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AseanAffairs Magazine January - February 2011



With the growth of the Asean economies, David Swartzentruber reports on the entry of Dark Pool electronic trading platforms into the region.

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Thomas McMahon, Chief Executive Officer of the new Singapore Mercantile Exchange (SMX) discusses the operations of the exchange, the first pan-Asian multiproduct derivatives exchange for both commodities and currencies.
: SMX commenced operations in Singapore last year. What is the focus of your operations and what new products have you introduced? H ow will this impact Asian commodity trading?

A: The Exchange went live for trading on 31 August 2010 with futures contracts on WTI crude oil and Brent crude priced in Euros, Singapore-deliverable gold futures and Euro – US Dollar currency futures.

Presently our operations are focused on enhancing all trading, clearing and settlement processes, procedures and systems to establish robust foundations that all parties involved, from stakeholders to market participants and regulators are confident about and can be proud of.

>>As the first pan-Asian multiproduct derivatives exchange for both commodities and currencies, emphasis on industry familiarization and education about the benefits of trading on SMX is also a high priority focus in the short to medium term. <<

As the first pan-Asian multiproduct derivatives exchange for both commodities and currencies, emphasis on industry familiarization and education about the benefits of trading on SMX is also a high priority focus in the short to medium term. Feedback from key industry players so far is that the SMX platform is just about ready to move into advanced developmental stages organically, i.e. product range expansion and diversification as membership and participation increases with time.

Slated for listing next will be additional currency pairs, the world’s first international black pepper futures contract and an iron ore futures contract with basis on the Metal Bulletin Iron Ore Index. We have also signed a strategic agreement with the Tokyo Commodity Exchange – TOCOM which will see SMX TOCOM futures contracts on TOCOM energy products already trading such as TOCOM crude, gasoline and kerosene.

SMX is designed to consolidate key commodity sectors across the Asia-Pacific region. This includes agricultural produce, which may already be ahead in terms of volumes compared to the established consolidated exchanges in North America and Europe, but is currently still fragmented and regionally, domestically focused. Derivatives trading – a managed system of investing resources and efforts into insuring baseline earnings and hedging against unexpectedly adverse trading environments is very important for the physical trading of commodities. SMX markets and products will impact Asian commodities trading positively for several reasons.

1. Buy and sell activity along with price discovery achieve transparency which will benefit participants along the entire demand and supply framework for any given commodity. At present both over the counter swaps sitting in bilateral spaces and main Asian exchanges listing products to satisfy primarily their domestic marketplace are constricting price discovery based on actual demand and supply fluctuations which physical traders are capable of bringing to the same table as all other players in daily price determination.

2. The SMX architecture is open and inclusive in all aspects from membership to accessibility and connectivity via accepted platforms already in employment. That basically means borderless trading, which paves the way for direct market participation from physical and paper traders, brokerages, investors not located in Singapore. Previously only a handful influenced commodity prices, now the SMX platform allows an infinite number of participants for each SMX market, and that will naturally ensure that prices reflect fundamentals affecting the majority and not the other way around.

3. Implications for the global context then follow significantly. Previously international liquidity is restricted by default to exchanges not operating during real-time physical trading hours for a specific commodity, now global hedging portfolios and physical commodity traders worldwide can simply plug into just one platform to trade with Asia as a whole.

4. Given that Asia is home to the world’s largest producers and consumers of commodities, price discovery during our trading hours is less artificial and inflated in favour of native consumption needs. This benefit is especially significant for the agriculture and energy markets, where the price of basic necessities like food and heating oil remain affordable for the majority.

5. Onset of new regulatory and credit environments are calling for greater risk management measures such as compulsory central counterparty clearing houses, which are what SMX offers.

Q: How do you see the evolving role and future importance of Asian financial centres for global commodities trading? co
I expect an increase in importance and influence and see financial centres in cities such as Mumbai, Singapore, Hong Kong and Shanghai share more of global activity. Commodities trading in fact will be one key driving segment by proxy of Asia being home to the world’s largest production and consumption markets.

Physical commodity production and consumption activities have gained enough traction over the past decade to directly affect the pricing and trade of many other tradable asset classes/derivatives/financial instruments. Much sought after market volatility and/or price gains for traders have for most of 2010 have been in commodity markets, which have outperformed all other financial trading segments. Asian financial centres, located in the same backyard as the more commonly traded commodity markets globally, will therefore exhibit incremental growth in size and exert influence organically in line with actual market requirements.........


Thomas McMahon is CEO of Singapore Mercantile Exchange. He has more than 25 years of industry experience in derivatives and commodities across Asia and the US Prior to joining SMX, he was president of the Hong Kong Mercantile Exchange and former director of the New York Mercantile Exchange.


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