The Singapore Exchange (SGX) plans to introduce an iron ore futures contract next month in a bid to retain and attract more US clients faced with tougher rules in trading over-the-counter (OTC) derivatives, industry sources said yesterday.
The plan by SGX, which clears the bulk of globally traded iron ore swaps, shows how exchanges outside the US are trying to ensure Washington's regulatory net over the world's US$640 trillion (S$780 trillion) OTC market does not dent their US client base.
"Although the US clients remain a small part of SGX's swaps business, I believe it wants to make the new product available to them so as not to lose market share," said an industry source with knowledge of the plan.
The futures contract, which will also be cash-settled like the swaps, may be launched late next month.
"I think we are unlikely to see other clients based outside of the US trading these futures contracts, as from my understanding, the swap and futures contracts will be fungible on the exchange so as not to create a two-tier market or split liquidity," said another source.
"I guess brokers will still play an active role in the swaps contracts finding counterparties and matching prices, while futures trades will be block trades from the brokers."
SGX declined to be specific about its future plans.
The bourse is working with regulators "to deliver innovative products to our customers from diverse regulatory regimes", Mr Michael Syn, head of derivatives at SGX, told Reuters in an e-mail.
Mr Syn reiterated that SGX is working to register with the US Commodities and Futures Trading Commission (CFTC) as a derivatives clearing organisation, or DCO.
Under Washington's Dodd-Frank Act, the CFTC requires all clearing houses that clear swaps for US customers to be registered with the regulator as a DCO.
The reforms are aimed at preventing financial catastrophes in the OTC market - a huge, opaque market that is partly blamed for fuelling the 2008 global financial crisis.
There was concern that the Dodd-Frank rules would push SGX's US clients to other exchanges, including the CME Group and Intercontinental Exchange, some of whom have adapted to the new regulations.
SGX, which clears over 90 per cent of iron ore swaps traded globally, saw volume hit a record 17.7 million tonnes in September from less than 200,000 tonnes when it launched the service in April 2009.
But an increasing shift to futures from swaps would be a natural progression for iron ore, whose pricing has rapidly evolved to spot-based from four decades of yearly-set contracts in less than two years, increasing the need for steelmakers to hedge prices.