CBOT, SGX To Launch Asian Derivatives Market

Securities Industry News: " The Chicago Board of Trade (CBOT) and the Singapore Exchange (SGX) have agreed to form a joint venture to establish a regional commodity derivatives market, the Joint Asian Derivatives Exchange (Jade). The all-electronic market, half-owned by each partner, is expected to be launched in the third quarter of 2006, CBOT and SGX said this week.

Robert Ray, CBOT's senior vice president of business development, said that the company's electronic platform, built on the Euronext organization's LiffeConnect technology, will also be the trading backbone of Jade. The CBOT will also be responsible for straight-through processing into SGX Clearing Corp.

The agreement follows a memorandum of understanding (MOU) that CBOT, which is leveraging the recent extension of its telecommunications network into Singapore, signed with SGX in August.

Ray explained that the CBOT pursued formal cooperation to help meet the "incredible demand" within Asia for commodities. In particular, the CBOT noticed a "very fragmented marketplace in Asia, with a lot of exchanges in different countries as well as technological and financial challenges" that it wanted to address.

"We saw an entire region that was fraught with systemic risk," he said. "We saw the opportunity to develop a pan-Asian exchange that would mitigate all of those risks, based in Singapore, which has been the gateway to most of Asia and the West, with a strong government and a sound regulatory environment."

He added that CBOT could couple the SGX's "very sophisticated exchange and clearinghouse [with] our technology and overall knowledge of commodities, and we thought this made for an extremely positive partnership. That's a value proposition we think we're bringing to the region."

CBOT president and CEO Bernard W. Dan said: "We are excited that our initial MOU with SGX has evolved into a defined action plan to launch a new commodities exchange in Singapore. Our agreement with SGX to build a premier electronic marketplace in this growing economy demonstrates our commitment to meeting the growing demand for liquid risk management tools in the Asia-Pacific region."

Hsieh Fu Hua, SGX CEO, called the joint venture "key to SGX's strategic focus to be an Asian gateway. It represents a further step in Singapore's development as a leading derivatives trading and risk management center in Asia. Just as we have pioneered successful partnerships with other leading exchanges, we are excited to collaborate with CBOT to establish an Asian commodities exchange that meets the increasing demand for hedging Asian product prices."

Asia-Pacific derivatives growth has also lured the Chicago Mercantile Exchange, which has made several announcements over the past year regarding expansion in the region. CME currently has offices in Tokyo and Sydney and a telecommunications hub in Singapore. Earlier this month, the CME appointed C.F. Wong as managing director for Asia. In October, it announced plans to launch a new futures contract based on the S&P Asia 50 Index, billed as the only pan-Asian equity index and tracking the 50 largest stocks traded in Hong Kong, Korea, Singapore and Taiwan.

A CME spokesperson also noted that the CME has a 20-plus year MOU in place with SGX to trade eurodollar contracts. Regarding the CBOT's new venture, he added, "Competition is good and we believe everyone is following our lead in Asia."

William Cline, head of Accenture's capital markets practice in New York, said the joint venture reflects the high expectations for Asia-Pacific markets and the current fragmentation of liquidity along national lines, with each market's being of modest size relative to the U.S. and Europe.

"This alliance is something that I expect we'll see more of as the major exchanges in Europe and the U.S. seek to expand and diversify their revenue through the Asia-Pacific region," said Cline. "What we're seeing among the Asia-Pacific exchanges is a recognition of the fact that there is likely to be further concentration of liquidity around fewer trading hubs. An interesting component of this deal is the fact that through leveraging the CBOT technology, the SGX is able to enter a new market very quickly.""