LUKKEN: I should start by congratulating you on your anniversary. It’s been four years since you joined SGX.
BÖCKER: Yes, exactly four years and one day.
LUKKEN: So let’s start by talking about what led you to join the exchange. Where were you at the time, and what inspired you to come out here to Singapore?
BÖCKER: Well, at the time I was president of Nasdaq, living in New York. This was not long after the merger of Nasdaq and OMX. When I started thinking about this move, I did my homework pretty thoroughly, talking with my friends at the IMF and World Bank and a few other places, learning more about what was going on in China, Singapore and Southeast Asia. I spent a lot of time out here as well before I said yes. In fact, it wasn’t until I really did my homework that I got really, really keen to see what we can do.
LUKKEN: Did this turn out to be what you expected?
BÖCKER: It’s a bit different here than at other exchanges elsewhere. We are operating in a part of the world where derivatives are still fairly nascent and under-used comparatively. If you look into how many corporates are risk hedging, how many longterm investors are using futures, how many in the farming industry or in the commodities industry are using these markets, you can see that we are still in the early years.
This is why we welcome other exchanges to come into Asia. I’d like to see CME investing more in Asia. I’d like to see ICE investing more here. I’d like to see Eurex, Liffe, all of them to come to Asia and play a part in growing the market.
One of SGX’s key strengths is proximity and accessibility to growth areas. Not many people realize that half of the world’s population is within six and a half hours of Singapore. There are not many places where you can reach so many potential users. In the next two decades, we can expect another 2.5 billion people coming into the middle class with needs and expectations. Just think of the capital resources that will be required to build infrastructure to satisfy these exacting new needs. There is a huge opportunity for financial markets in this part of the world, and that is really what attracted me to come here.
LUKKEN: A lot of us in the industry are working on regulatory projects such as EMIR and Dodd-Frank implementation. Are you dealing with those issues as well or are you more focused on opportunities to grow the business?
BÖCKER: I wish I could say that we are not dealing with regulatory matters and only focused on clients and products. The truth is we are spending a lot of time on the regulatory changes and we have committed huge efforts to this.
As an international financial center, we will succeed for the long term only when we have a very clear and good understanding of the regulatory regime in the U.S. and Europe. We need to have a regulatory framework in Singapore that is well recognized in the U.S. and in Europe, and we have to adapt to the local Asian regulatory obligations as well. That is the challenge of being a younger international financial center. If you are a newer market, you need to be even tougher when it comes to openness, transparency and building trust.
LUKKEN: What is the mix of trading on your exchange? How much of the trading comes from within Singapore, how much from the U.S. and Europe, and is that trend changing?
BÖCKER: The trend is indeed changing. Today, about 20% of our volume in the futures business is from overseas. That is 20% up over the last few years. This is because an increasing number of international firms are choosing to move over to Singapore. Some of them could have been trading with us from other locations, and now they would rather be located locally in Singapore. Investors and firms are voting with their feet.
LUKKEN: Are people moving here because they don’t like the regulatory environments in other locations?
BÖCKER: There are many factors and reasons why firms are coming here, but I want to emphasize that I’m not a strong believer in regulatory arbitrage. I don’t think we will ever be a recognized financial center like London or New York if there is regulatory arbitrage. We need to be on par with international practices when it comes to regulatory trust.
There is, however, a difference in how we approach the matter. We are more oriented towards an outcome-based approach. We ask ourselves, what do we want to achieve? What are the things in the market that we want to improve? How can we incentivize better behavior? Such is the thinking in Asia, more so here than in Europe and the U.S., where there seems to be more of a focus on legislation. The market has a tendency to find new ways to do the things that have been forbidden. In my view, finding regulation that incentivizes the right behavior will move the market faster in the right direction.
LUKKEN: You are looking to become a registered clearinghouse in the United States, and also looking for recognition status in Europe. Strategically, how does that position SGX?
BÖCKER: Our clients need to feel confident that we are living up to the regulatory framework in those different jurisdictions, so we need to adopt international standards. For example, we were the first country in the world to adopt the new PFMI [Principles for Financial Market Infrastructures] standards. It took us nearly a year, from the preparation to changing all the things that needed to be changed, in order for us to get to the required international level. It is fantastic that we were able to manage those changes and make it happen for our clients and markets in such a short period of time.
LUKKEN: You spoke before about welcoming other exchanges to compete with you in Asia. We have ICE buying Singapore Mercantile Exchange to get access into Asia. We have CME building partnerships around the globe. Do you see one model winning out over another?
BÖCKER: First of all, scale is much less important for an exchange in Asia than it is in Europe or the U.S. Asia is not just one country or one region. It comprises many diverse countries with totally different rules and legislations, and I don’t expect to see any harmonization in the foreseeable future. There’s hardly any incentive for countries here to adopt neighboring countries’ rules of law.
Here is where Singapore Exchange comes in. As an exchange, we create clarity amid the complexities. We have been operating an established futures market here a long time. We have legal certainty with rules that people are familiar with. Singapore, with an ‘AAA’ rating, is also the arbitration center of Asia.
All of these factors are driving the success we’ve seen in our equity futures business. At our exchange you can trade futures on the Nikkei, the Indian Nifty, the Taiwanese index, the Chinese A50 index, the MSCI index for Indonesia, and we’ve just added Thailand and the Philippines. For clients, they can manage their clearing and counterparty risk at one place.
If you look back over the last two years, SGX has been growing quite rapidly. In November, our futures volume was up 23% year on year. If you take the first 11 months of this year, compared to the first 11 months of last year, we’re up 44%. Open interest is scaling even faster. In the same 11 months, January through November, open interest is up over 80%. It tells you that more and more of that volume is staying here overnight. We have a higher market share of overnight risk than we have for volume trading. For our Nifty futures product, our share of the open interest is about twice the share of the trading volume [relative to the home market in India]. So going back to your question, this really validates the importance and shows the results of all the work we have done to strengthen our clearinghouse and meet international standards.
Earlier in the year, the IMF was in Singapore to assess our financial market infrastructures. They did a very thorough job in inspecting every aspect of our operations as well as the oversight and supervision of our regulators at the Monetary Authority of Singapore. In their report, which was released in December, SGX was accorded very high ratings for meeting the standards set by IOSCO. This is a very strong validation of all the work that we have done in Singapore—not just from my colleagues at the exchange, but also guidance and efforts from our regulators—to strengthen Singapore’s position as an international financial center that meets the highest standards for financial market infrastructure.
LUKKEN: So are you saying that strong regulation is actually a competitive advantage for SGX and Singapore?
BÖCKER: Exactly. People talk about the flight to quality in the bond market. What we are seeing now is essentially the flight to quality in regulation.
LUKKEN: I’d like to turn back to your growth plans and the business opportunities you see on the horizon. In October you entered into a partnership with the Shanghai Futures Exchange for commodities. What sort of connections are you building with China?
BÖCKER: First of all, there is a strong history of the Singapore-China relationship in financial markets. We have a long tradition of investments from China into Singapore and even more from Singapore into China. Singapore ranks in the top five sources of investment in China. So the Singapore-China relationship is very strong and healthy.
As a financial market, we are constantly working to strengthen and enhance that relationship. Today, we have 140 companies from China listed on our exchange. Our A50 index futures contract, which covers the 50 largest companies on the Shanghai and Shenzhen stock exchanges, is gaining in prominence and growing from strength to strength. We signed an agreement with the Shanghai Futures Exchange in October with a focus on energy products. In December, we inked an agreement with the China Futures Association, which is an interesting way to channel futures trading into Singapore. In April, we reached a deal with the China Financial Futures Exchange to connect with them on index futures.
On the commodities front, we confirmed an agreement in May this year with the Beijing International Mining Exchange to promote the development of the iron ore market. Iron ore is the world’s second largest commodity demand after crude. SGX has 90% of the cleared iron ore volume. However, that volume is still smaller than OTC trade.
LUKKEN: Will there be significant opportunities for SGX as China internationalizes the renminbi?
BÖCKER: Absolutely. Singapore is a significant and important offshore hub for renminbi products and we launch new products all the time to meet the needs of our customers using our platform. In the bond market, for example, we are working with the Bank of China to promote renminbi bonds. More than half of the renminbi bonds traded offshore are actually listed here in Singapore. In August, we started trading equity stocks in renminbi.
If you step back and look at the overall trend, what’s going on right now is that north and south Asia are being connected through these financial products. As more of these connections are established, it plays to our strength as the natural gateway. Other markets have their strengths. Our strength is being open and transparent, having clear rules about the market and having robust frameworks for trading and clearing.
We are now trying to enhance that by building our distribution network. We recently received the ATS license in Hong Kong for our futures market. You will probably see us in Mumbai in the first quarter next year. We are adding more people in Tokyo, London and the U.S. We are expanding our reach.
LUKKEN: Tell us a little bit more about what you are doing to strengthen clearinghouse procedures and to strengthen risk management in that area.
BÖCKER: That would be a long list, actually. Starting from the top, we had some organizational changes, and put more emphasis on risk management. I appointed Agnes Siew to be the new chief risk officer. She is very experienced in risk management, and she will be reporting directly to me. A year and a half ago, we made a big investment in the next generation of technology for risk management. We’re now implementing that technology, which will take us into the future with a new way to measure and constantly monitor risk in this part of the world, making it much easier to broaden out in products and time zones.
We are putting a lot of our own money into the clearinghouse. We have more of our own money in our clearinghouse than most of the bigger clearinghouses have from their owners. What this means is that we share the risk commitment by putting in our own money. This has been the practice of SGX. I was very pleased when I came here four years ago and learnt about this philosophy and belief, because this is the same practice at OM and OMX. We always put our own money forward and minimize the funding from our members. Members should predominantly see to it that their own clients put up collateral and that should be the base of how we build the structure of risk management.
LUKKEN: Since the financial crisis, the buy-side has become much more interested in understanding how clearinghouses manage risk. Do you see that here in Singapore as well?
BÖCKER: No doubt, there is a higher interest from both our members and our members’ customers. There is more scrutiny of how we are operating and more demands for us to explain what we are doing. We’ve always been very open and transparent about our clearinghouse operations and how we mitigate our risks.
We haven’t changed in our approach. Our company does not have leverage. We have no debt. We have more cash than is needed for our operations and for our clearinghouse. We take a very prudent approach in our operations. That’s been our DNA since we came together as one company at SGX, 11 years ago. So I would see it as a continuous development rather than a sudden change. When you’re growing by 80% per annum in open interest, of course you need to manage that and match that with your own capital. We do that, with a smile.
LUKKEN: I’d like to end with a personal question. As someone who grew up in Scandinavia, you must find it very different to live here in Singapore, which has the same climate as a tropical rainforest. Do you miss the snow?
BÖCKER: I may look Swedish but hopefully I think more Asian now. I love the sun, humidity, scent, noise, people and especially the food. Singapore has awakened my taste buds and made me into a foodie!
Walt Lukken is the president and chief executive officer of the FIA and chief executive officer of FIA Global.
