“Singapore Exchange after the failed ASX bid – what next?”

May 2011

(Part 1 of 3) Conversation with Muthukrishnan Ramaswami, president of the Singapore Exchange, on the Australian government’s reaction to SGX’s bid for the Australian Securities Exchange – building infrastructure – strategy in Asia.

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Here is the transcript of the video.

Emmanuel Daniel (ED): Good morning everybody, and welcome to this very important and special interview with Mr. Ramaswami, the president of Singapore Exchange.  We’re very pleased at having you here this morning, especially at the back of very interesting developments in the Singapore Exchange story.

Just by way of introduction, we are recording this session, and for the first half hour, I will interview Mr. Ramaswami on stage and then after that, we will open up for questions from the floor.  Okay?  And so that we can capture an essence of – as much as possible in terms of what we need to learn from this conversation.  Another point about the conversation is that I know that the current developments on Singapore Exchange is of great interest to everybody.

But the focus of the interview will be really on building infrastructure and the direction of the markets and exchanges industry as a whole and Mr. Ramaswami’s perception in terms of strategy and where he thinks that the industry will be heading.

We’re okay?  I’m very pleased to be able to speak today with Mr. M. Ramaswami, the president of Singapore Exchange at the back of some very interesting recent developments in the exchange’s attempts to become more regional.  Mr. Ramaswami, thank you very much for having joined us this morning.  Well, you’re coming on the back of some very interesting developments in terms of Singapore Exchange’s desire to become more regional in its attempt to be merged with the Australian Stock Exchange.

Where are we now, really, in terms of the conversations, in terms of the perceptions of the Australian government in terms of how far they will want to support such an initiative?

Muthukrishnan Ramaswami (MR): Morning Emmanuel.  Thanks for having me here.  I think this morning the honourable treasurer in Australia came out with a formal statement that he does not approve of this particular deal going forward.  Along with that, he has kind of made a couple of other remarks, which is the rationale for kind of saying no to this and what they think would happen in the future in Australia.  So having taken note of that, I think we will work towards seeing how that develops and where Australia goes over time.

But for us, it’s – life goes on as usual.  I think that this was a transaction that we were hoping to do.  We thought there was a good potential and upside for both the exchanges.  That’s kind of why we pursued that, but not having that kind of immediately come to fruition is not by any means a disaster for us.  It’s something that we just live with, and we’ll move on.

ED: But the Singapore Exchange, over the past five to eight to ten years, has been finding or looking for the Phillip in order to see what the next big thing is in the exchanges world.

And on a number of fronts you are challenged, just as many exchanges around the world are challenged.  You had for a time the prospects of the Chinese listings in Singapore, and then you did a lot of joint venture deals, especially with the Indian companies and Indian exchanges in terms of representing their products on your platform.  And then, more recently, you have had initiatives with Chi-X and – to look on the electronic platform.  It would appear that nothing seems to be working too well.

MR: I think what I need to do is kind of step back and talk about the strategy for the Singapore Exchange, what it’s been doing over the past, let’s say five, seven years, as you point out, and where it’s trying to go – and where we think we’ll be in a few years from now.  If you take the exchange, there are three big activities.  One is the ability to raise capital for the industry and for companies that want to raise capital.  The second is the securities marketplace where the trading of these takes place, and then the third is the derivatives marketplace where there’s a lot of derivatives contracts that we trade.

In each of these contexts, we try to play the role of a gateway to Asia, and let me explain that in kind of each of the contexts.  So in the first context, which is capital raising, what we look at as a gateway to India is we have companies from all around Asia who list on our exchange.  Increasingly, companies don’t look to list only on your home exchange in terms of raising capital.  What’s happening is there is a sector of specialization that’s coming across exchanges.  If you look at SGX, we kind of have a number of REITs or real estate companies that are from China, India and around the region that are listed on SGX.

Similarly, there’s a concentration of marine and port-related activities where you have companies all the way from Norway through to most of the Asian locations, which kind of list on SGX.  So we – the third area we would like to focus on is mining and minerals where, I think, there’s a lot of potential from companies in Australia, companies in Indonesia, which need to raise a large amount of capital for them to kind of be able to pursue what they need to pursue.  And lastly, the infrastructural trust.  We kind of look at India and Vietnam and places like that, which require a lot of infrastructural investments.

And again, we look at the listing venue for that.  So in our context, what we look at is, given the fact that the Singapore marketplace itself is limited, what we are trying to do is become a regional hub for raising capital and be available for all these kind of four or five specialized industries to be a listing venue.  Right?  So that’s the first of our strategies.

The second part of it, which is the trading venue – now, as a trading venue, increasingly, round the world, when you look at it, there’s more and more evidence that people do want execution capability, which is institutionally driven.  That’s how the dark pools kind of emerged.  And so, what we do want to do is kind of not fight that trend but play with that, which is kind of provide better execution capability such that the retail investor has the things they need, the institutional investors have the things they need.

And again, in both of these, if you look at a marketplace, the key is about being fair, transparent and orderly.  That’s kind of what we insure, so the marketplace we run is, therefore, amenable to both an institutional trader and a retail trader.  If you look at the bourses in the West, most of them have become institutional trading locations.  Very little retail participation happens in, let’s say the New York Stock Exchange or the London Stock Exchange.  Most of it is institutionally driven, either by hedge funds or mutual funds or pension funds.

Whereas, in Asia, depending on the market, the retail participation is reasonably big.  So we need to provide for both, and so that’s the second part of what we do.

And then the last piece, which is the derivatives piece, again, we play very strongly to what we call a gateway to Asia because we have derivatives contracts that provide an underlying marketplace, which is very different.  So we have a contract from India, which is a NIFTY contract that we trade.  We have the largest liquidity on the NIFTY outside of India.  It trades on CME and on us.  So if you compare, we traded the NIKKEI contract, we trade the Taiwanese contract.  Over time, what we want to do is kind of be able to trade every contract that is in Asia to provide this ability to come to one place and be able to trade the derivatives of that marketplace.

So in this context, a small trader sitting in, let’s say Chicago, where all the futures traders on CME, by coming into one exchange in Asia can take a position or a view or participate in the underlying economics of all of the Asian marketplaces.  So that’s kind of the third aim.

And now, what we are looking at is the emergence of the commodities marketplace, and I think that over the last several years, depending on who you talk to, the production and the consumption of commodities is at its largest in Asia – with China and India being huge consumers and Indonesia and Australia being big producers.  But at the same time, when you look at the commodities marketplace, most price discovery happens in London, happens in Texas, West Texas Crude.  So very little price discovery is happening in the places where commodity is produced and consumed.

But price discovery happens elsewhere, and these contracts are traded off those prices.  So I think over time, in the next five, seven years, Asia will develop its own price discovery mechanisms, and we will be a key part of that.  So in this backdrop – right?  – that’s where you’ve got to look at how we are trying to transact with anybody else.  And as an exchange, we’ve been pioneering in many of the efforts, so if you take our association with CME, you know, it started in, I think, 1984.  At that time, no one thought about working with exchanges cross-border, and even today we have the only mutual offset agreement in place round the world between CME and SGX.

And so, a trader sitting in Asia can trade contracts that are fungible with those on the CME and kind of decide to clear it in another location.  So it provides great risk control, as well as clearing capabilities but allows you access on a 24-hour basis to that contract either in CME or here.  So if you take all of these efforts and kind of look at how SGX has grown over time, it’s grown pretty well.  We have a cumulative growth rate of over 20 percent.  Very few exchanges can kind of boast of that.  And the second part is, that’s how we have stock price that allows us to kind of even make a bid for a larger exchange like ASX, which is part of the problem.

You know, where people think it’s a smaller exchange that’s making a bid for a larger exchange, but I think it’s all about our potential and how we are viewed by the investing public.

ED: You’ve a lot of infrastructure put in place, and as you just pointed out, you’ve got a very comprehensive derivatives trading platform, but they’re not necessarily used by the traders.  The CME traders do not necessarily use Singapore as a one-stop shopping spot for the rest of Asia.

MR: No, I wouldn’t say that.  I would say that it – the traders who are not very large institutions and who are futures traders in U.S. use SGX extensively.  If you look at the volume of NIKKEI that is traded on SGX versus the home market, if you look at the contract in Taiwan traded – in each of those contracts, about 20 to 25 percent of the volume is on SGX, and the 75 percent is the home market.  And by having that interplay between an overseas location and the home market, it also helps kind of insure continuity regardless of what happens – you know, an earthquake in Taiwan or a tsunami in Japan.

In each of those kind of contexts, all of these dealers have always had access to an overseas location – similarly, in the context of some of the issues in India.  And we believe that a market share of about 25 to 30 percent is kind of appropriate for a second location.  We don’t think that we would be a hundred percent of the contract.  For us, the key from where we are is, one, expanding participation so that we bring more liquidity into each of those contracts and it helps the home market as well.  And the second is to kind of expand our contracts such that we cover the rest of the market.

So that’s where we constantly are in dialogue with Korea, we constantly in dialogue with the marketplaces whose contracts we don’t have on our platform.

ED: You are in some ways Asia’s perfect exchange.  You have all the infrastructure in place, you have all the joint ventures in place, you’ve got all the technology in place and so on.  You’re not small, as in many of the local bourses are, and neither are you large, as many of the global bourses are.  And in fact, the Hong Kong Exchange would be much larger.  And if you look at the formulas that make them successful, the ones that are smaller are actually closer to their marketplace, and the ones that are larger are actually very successful on the back of very simple product sets.  In the case of Hong Kong, it’s the China story.

Singapore, as a country, seems to be – seems to have become successful on the Forex part of the business, and I think that you – you’re taking on a number of the derivatives, a number of the futures products, quite successfully in that sense.  Give us a sense of your relationship with the Singapore government and the Singapore regulators.  And what is their sense of what the marketplace should look like?

Given the fact that you have built so much infrastructure, would they like to see more product sets go through you, or are they really open to new electronic channels and electronic exchanges coming onboard and take an open market field sort of an approach?  Are they moving towards that?

MR: So I’ll answer this with two examples.  The first one I will use is the context of OTC trading of financial derivatives.  Now, from the time of the last financial crisis to now, that’s where most regulatory focus has been on and how do you get these either on to a clearinghouse or onto an exchange.  Well, the Dodd-Frank implications to the banks in issue and so on.  So if you take the SGX there, we kind of look at this as, again, a process that will bring more and more off the settlements onto a CCP and onto a clearinghouse.

We don’t think the trading will go onto an exchange.  Therefore, what we have done is we’ve become a CCP that today clears interest rate swaps, and we are the first one to do that, and we’re the only one to do that outside of LCH and CME who were always in that business.

ED: The relationship between you and the CEO of Singapore Exchange – is the CCP your initiative, as opposed to the core business?

MR: No.  The way we run it is there are two of us who are presidents, and then there is the CEO – and the three of us share quite a lot of the responsibilities.  Right now – the way to think of it is Magnus is very externally focused, Ghan is focused on building what you would call the trading marketplaces, the securities and the derivatives, and I’m focused on insuring our infrastructure can cope with everything that we want, and in terms of kind of charting a path for us on our clearing business and where regulatory in fact is going to come to us.

And so, I work pretty closely with the development arms of MAS, as well as with the regulatory part of it in terms of deciding where Singapore should position itself – as well as the approvals we need to run these businesses.

ED: So the entire CCP initiative is your baby?

MR: I wouldn’t say that.  It’s kind of investment that was approved by our board.  It was something that Fu Wah and I started together, and it’s something that Magnus, Ghan and I had done together.  So the reason it kind of looks more like my baby is because it has a lot of technology and it has a lot of execution to be done before we could launch it.  And so, it took us about 18 to 20 months to get that done.  And yet, we are probably a couple of years ahead of anyone else who can kind of get that done.

So the executional part of it falls mainly under the ideas I run, but if you take the cultivating of the banks – and interestingly, all the global banks in Singapore are members with us, and that was an area of uncertainty whether they would want to become members in a clearinghouse, whether they would support the need to clear these instruments.  But the way they all look at it, which I think is very logical, is that should the Dodd-Frank implication mean that they have to clear most of these derivatives that they trade, what they did not want to be in was in a situation where they couldn’t clear the trades with their Asian counterparties.

So that’s where our members are both the Asian banks and the global banks, and the two meet here.  And so, what it insures is that in the long run they can continue to do the businesses they do in Singapore and in Asia without threat of either having to curb it because of Dodd-Frank implications or lack of capital available for them to do those businesses.

ED: Well, the clearing – central clearinghouse business is fraught with a lot of industry politics in a way.  All of the players who are your members today are not necessarily only your members, and they have their only little agendas in place as well.  What’s it like working with the banking industry, and what do you need to do to get it right in terms of the relationships?

MR: You know, we took an approach of creating a committee of all the 17 banks who are players in this marketplace.  Right?  So we worked with them over a year to get what I would call the most common denominator among of all them.  Right?  And that’s the offering that we brought to market.  So from that, 12 of them became members, and the other five are in various stages of internal approval.  So the fact that we could get all of them to agree to a reasonable level.  Right?

Now, I think the issues will come up in terms of, like you say, each of them have a agenda that is their own and an a agenda that is shared.  And the skill for us is about finding the agenda that is shared and making sure we can provide for that.  They’re not gonna stop competing with each other because they clear with each other, but what it does is makes what I would call the smaller banks a little more powerful in the fact that they don’t have to – you know, they are on an even footing with the bigger banks.  So there’s a plus and a minus.

The plus is that it helps the smaller banks, and the minus is that the bigger banks might feel that they lose of some the clout they have in the marketplace.  But they all recognize that the status quo of a dominant five banks in the world, which are too big to fail, is not gonna continue.  Therefore, they are also trying to chart their way forward.

ED: In terms of building the CCP business, there’s a lot of education involved.  You are trying to persuade some of these traders to bring on stream trades that are being run OTC at the moment.  You actually – it’s a pioneering business for you, and the moment you get it right, two things probably have to happen.  One is you’ve got – probably have to form an association of sorts to create even more memberships and clearing and make the clearinghouse itself as neutral as possible as an organization.  Or you need to be sold to a larger exchange that probably can make sense of the volumes that you create through the CCP.

MR: Yeah, we’ve been operating the CCP now from November.  Right?  So from November to now we’ve cleared about $60 billion worth of trades.  Now, there are clearing houses in the U.S. who have been operating for probably a year and a half who have done $3 billion or less.  So it kind of does establish that we have subscription to our model and we are what I would call well engaged with the banks.  But to your point of vendors that become – you know, today we are a for-profit exchange and we charge a commercial fee to do this, and at some point we would become – the banks would say, why am I paying so much?  Why don’t I have this as a utility?

And the way we – I kind of talk about it to the OTC is you are still buying by the drink, and you haven’t bought the distillery.  And so, at some point when you really want to buy the distillery there is discussion.  Right?  So we will come to that, but I think that it is still some ways off for Asia.  We kind of look at it as a three-to-five-year horizon.

ED: What happens if another exchange looks at you, and especially from a larger marketplace, Tokyo exchange or another – the merged entity with New York and so on?  They look at you and they say, what I beautiful little exchange this is.  It gives us connectivity, it gives us ubiquity, it gives us access to all of these pioneering initiatives in the exchange world – and we want to make a bid for Singapore Exchange.  Is Singapore Exchange as open to being a subject of a bid as you were in pursuing a bid with Australia?

MR: Yeah, we don’t have a particular block against being subject of a bid.  Right?  I mean – and the key is they joint business vision over time.  What does that do for the Singapore Exchange stockholder?  What does it do for Singapore?  What does it do for our members?  And I think that as long as those constituents are well served, we have no particular reason not to engage in anybody who wants to kind of look at us.

ED: The Singapore government recently approved a commodities exchange.  Shouldn’t that have been one of your various initiatives?

MR: Yeah, we have a commodities exchange, and we today trade commodities.  We kind of do rubber, we do palm oil, we – you know, we’ve just tied up with the London Metal Exchange and launched three futures contracts on metals, which are mini-sized as compared to the LME.  But the reason why there is another exchange and they kind of are trying to develop a commodities exchange in Singapore is, again, we don’t think that there should not be competition or we don’t think that there should not be another exchange that is trying to do the same.

And we do think commodities, as a space, has enough scope and ability to grow – and we’re averse to multiple exchanges there.  I think the Singapore regulator and the government take that view, which is we’re by no means a protected, only exchange in town.

ED: Give us a sense the collaborations and the joint ventures that you put in place.  In India, you’ve got into a little bit of a bind because you’ve got two joint ventures, and the original one with the Bombay Stock Exchange seemed to be contravened as a result of your subsequent one with the National Stock Exchange.  How successful are these joint ventures?  Are they just an effort to be able to provide choice to your customers and just having a good storefront?

MR: The ability to build alliances and the ability to kind of work with other exchanges is important over time for us, because we are by nature – we look at all of Asia as our marketplace that we want to serve.  So whether these 5 percent shares help, I don’t really have a view whether it helps or not.  I don’t think it hinders, but it doesn’t particularly help either.  So in the context of India, what happened is that we always used to trade the NIFTY on SGX well before we took the 5 percent share in the Bombay Stock Exchange.

And one of the things that we wanted to gain out of the share in the Bombay Stock Exchange was probably a listings platform that would allow Indian listings to come on.  But the regulations in India still don’t allow a primary listing for an Indian firm outside, and it is something that we’re still working with the regulators in India on.  And where we think we’ll go on that is kind of become the listing location for Indian firms wanting to expand overseas.

So if you take the example of Punj Lloyd, which is one of the firms, they’ve incorporated themselves in Singapore.  They call themselves Sembawang in Singapore.  They’re a big construction company with ambition in Indonesia and all of ASEAN.  They are incorporated in Singapore and they kind of listed on us, so it’s an Indian firm that is looking to go overseas that lists here.  Now, if you take the Indian business ambitions, they are now quite outwardly focused.  At least, I would say, about 40 or 50 Indian companies for sure are externally focused, and they need to raise capital for those expansions.

And that’s where we’ll play a role, and BSE will help in that.  And they NSE, like we said, the NIFTY is the one that we trade, and that is the de-facto contract for the Indian derivatives market.  You know, the BSE doesn’t have an equivalent.

ED: But volumes haven’t been very encouraging.

MR:     No, NIFTY is a hugely traded contract.  In fact, if you look at NIFTY, it’s grown at more than 50 percent compounded over the last four or five years, and it’s about 25 percent of the volume of NIFTY is traded overseas, which is on SGX.

ED: So as an external exchange, you look at 20 to 25 percent?

ED: That correct.  That’s what we think is realistic because that’s when – you know, when you have volumes that are much smaller than that, you don’t have an interplay between the domestic and the overseas markets, and you can’t expect volumes much higher than that unless there is difficult in getting into that country and out.

ED: Okay, for the sake of completeness, talk to us a little bit about speed trading.  And why is that important?

ED: Okay, we recently made a big investment.  We’ve invested probably $200 million in setting up a data centre, setting up what we call the Reach Initiative.  And what we are doing is building points of presence in Chicago, London, New York, and Tokyo, which will allow traders from those locations to kind of act like we have a local presence there.  And along with that, we have upgraded our trading engine, and it kind of goes live in August, which would for a brief moment make us the fastest trading engine.

These are like the arms race, right?  Your speed, you stay live for probably six months before someone else claims they are faster.  And we don’t think that being the absolute fastest is very important.  What is important is that you are within the ballpark form – you’re in the same playground as any of the fast exchanges.  The reason for speed, again, is that, A.)  The ability to react to all the flow, which can kind of go up or down based on the events of the news that drives these things.  Now, is 50 nanoseconds more important than 200 nanoseconds?  I don’t think so, but it’s just become a way of bragging rights more than anything else.

Now, I’m a technologist, but having said that, I still think that technology for the sake of technology doesn’t really help, though we do participate in that race and we do kind of do the required to have our bragging rights.

ED: As a technologist, when you look around the world and look at the different exchanges, which exchanges do you admire the most?

MR: You know, if you kind of look at electronification of trading, the Korean market is outstanding in terms of all the way from a retail investor through to the exchange.  If you look at it purely as the exchange itself, I would say NASDAQ and NYSE.  They’re both impressive.

ED: But that’s because they have a strong domestic market though.

MR: No, I’m just saying even in terms of their electronic platforms.  Right?  And if you take the width of the platform, all the way from trading through clearing through data, then Deutsche Börse is very impressive.  So they sell — I would say the best data business today is probably done by Deutsche Börse, and they give you the best kind of data that you can use on their trading and their clearing and so on.

ED: And what’s your opinion on the Hong Kong Exchange?

MR: The Hong Kong Exchange is kind of massive in its size and the amount of capital that is raised here.  And the rationale for that is the amount of capital that’s required by all the Chinese entities, and the large ones there are listing here.  And so, Hong Kong has an enormous – what I would call a – marketplace to serve, and given that China is kind of one of the key centres of growth today in today’s economic context, Hong Kong is extremely well placed.  So just serving that is kind of their primary goal, right? So, in that context the innovation of being able to launch three products or all of that pales in comparison with serving this market place well, which is the capital rate.

ED: Has the Singapore exchange given up on China yet?

MR: No, I don’t think that we have.

ED: Well given the fact that China is becoming more insular in a sense, its own exchanges are doing well, there’s greater liquidity in China and the Chinese companies that are listed in Singapore have generally been second tier companies.

MR: Smaller, I would say.

ED: Smaller.

MR: The rational for that is very simple, right? What happened was that there is a queue of companies that want to raise capital in China.  Priority is given to the bigger ones and they’re listed in Hong Kong, and the Chinese government would like them to be listed in Hong Kong.  So all the smaller ones who are further in the queue but have a good business case are the ones that came to Singapore for listing.  So, I wouldn’t say they’re second tier, other than in size.

ED: But they’re also second tier in terms of risk profile.  I mean, the number of companies with trouble in Singapore, Chinese companies with governance problems.

MR: There is a lot of discussion on this number that is out of proportion with any other market place.  And when you look at the actual statistics, the proportions are not very different.  If you take the NASDAQ market place and you take the electronics of the technology companies that start up in the US, the rate at which some of them die and collapse is in fact much higher than the rate at which the S Chips as they’re called in the Singapore exchange collapse, right? So, the numbers are very different.  In fact, higher in the US.  But the reason why there is not a specific noise is an awful lot of Google and there’s an equivalent  large company that everyone can focus on, and the slip stream tends to get ignored.  Whereas in Singapore I think what we lack is that one giant – or two giants that have come out of this.  So, that’s something that we need to focus on.  We need to focus on creating what I would call are positive role models that we can kind of expand on, so that it is not only the negative that’s focused on.  So, the negative, per se, is not bigger than it should be, but our issue is we don’t have a giant success that we can kind of show, unlike, say, the big listings in the Hong Kong exchange.

ED: Well that being the case, if you slice and dice the performance of Chinese stocks on the Singapore exchange, over a period of time, they’ve not been value contributing, they’ve not been as profitable, even.

MR: See, there have not been runaway successes.  And there I agree with you, they’re not – like I said, there hasn’t been a Google, or an Apple that you can readily refer to, right? Or an ICBC, or a – you know, the successes of Hong Kong, and I think that’s the issue we need to focus on.  We got to up size some of our listings.  We have to see how we get a mix of reasonably large ones as well as the small ones.

ED: Is that a Singapore curse to be very good at what you do, build all of the infrastructure, but because you’re in South East Asia, you never have the kind of scale of the India, or the China, or the Tokyo, or the New York exchanges would have.  And is there a way around that curse?

MR: I wouldn’t really call it a curse.  It’s probably reality, right? I mean, it’s true that we are in a part of the world where the two giants are China and India, and you have to find ways to solve those, so, back to your question of would we give up on China, I don’t think so. I think we’re still very engaged with China, looking at, like I said, creating a couple of winners from there, and we’re looking at how to engage with India.  So, Singapore as a hub has always been a transhipment point, a port, a trading location, and I think those will continue.  And given the size of Singapore, if you kind of take the five million people, or the six million people and the size of the market place, it is kind of – it punches way above its weight.  Now, if you take that and compare it with a country of a billion two, that’s India, or a country of a billion three that is China, then obviously the sizes are very different, and I think that part of our issue is that given how well Singapore has done, we now don’t hesitate in comparing it with these giants.

ED: Is the Singapore exchange a national asset? In the way that Singapore Airlines is?

MR: I would say we do Singapore proud, we are an asset, but are we a protected asset? No.  I don’t think that we are protected from competition.  I don’t think we are given any undue advantage, so I don’t think that we are a favoured child.  However – but I would say we should be an asset.

ED: And you know that’s a loaded question.  A question from the floor.  Let’s continue this discussion on your personality.  You’re a very interesting man yourself because you’re a banking man who moved into the exchanges world.  What were some of the most important mindset changes that you needed to have to make that transition?

MR: Well, I worked in Citi for  21 years, a little over 21 years.  It’s a 250 thousand people company.  The skills you require to managing that place are very different from those you require in the Singapore exchange, but to me it was more of my personal circumstance, that I wanted to move back from New York.  I didn’t want to be in Citi and be commuting to New York every second day, so I took the job.

ED: But it’s interesting because your rise to president also mirrors the importance that technology and infrastructure is to the whole equation, as the listings part of the business, the IPOs, the capital raising.  And then there’s the CCP dream and the derivative trade and today the algorithmics and the speed trading and so on.  Were you brought in for the second bid?

MR: I would say that we were behind on technology, so that’s kind of why they were willing to bring in an incult well paid technologist in their mind, so, certainly it was an investment, and I think that in the three years that I’ve been there, or three in a half years that I’ve been there, we have money to put in all the technology we wanted, and so now we are in a place where I can become a pure overhead if I did only technology, so that’s part of the reason why I guess I’m trying to do things which are more than just technology.

ED: What is your sense of the global mergers taking place, and to what extent was the talks between Singapore exchange and the Australian exchange, driven by personalities rather than any strategy.

MR: We have been in talks with many exchanges in the four years I’ve been here, and some of them go this far, some of them go a bit farther.  So, this one went pretty far.

ED: So you’ve been in talks with them.

MR: Yeah, so we’re not adverse to exploring options with anyone.  Like I said, we have very little that we hold back, whether we are the smaller one, whether we are going to be acquired, or whether we are in a position where our stock price affords us the ability to acquire.

ED: Your best friend in the exchanges world has been the CME because the relationship goes further from the previous CEO and so on.  Were there talks with the CME for greater collaboration and perhaps an integration of purpose?

MR: Not on an acquisition or a whole corporate – because CME doesn’t do anything on the security site.  They’re not a stock market operator.  Their focus is purely derivatives and futures and therefore any talks with them have always been only on how do we further the derivatives, or the commodities or the clearing.  And in those areas yes, we constantly explore what we could do.  But again, today, like I said, we are their partner in Asia, but they have also gone directly to many markets in Asia, so 15 years back they used to come only to Singapore and then the rest, whereas now they’re going from that hub and spokes into directly spoking or two, so – and that’s a trend that I think will continue.  You won’t see – overtime people won’t go directly to the big markets in Asia, so we have to see how to deal with that.

ED: So in some sense, you’ve now changed in their perspective from being the platform for Asia to being one of the spoke.  And it makes sense to own some of these spokes.  And therefore, it would make sense for CME to make a bid for you, for example.

MR: No, I think they wouldn’t do that purely because of the fact that we are both the securities and derivatives exchange.  And like I said, they don’t intend to do securities business.

ED: Okay.  How do you read some of the global mergers and acquisitions taking place? Very bold ones, the Germans and the Americans and the British and the Canadians.

MR: The way I look at it is that most of those mergers are driven by cost considerations.  So, today what’s happening is that if you take the three parts of the exchange, the capital raising, the trading, and then what I will call the clearing and settlement, and the CCP functions, the third part of it is done as a utility in most of the Western markets.  It’s done by the DTCC, it’s done by NC Hedge, it’s done by – right? Only Deutsche Börse does all the functions by themselves.  So, and the first part is where they each compete, and the second part, which is the trading, is where they have intense competition from the dark pools and all the other execution venues.  If you take the US there are, I think, at last count, 76 execution venues.  And when you have 76 execution venues, and your platform for execution remains as expensive as they were when they were one or two, you really become uncompetitive.  So, those are driven by the need to take our cost from the execution platform, and to try and consolidate the strength of the issuing platform.  So, none of the dark pools or the trading platforms by themselves can raise stock.  They can’t do an IPO.  They can’t kind of figure out whether a company is something that can be listed or not, therefore the strength that these exchanges have is about capital raising.  And what they’re trying to do is kind of build bulk there and show that up, so there is, in the Asian context, I think that will come, it’s a matter of time, and I think in the next five, seven years you’ll see that.

ED: What happens if the world changes on you and the tri-axes of the world generate more volume to electronic channels than through the traditional exchange, which they have done in London and in several places.

MR: That’s why we’ve invested in Treist, so we don’t see them as kind of…

ED: Keep your friends close and keep your enemies closer.

MR: Closer, absolutely.  If you can’t beat them, join them, so…

ED: And, well that’s like betting on your future, in a sense, but what do you fear most, in terms of the kind of competition that will come from outside of the box?

MR: I would say the competition doesn’t phase us.  What we really have to work very hard on is on expanding our presence into other market places. To get progress.

ED: But that’s work in progress.  That’s work in progress.

MR: So, competition per se, I think, is a way of life.  Today we compete with four listings, we compete with every other exchange in the world.  The company that lists on SGX, can equally list itself on NASDAQ, on LSE, on NYSE, they can choose to list anywhere.  And everyone has pros and cons.  They can list on Hong Kong exchange, right? So we are competing, and so, competition by itself doesn’t phase us.  It’s more, I think, over time, having hinterlands that we can serve, and kind of being the preferred partner there.

ED: Just going back to the question of your own career as a technologist and moving into – actually running a business; how does – how is the risk profile when you are a banker different from the risk profile today? And especially now that you’re promoting the CCP, what is your perception of risk, and how’s that changed?

MR: If you go back to my banking days, I was mainly a transactions banking and technology guy.  I was not in the trading group where they were taking risks, so most of my life is about ensuring that the post-transaction risks are limited.  So if you are doing a funds transfer from A to B, the fact that it happens at once, right? And – so, if I go back 20 years in Citi, one of our big goals was to get same day fund transfers executed across Asia, and we build platforms for that.  Today people talk about Western Union, right? Where you can kind of put in cash here and take it out two minutes later, in the Philippines, if you look at the back end of Western Union, it’s all settled by Citi.  And so, what Citi doesn’t have is a large branch presence and the ability to take and count cash in very many places, and Western Union does that, so there again it’s all about risk mitigation for a given transaction, so, to me, the things I do are not that different.  The challenge today is about pricing for risk.  What’s happened in the last five, seven years is that capital has been so cheap that people don’t want to pay for capital.  They kind of take it for granted that the interest rate is close to zero, or that capital that you put at risk, or the leverage that you take comes free, and I think in the next five, seven years that’s going to change.  And in a CCP kind of service, that’s where, I think the big issues are, which is, how do you price the transaction for risk, and how do you ensure that you’re clearing funds and your margins are adequate.  Those are all the challenges, and a trader who’s used to a free ride, you know, I’m saying it kind of loosely as in the cost of capital has been very low, now forced to deal with increased cost of capital, increased margin requirements, kind of thinks of it as overly-conservative.  But if you look at that over a 20 year horizon, what we are doing now is still probably quite laissez faire, and I think it requires even more capital.

ED: But even in starting the CCP business, you do take on some of the risk.  You’re not a pure transaction provider.

MR: That’s right. Yeah.

ED: And as the competition increases and there are different options in terms of CCP capabilities, you’ll find that you probably need to offer the risk part as a value added advantage, which then changes the model of your business?

MR: See, that’s where all the CPS, Basel, all of that come in.  So the key that they got to do in some ways is sort of ensure that the minimum standards that everyone has to adhere to are there.  So if you take a CCP as an example, one of the things that are in the Basil III is the amount of capital that a participant has to provide against exposures to a CCP is based on how much capital the CCP has.  So a well capitalized entity like GSX, kind of putting out a CCP will have significant advantage for the participant, as against going to a CCP that is not as well capitalized.  So, if someone operates on the minimum that the Basil allows, then what happens is that the participant has to earmark more capital.  So that’s where our strengths, which are an extremely robust balance sheet, zero debt, ability to kind of back ourselves in terms of what we do, is important, and I think we will be able to take advantage of those strengths, which are, in the context where capital is very cheap, those strengths don’t look very visible.  But in the next three to five years I would say there’ll be big differences.

ED: Are there risk mitigation – ring fencing that business, is that important?

MR: Yes, it is.

ED: And you already ring fence many things.

MR: Yeah, so the way we do it is to run stress tests, and we kind of ensure that we are adequately provided for, for the so called daily events or the extreme events.

ED: Give us a sense, finally, of the government structure of the Singapore exchange.  When Magnus Bockner came up with this crazy idea of buying the Australian exchange, what were the processes that he needed to go through internally to get a buy-in in the first place?

MR: We have a very active and involved board.  So, our board is very involved with most of our activity in terms of anything that’s strategic, so we had to go through several rounds of reviews with the board.  We had to go through several rounds of reviews with our risk management committee, and so that’s the process that – it’s not different than any other company.

ED: But it was a life changing proposition, so I’m sure that the process would have been.

MR: Like I said, we’d been through a series of “should we do this?” kind of review, so, internally, to us, this was – like I said, this went a little further, but it’s not the first one we’ve looked at, and therefore our processes for looking at it, the processes for dealing with a regulator to say why we are doing this, those have all been in place because we’ve done quite a few what ifs, or should we do this, and finally whether the bid gets made, and whether it’s public, like I said out of every four or five you try, probably one goes this far, and probably, hopefully, out of the seven that you try, one will happen, I mean.

ED: And what’s the sense of governance relative to the responsibility to the shareholders? Because you ram up their share price, and then now it’s going to find another level – play – levelling ground at that.

MR: First thing, I don’t think we can ramp up our share price.  It’s the market place that looks at the value of your company over time.

ED: But what about ideas that ramp up your share price?

MR: Sorry?

ED: You come up with ideas that…

MR: Yeah sure, I mean, with performance that hopefully provides an indication of what you could deliver in the future, and again, exchanges around the world went through a big up and down, so, if you compare us with the index of exchanges around the world, we’ve done a little better than that, and if you compare us against the index of the SPI, we’ve done a little better than that, so that’s kind of how we measure ourselves; are we keeping pace with the world exchange indexes? Are we keeping pace with the SPI? And – so those are our two benchmarks if you will.  And separate from that we have our kind of goals under done and equity, and we have a very good redone and equity, and – so those are the measures we have, not the absolute stock price itself.

ED: Questions.

Male speaker:  Hi. You spoke a little earlier about the competition between exchanges.  We’re also seeing, or hearing more and more about cooperation among exchanges, especially across Asia.  Do you believe that the – there is a proper forum in place for the exchanges to talk to each other about cross-trading, sharing technology, common platforms, etcetera, or is it kind of a lip service type of event or it’s real traction happening?

MR: There are forums where I think most of the exchanges meet at least two or three times a year, either as exchanges, or as clearing houses or as depositories, and there are forums for each one of those.  So the cooperation piece has enough forums where it can start.  If you take the ASEAN exchanges as an example, one of the things that the ASEAN group is now working on, is putting up a trading platform that can trade the top X number of stocks for each of the ASEAN countries.  Initiatives like that require not just the exchanges, but the finance ministers and the political blessings in those countries to make it happen.  So, I think if you compare Europe and Asian looking at it as how will this progress, I think the rate of progress here will be quicker.  I don’t think that we’ll go through every lesson learned in Europe, so we will leapfrog some of that.  And the economics of this, there’s going to be a lot of cross ASEAN trading.  It’s not yet obvious, so that’s kinda why the pace of development has to be in line with the demand for it.  And also if you take ASX and SGX as an example, ten years ago, had a direct trading link, but we didn’t have any trades on it.  So then we shut down the link.  So our association with ASX goes back quite a while, and it wasn’t a merger, or it wasn’t anything other than pure cooperation.

ED: Yes, can the media not ask questions first? Because let the delegates ask questions and then – you can do the questions afterwards.  That’s interesting.  That’s a very – oh yes.

Male speaker:  Sorry you spoke about raising capital and being a gateway to Asia, I was thinking, has SGX looked at Africa, or is that a place that you could be raising capital for?  Traditionally the African markets have gone to the US and Europe for raising capital; however, the biggest investment that was ever made in Africa was actually from China, so, it’s just interesting.

ED: Where do your business development people travel to?

MR: You’ve got to have some – what you would call either knowledge or strength about that place, so most of our business development people travel to China, to India, to – now increasingly the Central Asian republics, and then to places which are very maritime oriented, like Norway, so it just depends on either – there’s gotta be a sectoral strength that we’re interested in, or there’s got to be an ability – you gotta have rules and regulations that are common, based on English law, or things which make a listing kind of amenable to your exchange and your practices.  Now, I must confess that we haven’t deeply discussed Africa, and we always look at it as China as making direct investment in Africa and they’re not going to come via SGX to do that.  At least we haven’t considered that, but it’s a fair question.  So, I’ll bring it up to ask someone.

ED: Thank you so much for spending time with you.

MR: No, thank you.  Thanks for having me.

ED: Thanks for giving us insight.

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