SGX is down 16 per cent in 2 days: What happened?

What

Singapore Exchange (SGX: S68) or SGX announced that its licence agreement with MSCI (NYSE: MSCI) will expire in Feb 2021.

With this news, it means that SGX will no longer be able to offer derivatives and options products bundled with MSCI, except for MSCI Singapore futures and options products. SGX intends to renew the MSCI Singapore licence agreement well beyond 2021.

At the same time, Hong Kong Exchanges and Clearing Limited (HKSE: 0388), or HKEX, announced that it will launch Asia and Emerging Markets futures and options contracts under a licensing deal with MSCI.

Under the agreement, HKEX will receive a suite of MSCI indices for which it will base an initial 37 futures and options contracts. This announcement follows a licence agreement signed last year with MSCI to launch futures contracts on the MSCI China A Shares Index.

So what

The expiry of the MSCI contract will have some impact on SGX.

For context, MSCI contracts comprise around 15 per cent of SGX's equity derivatives daily average volume (DAV), and around 12 per cent of total derivatives DAV.

The potential pro-forma negative impact on the fiscal year 2021 net profit after tax will be between 10 per cent to 15 per cent (assuming a full 12 months are used and before any mitigating actions).

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Now what

SGX intends to either collaborate with other partners or develop their own derivative products to mitigate the impact of the loss of the MSCI derivatives suite of products.

At the time of writing, SGX's share price has declined by around 16.2 per cent from $9.90 to $8.30 in response to this news.

SGX has announced this almost nine months in advance, so it provides the bourse with sufficient time to devise strategies to mitigate the decline in earnings.

The company has also reiterated its commitment to keeping a sustainable and growing dividend.

This article was first published in The Smart Investor. Disclosure: Royston Yang owns shares of Singapore Exchange Limited.