Once dubbed a ‘zombie’ index, this Asian stock market is trying European-style trading to reinvent itself

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September 28, 2023
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TOPSHOT – People pass by as the city skyline is reflected in a puddle leftover from earlier rain in Singapore on February 8, 2022. (Photo by Roslan RAHMAN / AFP) (Photo by ROSLAN RAHMAN/AFP via Getty Images)

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The Singapore Exchange has become the first exchange in Asia to offer trading in “structured certificates” — but analysts say it’s not clear if the new offerings will benefit SGX significantly or boost its trading volumes.

Structured certificates are financial instruments issued by a third party, that are based on underlying assets — their returns depend on the performance of the asset, which can be a single stock or an equity index.

It’s still “too early to say whether there will be demand for the specific securities introduced,” said Thilan Wickramasinghe, Maybank’s head of research in Singapore.

Singapore began offering listed structured certificates on Aug. 30, with its inaugural issue being one linked to Hong Kong-listed shares of Chinese tech giant Alibaba Group Holding.

“We think this market will take a period of months … to figure out what investors’ appetite are for various names,” Michael Syn, senior managing director and head of equities at the SGX told CNBC’s “Street Signs” in late August.

“So tech names, Hong Kong names, U.S. names, Japanese names. I think there’s lots of possibilities there. But the first few, I think, appeal quite broadly.”

Serene Cai, SGX’s head of securities trading, told CNBC on Tuesday that since the launch a month ago, the exchange has seen “increased interest from both issuers and distributors keen to incorporate this product into their offerings.”

SGX sees this as a positive development, she said, as this broadens the range of investment options available to the market.

Will it revive SGX?

The SGX has sometimes been deemed “boring” and “unexciting.” It was once even referred to as a “zombie” bourse due to its thin trading volumes.

In 2022, there were more delistings than IPOs on the exchange.

Even before the pandemic, the exchange more saw delistings than listings. From 2009 to 2019, there were 302 delistings, while only 279 companies were listed, according to the finance minister at that time, Tharman Shanmugratnam.

Singapore’s IPO market has seen listings worth only $18.6 million so far this year, putting it on track to have the worst showing since 2011, according to aggregator Inside Venture Capital.

SGX’s move to broaden its equity-linked product base “could drive incremental market interest,” including offering depository receipts and structured certificates, Wickramasinghe told CNBC.

“This will give investors a wider choice of market and thematic exposure, beyond what has been available before,” he added. “We have observed success in SGX’s derivatives business where exposure to a wide variety of geographies and underlying asset classes are offered in an Asian time zone.”

In the near term, structured certificates are not likely to have a material impact on the earnings of SGX, he said, but they could give exposure to underlying securities in other markets, with easier and more convenient access through SGX, Wickramasinghe said.

Still nascent

Speaking to CNBC in late August, Syn said he’s confident the market will develop and mature as the SGX lists more of these structured certificates.

One of the benefits of listing structured certificates is transparency, Syn said. There is daily pricing with listed certificates and investors can liquidate their positions if they wish to — which is harder when the certificates are in an “over-the-counter” position.

But it will take “significant efforts from all involved to grow this market in the short term,” Adam Reynolds, Asia-Pacific CEO from Saxo Markets told CNBC.

According to Reynolds, under the OTC distribution model, structured products are typically distributed to high-net worth clients by private banks, and would involve embedded fees for the creator, as well as fees for the bank or distributor.

However, with listed certificates, he said there will still be fees paid to the creator but no fees paid to the distributor. “This might disadvantage the growth of the listed certificate market [compared to] the OTC market distributed through the private banks.”

Why Asia?

Structured certificates are more more popular in Europe, as investors there are “broadly speaking, very yield focused,” Syn told CNBC.

The structured certificate market in Asia is “very vibrant,” but until now, it was only available OTC and from private banks to accredited investors, he added.

“The difference with listing it on the exchange is that it comes with a broader distribution perimeter, meaning you don’t have to be a private bank client, or an accredited investor,” Syn said.

In addition, he said Singapore’s status as a wealth management center means investors are more sophisticated and there is a “great desire” for yield enhanced products.

Syn noted, “In the current market environment, yields are up, base rates are up, the curves are flat, equities aren’t going anywhere. So any kind of yield enhanced product for range-bound trading is very, very popular with investors.”

How do they work?

Some structured certificates, like the one offered by SGX, are designed with an autocall feature, and is a yield enhancement certificate which means it expires after a set time and investors holding the certificates then are assured of a fixed coupon rate, or a return, when it expires.

For example, if a structured certificate comes with a 10% coupon, an investor buying the certificate will get a 10% return upon expiry, even if the value of the stock goes up more than 10%.

“So it’s a trade-off of believing that it won’t go up more than 10%, but in return getting some sort of assured return at the end of the period,” Syn told CNBC.

This works well if an investor expects markets to be range bound, as the coupon is likely to be higher than the capital gains.

Should the stock price go south, the shares will be delivered to the investor when the structured certificate expires and the investor holds the shares at current market value.

As such, Syn explained that investors must have the view that they want to buy the stock before they purchase the structured certificate: “You did not think it was going too high, you’re willing to collect a coupon. But if it does go down, then you’ll own the stock.”