Is HK a threat to Singapore's lead in Asia FX trading?

Is HK a threat to Singapore's lead in Asia FX trading?

Singapore remains the world's third largest foreign exchange (FX) centre and Asia's biggest, according to the 2016 Triennial Central Bank Survey by the Bank for International Settlement.

This is no mean feat but with perennial rival Hong Kong snapping at its heels, an interesting question is whether the Republic's status as the largest FX Asian centre is under threat.

The survey results, which were released early this month, showed that Singapore's FX average daily trading volume jumped 35 per cent from three years ago to US$517 billion in April 2016.

The expansion in Singapore's FX market was chiefly driven by growth in G-10 (which has the most heavily traded currencies in the world) and Asian currencies.

The currencies which increased the most included the yuan (78 per cent), yen (67 per cent), sterling (60 per cent) and South Korean won (55 per cent).

What was impressive was that the jump in volumes came amid a fall in global trading volumes; this in part boosted Singapore's share of global FX to 7.9 per cent in 2016, from 5.7 per cent three years ago.

The fall in global volumes - which averaged US$5.1 trillion per day in April 2016, down from US$5.4 trillion in April 2013 - was due to the appreciation of the US dollar (USD) during that period as it reduced the USD value of turnover in currencies other than the USD.

When valued at constant exchange rates, turnover was up slightly, by about 4 per cent between April 2016 and April 2013.

Still, that doesn't negate Singapore's pre-eminent FX position in Asia.

Singapore overtook Tokyo to become the world's third-largest FX centre in 2013. In 2010, Singapore had ranked fourth, with average daily turnover of US$266 billion that year, behind London, New York and Tokyo.

In 2010 Singapore had leapfrogged Switzerland to fourth place, pushing the latter to fifth rank. Coming in sixth and seventh places were Hong Kong and Australia respectively.

London remains the world's largest FX centre, though its 37 per cent market share in 2016 had declined from 41 per cent in 2013, its first recorded fall since the drop in 2001 from 1998.

The fall was mainly due to a drop in hedge fund activity as a result of difficult markets and profitability, said Andrew Ng, DBS Bank group executive and head of treasury and markets. New York ranks second globally.

Singapore's FX growth is due to several factors including being the Asian headquarters for mega banks, global institutional investors and MNCs as well as a leading private wealth management centre.

In the past few years, some of the world's largest pension funds and central banks have made Singapore their Asian home from where they invest into the region.

Among them are South Korea's National Pension Service, La Caisse de depôt et placement du Quebec, one of Canada's leading fund managers, Investment Company of The People's Republic of China, Norway's Norges Bank Investment Management, and the Swiss National Bank.

Japanese behemoths The Bank of Tokyo-Mitsubishi UFJ (BTMU) and Mizuho Bank also made Singapore their Asia and Oceania headquarters in 2013, as they go after more trade finance and cash management businesses among the region's ever-expanding corporates and MNCs.

Singapore is also benefiting from the trend of increasing affluence in Asia and FX trading being increasingly used as a wealth management tool, said Peter Chia, United Overseas Bank FX strategist.

The asset management industry continues to expand, with assets under management posting a 9 per cent increase to reach S$2.6 trillion last year, said Ravi Menon, managing director, Monetary Authority of Singapore (MAS) in July.

Matthew Cannon, HSBC Singapore head of global markets, said Singapore benefits from the scale and diversity of global institutional investors who use it as a base for Asian currency trading activities.

This has enabled Singapore's FX market share to grow despite the relative decline in importance of hedge fund investors as other institutional investors have increased their share of trading volumes, he said.

A great enabler of the shift of FX trading to Singapore away from centres like London, Tokyo and Sydney is the electronification of the market.

The growth in FX trading in Singapore is magnified by the adoption and strengthening of electronic dealing and trading infrastucture, amid the diminished or negative growth in other mature financial centres such as in the US and UK, said UOB's Mr Chia.

The 2016 survey also turned up another (leaping) frog - Hong Kong - which is now the fourth largest FX centre globally, having steadily marched ahead of Switzerland in 2013 and overtook Tokyo this year. Recall it was sixth in 2010.

Hong Kong's FX average daily turnover in April 2016 surged 59 per cent from three years ago to US$437 billion.

Hong Kong's sharp gains were due to big increases in trading between the USD and yen which doubled and accounted for 21.1 per cent of the total average daily turnover, up from 16.6 per cent in 2013, said the Hong Kong Monetary Authority.

There was also marked increase in trading between the USD and the yuan, up by 56.2 per cent, reflecting the role of Hong Kong as the global offshore yuan hub.

Impressive as Hong Kong's FX growth rate was, more formidable was its over-the-counter interest rate derivative activities. Over-the-counter interest rate derivatives average daily turnover rose 2.9 times to US$109.8 billion in April 2016 from April 2013.

By contrast, Singapore's interest rate derivatives market registered strong, but slower growth, with average daily volumes up 57 per cent to US$58 billion in April 2016.

The triennial survey said yuan doubled its share, to 4 per cent to become the world's 8th most actively traded currency and the most actively traded emerging market currency, overtaking the Mexican peso.

As the yuan joins the International Monetary Fund's elite basket of reserve currencies on Oct 1, many have predicted a meteoric rise in FX volumes.

Analysts have said that could attract as much as US$1 trillion of buying by public and private fund managers.

Hong Kong's formidable performance brings us back to the question: Is Singapore's status as the largest FX Asian centre under threat by this perennial rival? Given its largest offshore yuan hub position, is Singapore's decline - to second place - inevitable?

Maybe not. Hong Kong's FX expansion volumes may not be linear beyond an initial boost post Oct 1 because of it being joint at the hip to China where growth is slowing.

That's not to say Singapore won't face challenges with global trade slowing as just one example but the lion city does have certain advantages - it is a more diverse financial centre, and is not part of China.

What Singapore cannot do is rest on its laurels, and that's unlikely as the fear of becoming irrelevant is pretty much part of the country's DNA.

In July, Mr Menon also said that digitisation, competition, and consolidation are rapidly transforming the global (FX) landscape and MAS's focus is to position Singapore as Asia's e-trading hub to build on its FX centre, which is already the largest in Asia.

MAS is working with financial institutions and FX trading platforms to build relevant infrastructure such as matching and pricing engines that will anchor liquidity in Singapore, he said.

This article was first published on September 20, 2016. 
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