derivatives market in terms of size and maturity. Its Korean Futures Exchange (KOFEX) has become the largest futures exchange in the world in terms of trading volume and was created in 2004 by merging the Korean Stock Exchange and KOFEX. It offers 9 types of derivative products with relatively simple products, low transaction costs, and very advanced IT and internet trading. In 2010, its average daily foreign exchanges derivatives turnover and interest rate derivatives turnover was USD 25 billion and USD 11 billion, respectively. Thailand In 2006, Thailand’s exchange was largely dormant in derivatives. After serious losses in the Asian crisis, Thailand has kept its offshore and derivatives market on a short leash, with OTC derivatives trading in the range of USD 30 billion in 2004. The Thailand Futures Exchange has been established in 2004 and hopes to start trading index futures in 2006, and the introduction of interest rate derivatives in being actively considered. Indonesia Indonesia has established the Jakarta Futures Exchange and also introduced equity index futures at the Surabaya Stock Exchange in 2001. However, market infrastructure and investor interest have been little developed so that trading volumes have remained very low as of 2006. In 2010, the Indonesia Commodities and Derivatives Exchange (ICDX) was launched and began operations with a single palm oil futures contract, but planned to add other heavily-traded Asian commodities in the near future. China The first commodities futures market in China, the China Zhengzhou Grain Wholesale Market, opened on 12 October 1990. Subsequently, the Shanghai Futures Exchange and Dalian Commodity Exchange have also started operations. In February 2010, the China Securities Regulatory Commission officially approved the HuShen300 stock index futures contracts and business rules o n the China Financial Futures Exchange, and HuShen300 stock index futures contracts were first traded on 16 April. Interest and exchange rate derivatives posted a volume of almost CNY 6.8 trillion in 2008 and 2009, and increased significantly in 2010. By the end of June, the total of interest rates and exchange rates derivatives had reached CNY 9.7 trillion. The USD 1.42 trillion derivatives market in China accounts for only 0.33% of the global market, which is worth about USD 427 trillion. In 2010 , China’s average daily OTC foreign exchange derivatives turnover was USD 11 billion, which was 10 times larger compared to its turnover in 2007. India India’s tryst with derivatives began in 2000 when both the NSE and th e BSE commenced trading in equity derivatives. In June 2000, index futures became the first type of derivate instruments to be launched in the Indian markets, followed by index options in June 2001, options in individual stocks in July 2001, and futures in single stock derivatives in November 2001. Since then, equity derivatives have
come a long way. New products, an expanding list of eligible investors, rising volumes, and the best risk management framework for exchange-traded derivatives have been the hallmark of the journey of equity derivatives in India so far. India’s experience with the equity derivatives market has been extremely positive. The derivatives turnover on the NSE has surpassed the equity market turnover. The turnover of derivatives on the NSE increased from ` 23,654 million in 2000 –2001 to ` 292,482,211 million in 2010 –2011, and reached ` 157,585,925 million in the first half of 2011 –2012. The average daily turnover in these market segments on the NSE was ` 1,151,505 million in 2010 –2011 compared to 723,921 in 2009 –2010.
India is one of the most successful developing countries in terms of a vibrant market for exchangetraded derivatives. This reiterates the strengths of the modern development in India’s securities markets, which are based on nationwide market access, anonymous electronic trading, and a predominant retail market. There is an increasing sense that the equity derivatives market plays a major role in shaping price discovery. Malaysia In Malaysia, strict capital controls were imposed in September 1998 to insulate Malaysia from the financial crisis. The government still maintains some strict regulations on the currency market. Hedging of foreign exchange exposure must be related to trade activities and cannot exceed a tenor of one year. Non-residents can only access the onshore forward market for the purpose of purchasing MYR securities listed on the KLSE. Financial hedging (for example, hedging of profit repatriation, loan payment) is not allowed without Bank Negara Malaysia (BN M)’s prior approval. An NDF market is not regularly available for MYR. In March 2002, the Malaysian Derivatives Exchange (MDEX) launched Malaysia’s first bond futures contract, with the five-year government bond being the underlying security. The contract has similar specifications to the five-year bond futures in Singapore, using a basket of bonds in pricing and being cash settled. Activity in the contract is not great with average daily volume or open interest rarely moving above 1,000 contracts. The use of the futures contract as a hedge for cash bond positions is small. Other futures products in Malaysia are three-year and 10-year bond futures, launched in September 2003, and three-month KLibor futures, launched in March 1996. As in the case of the fiveyear bond futures, liquidity remains poor.
With strict government regulation of the currency market, a cross-currency swap market does not exist in Malaysia. The only active OTC derivative product in the onshore market is the interest rate swap. Liquidity has improved over the years, but the average trade size is still small at MYR 10m. The most liquid part of the curve is up to three years with a bid/ask spread of 5 bps. Commercial banks, finance companies and merchant banks are the predominant users of the swap market. Given the illiquid nature of the long-term fixed rate assets such as commercial loans, banks with an expectation of higher interest rates are likely to hedge in the swap market rather than to sell such assets outright. Taiwan The Taiwan stock market, with its fully automated trading system and book entry mechanism, is known as one of the most active exchanges in the Asia Pacific region. The Taiwan Stock Exchange (TWSE) is the primary equities market in Taiwan. In addition to the TWSE, there are two other regulated markets, i.e.: the GreTai Securities Market (GTSM), the market for bonds and small to medium-sized enterprises (SMEs); and the Taiwan Futures Exchange (TAIFEX), the principal derivatives market in Taiwan. Every
trade is cleared and settled by the relevant market. The Taiwan Depository and Clearing Corporation (TDCC) provide the custodian and book-entry service. Derivatives in Taiwan include equity derivatives (index futures and options, stock futures and options), interest rate futures, gold futures and gold options. Other derivatives traded through GTSM includes convertible bond asset swaps, NTD interest rate derivatives, bond derivatives, structured notes, equity derivatives and credit derivatives. Currently, Taiwan’s financial services industry is facing many challenges, such as low growth in accounts and trading volumes, global competition, new technology, and investment outflow. Taiwanese regulators deregulated to drive the derivatives market, including increasing the derivatives investment quota, allowing advanced trading and overseas investment.
Competition is fierce in the Taiwanese financial market, and many financial institutions tried many methods to profit, including more investment in derivatives, high risk products, and overseas markets. The current trading value for Taiwan’s stock index futures is approximately 22% of the trading value of the spot market, lower than developed areas, and regulators believe financial transformation will drive the growth. Retail and proprietary trading firms account for major trading on exchange, and banks are major players on OTC. The major trends include: hedge funds may be founded locally; Taiwanese financial institutions are expanding in overseas markets; overseas expansion drives the growth of foreign exchange and interest rate derivatives trading; and the infrastructure of Taiwan Futures Exchange is not advanced, and most of the traders are retail, so high frequency trading will not be widely adopted in the near future. Singapore Singapore has one of the most advance derivative markets in Asia. The Monetary Authority of Singapore (MAS) has continued to drive the expansion in the FX derivatives market through liberalization. Interest rate swaps, on the other hand, are also more liquid than government bonds in Singapore. The floating leg of an IRS trade is the swap offer rate (SOR) posted by the Association of Banks in Singapore. Corporations are the main hedgers in the swap market, while hedge funds often come in for speculation as well as relative value investments. The MAS has recognized that hedge funds can offer diversification from more traditional funds, and help Singapore develop into an international financial center. Swap spreads have been generally market-directional and more so for long-dated tenors. In other words, swap spreads tend to widen when rates rise and tighten when they fall. There also exists an overnight interest rate swap (OIS) market, with the first trade done in April 2000. In 2002, the government removed the restrictions in the cross currency swap market. Meanwhile, there are two exchange-traded interest rate futures products in Singapore: three-month swap offer rate (SOR) futures and the five-year bond futures. The SOR is an FX forward-implied interest rate calculated from threemonth USD/SGD forwards, and an official fixing is provided by the Association of Banks in Singapore. Singapore Exchange is one of the Asia-Pacific region's biggest bourses. The average daily volume of contracts traded on SGX jumped 11% in 2012 compared with 2011 while the total number of contracts traded in 2012 reached 80.2 million. The increased trading volumes of derivatives in 2012 corresponds with the main trend that we have been seeing of the movement of traders away from European and US markets to Asia. The SGX remains a small derivatives exchange compared with the established US and European futures giants. However, the growth of its derivatives business – which includes commodity, equity index, and
interest rate futures – comes at a difficult time for its larger rivals, which were hit last year by the ongoing economic and regulatory uncertainty that led to a slump in derivatives trading. According to the most recent available data on global volumes provided by the Futures Industry Association, the total number of futures and options contracts traded – based on traded and cleared volumes across 84 exchanges worldwide – fell 10.2% for the first six months of 2012 compared to the same period in 2011. VI. Outlook
Most of the current market participants stated intentions to expand their use of derivatives most especially FX forwards, FX swaps and currency swaps. Hindrances to the expansion of derivatives activities centered on regulation, competition and lack of infrastructure and resources to appropriately manage the risks involved in the use of the instruments. The types of products traded are limited and transactions are concentrated to select number of institutions. Ghosh (2006) report on East Asian Markets identified two key factors essential for derivative activities to prosper. First, “efficient, liquid and integrated” cash markets for underlying assets (stocks, bonds, and other assets) should exist. Making cash markets robust should be the top priority. This could be addressed by broadening investor base. Banks dominate most markets thus encouraging greater participation of non-bank financial sector as well as retail investors will help the growth of the derivatives market. Second, suitable legal and regulatory framework over derivatives should be established. Asymmetric information with regards to the size and activity that goes on in the market can be solved by improving the framework on how market players can be transparent with regards to their transactions. Meanwhile for the Philippine’s derivatives market, there recently was significant progress in the development of local derivative products. Last 12 March 2013, the Philippine Stock Exchange (PSE) partnered with the Singapore Stock Exchange (SGX) to develop Philippines-linked derivatives products. A Philippines index futures contract, based on the MSCI Philippines Index, will be launched and is targeted for listing on SGX in 4Q2013. Moreover, both the PSE and SGX will also explore the potential listing of derivatives products on the local exchange in due course.
Appendix 1
Source: BSP Supervisory Framework on Hedging Activities: Conference on Gearing Up for External Competitiveness presented by Annaliza G, Tan-Cimafranca on Sept. 13, 2010
Appendix 2
Source: Balance of Payments First Quarter 2012: http://www.bsp.gov.ph/downloads/Publications/2012/BOP_1qtr2012.pdf
Appendix 3
Source: BSP Supervisory Framework on Hedging Activities: Conference on Gearing Up for External Competitiveness presented by Annaliza G, Tan-Cimafranca on Sept. 13, 2010
Appendix 4
A summary of Asian Interest Rate Swap (IRS) and Cross-currency Swap (CCS) IRS Floating rate Floating legal basis Fixed legal basis Active tenors Trading size Bid/ask spread Daily volume CCS Floating rate
HKD
SGD
KRW
TWD
Hibor
SOR
Threemonth CP Qtr Act/365
THB THDFIX
MYR
INR
IDR
PHP
CNY
O/n Mibor
Market nonexistent
Market nonexistent
Qtr Act/365
Semi Act/365
Threemonth CP Qtr Act/365
Semi Act/365
Threemonth Klibor Qtr Act/365
Daily Act/365
3month PHIFEF Qtr Act/360
Qtr Act/365
Semi Act/365
Qtr Act/365
Qtr Act/365
Semi Act/365
Qtr Act/365
Daily Act/365
Qtr Act/360
1 to 10 years HKD 200MN
2 to 5 years KRW 10BN
2 to 5 years TWD 300MN
2 to 5 years USD 10MN
1 to 3 years MYR 10MN
1 to 5 years INR 250MN
1 to 5 years PHP 50MN
10bp
1 to 10 years SGD 1030MN 2-5bp
5-10bp
5-10bp
10bp
5-15bp
5bp
HKD 1015BN
SGD 500700MN
KRW 100300BN
TWD 12BN
USD 1520MN
MYR 25MN
INR 46BN
5070bp PHP 50MN
Hibor vs. Libor
6-month USD Libor
6-month USD Libor
6-month USD Libor
6-month USD Libor
Market nonexistent
Qtr Act/365 vs. Qtr Act/360 Na
Semi Act/360
Semi Act/360
Semi Act/360
Semi Act/360
6month USD Mifor Semi Act/365
Semi Act/365
Semi Act/365
Semi Act/365
Semi Act/365
Semi Act/365
Qtr Act/360
2 to 10 years USD 30MN 10bp
2 to 10 years SGD 20MN 2-4bp
2 to 5 years USD 10MN 5-10bp
2 to 5 years USD 10MN 10bp
2 to 5 years USD 10MN 10bp
2 to 5 years INR 250MN 5bp
USD Volatile USD 30100MN 50MN Source: DB Global Markets Research
USD 2030MN
USD 1520MN
INR 1012BN
1 to 5 years USD 35MN 60110bp Volatile
Floating legal basis Fixed legal basis Active tenors Trading size Bid/ask spread Daily volume
References
Market nonexistent
3month T-bill Qtr Act/360
Market nonexistent
Hohense, Martin and Kyungjik Lee. “A survey on hedging markets in Asia: a description of Asian derivatives markets from a practical perspective”
Mijaljek Dubravko and Franck Packer. “Derivatives in Emerging Markets”. BIS Quarterly Review. December 2010 Fratzscher, Oliver. “Emerging Derivative Markets in Asia” Chapter for Asian Financial Market Development ”. The World Bank. March 2006 Goawami, Mangal and Sunil Sharma. “The Development of Local Debt Market s in Asia”. IMF Working Paper. June 2011 Yan, Jinan. “Development and utilisation of financial derivatives in China” . IFC Bulletin No. 35
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Jimmy Calapati. “BSP reviews bank hedging activities ”: http://malaya.com.ph/index.php/business/business-news/15576-bsp-reviews-bank-hedging-activities
Prinz P. Magtulis. BSP to banks: Trim NDF holdings: http://www.philstar.com/business/2013/03/09/917357/bsp-banks-trim-ndf-holdings PDS Group & PSE agree to co-develop Derivatives Market: http://203.177.79.3/_customer/pdex/PDS_Press%20Release_PSE-Derivatives_19Feb08.pdf Philippines to set up derivatives exchange (http://in.reuters.com/article/2008/02/20/philippinesderivatives-idINMAN12697820080220)
