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A COMPREHENSIVE REPORT BY EQUINIX AND KAPRONASIA

TRADING IN SINGAPORE

MARKET SNAPSHOT | 2

Not only is Singapore the geographical center of the incredibly diverse and large Asia Pacific region, it also is one of the key financial centers. The city-state of Singapore offers a diverse array of financial asset classes and trading instruments with a high degree of liquidity and market efficiency. Markets are supported by the Singapore government, which works to keep market intervention to a minimum to maintain market competitiveness. All these advantages have made Singapore’s capital market one of the most competitive and attractive markets in the Asia-Pacific Region.

The purpose of this report is to briefly introduce trading trends and opportunities in Singapore markets, as well as to provide an overview of asset classes and financial instruments available, regulations and regulators, and insights into capital markets technology for the market.

Singapore has one of the most advanced financial service industries in Asia and even globally. The over-the-counter (OTC) derivatives market in Singapore is highly developed and is ranked 8th globally by trading volume. It makes up around 5% of total global OTC derivatives trading volume with the FX OTC derivatives market ranked 4th globally and the IR derivatives market ranked 5th.

There are also other OTC traded derivatives such as CDS and equity derivatives, which take a smaller proportion of the aggregate OTC market, but still play important role. Energy and commodity swaps too have grown in importance due to demand from China.

After the G20 meeting in Pittsburgh in 2009, many countries including Singapore agreed to impose stricter regulations on and supervisions of OTC derivatives. The detailed policy changes from MAS (Monetary Authority of Singapore) cover 1) standard OTC contracts; 2) mandated central OTC derivatives clearing of all OTC derivatives; 3) trade of OTC contracts on appropriate and approved platforms; and 4) trade repository reporting.

MARKET SNAPSHOT

This whitepaper has been developed by Equinix together with Kapronasia, to provide you with a comprehensive view of the Singapore market across the following topics:

In the series are similar papers providing insights to ‘Trading in Hong Kong’, ‘Trading in Sydney’ and ‘Trading in China’. Write to us at financial-services@ap.equinix.com for more information.

1. Market Trends2. Asset Classes in Singapore

3. Regulators and Regulation4. Technology and Connectivity

Development of Central Clearing of OTC Derivatives At the September 2009 Pittsburgh Summit, the G20 agreed to better manage OTC derivative risk by implementing mandatory centralized clearing. Unlike America’s Dodd-Frank Act and Europe’s European Market Infrastructure Regulation (EMIR), Asian countries including Singapore have been slow to set-up mandatory central clearing.

On February 13th, 2012, the ‘Proposed regulation of OTC derivatives’ released by the Monetary Authority of Singapore (MAS) declared that Singapore would mandate central clearing. A similar document released by the MAS at the same time called ‘Transfer of regulatory oversight of commodity derivatives from the IE (International Enterprise Singapore Board) to MAS’ aims to improve current licensing and compliance requirements, and regulatory oversight of all commodity derivatives. This change takes place as part of the Singapore Securities and Futures Act.

The Singapore Exchange Derivatives Clearing (SGX-DC) is a wholly owned Singapore Exchange (SGX) subsidiary. It provides clearing services for products provided through the Singapore Exchange Derivatives Trading (SGX-DT) platform, OTC commodity trading registered via the SGX OTC Trade Registration Platform (TRS) and OTC financial derivatives trading registered via the industry specific trade registration system.

Under the SGX-DC, there are two different clearing engines that are specifically designed to support the clearing of different asset classes: 1) SGXClear, which is designed for clearing of equity, dividend, interest rate and commodity derivatives and 2) Calypso®, which is for clearing of OTC financial products (e.g. interest rate swaps). There is also another newly launched clearing system called SGX AsiaClear, which aims to facilitate OTC clearing and complements OTC trading in swaps and forwards by providing value-added post trade clearing services. The main products under AsiaClear system are oil, commodities, freight & financial derivatives (interest rate and FX derivatives).

Singapore Dollar (SGD) interest rate swaps, U.S. Dollar (USD) interest rate swaps and Asian currency non-deliverable forwards are the initial transaction types to be cleared centrally. Both bottoms-up and top-down approaches are being used for this. With bottoms-up, a Central Counter-Party (CCP) decides what product to clear and applies for regulatory approval. For top-down, the regulator determines which contracts should be cleared.

Agility is important as qualified financial service providers should be able to react quickly to the updated technical and regulatory changes especially as markets move from discrete to central clearing. This ability to adapt will require strong cooperation between exchanges and the government. In addition, as the shift to central clearing is also an agreement with other G20 member countries, fast and safe international connectivity is also important to meet customer demand.

China Establishes RMB Investment Agreement with Singapore to Allow Singapore Investors to Invest in ChinaChina is working to further internationalize its currency by allowing Singapore-based investors to buy Chinese yuan, (also known as renminbi, RMB), denominated securities, paving the way for direct trading between the two countries’ currencies.

In the latest agreement, China will extend its so-called renminbi qualified foreign institutional investor (RQFII) program to Singapore, allowing Singapore-based banks and asset managers a quota of RMB50bn ($8.2bn) to invest in Chinese securities, according to the Monetary Authority of Singapore.

Under RQFII, those holding renminbi offshore will be able to invest directly in mainland Chinese assets – from stocks to bonds to money market funds. By widening the investment options for renminbi sitting outside China, the system is partly designed to encourage the use of the currency for trade settlement.

The development of Singapore as a RMB trading center is not surprising: in September 2013, Singapore overtook Japan as Asia’s biggest foreign exchange center for the first time, making it the third-largest such hub in the world after London and New York.

MARKET TRENDS

MARKET TRENdS | 3

MARKET TRENdS | 4

According to data from Standard Chartered, cross-border RMB payments transactions through Singapore increased by 30% from 2011 to 2012. With the formal implementation of the RMB clearing businesses in Singapore, RMB payments in Singapore might soon catch-up with London, which is the 2nd largest RMB trade market currently behind Hong Kong.

An official from the MAS said that Singapore would also be “given consideration” as one of the investment destinations under a separate “renminbi qualified domestic institutional investor” scheme. This would allow Chinese investors to use the renminbi to invest in Singapore’s capital markets.

This increased integration between Singapore and China will drive the need for stronger global ‘ecosystem’ connectivity as cross-border investment is relatively complex and platforms need to be able to support the fast and complete flow of information. For instance, if a Singapore based fund wants to invest in China through the RQFII quota and trade on a daily basis, they will need a fast, safe and cost-effective technology platform in order to be able to effectively trade.

RMB O�shore Centers Weight and Ranking(excluding Hong Kong and China mainland)

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Britain

January 2014

Singapore

Taiwan

U.S.

France

Australia

Luxembourg

Germany

January 2013

30.8%25.7%

25.2%23.1%

9.0%3.6%

7.3%4.1%

6.7%7.0%

5.0%5.8%

3.0%4.2%

2.9%3.5%

Source: SWIFT, 2014

MARKET TRENdS | 5

Expansion of Derivatives and Commodities Traded on the SGX PlatformThe trading volume of derivatives and commodities on the SGX increased dramatically over 2013, even faster than securities.

The data from SGX clearly shows that derivatives and commodities trading volume on the SGX platform is growing rapidly in Singapore. Much of this increased trade is a result of increased competition and algorithmic / high-frequency trading participants, driving the need for faster connectivity and order dealing speed.

Increasing Number of Southeast Asia and Chinese Related Financial Assets and Derivatives Listed on SGXIn the third quarter of 2013, SGX released futures contracts for Thai, Indian and Philippine stocks, and had been working with China on a plan to offer other derivatives. An announcement in November 2013 that China-registered companies will be able to list in Singapore is thought to be the most important opportunity for SGX, after the October 2013 announcement allowing direct trading between the two countries’ currencies.

Increasing Demand for OTC Derivatives from Top Financial and Non-Financial Asian CorporatesA piece of research by the ISDA (International Swaps and Derivatives Association) illustrated that even in 2009, already 94% of the Fortune 500 firms in the world were using derivative instruments to manage and hedge business and financial risks.

In Asia, top non-financial firms are using OTC derivatives to manage their business and financing activities with FX derivatives being the most commonly used to manage currency risk. Commodities derivatives are also heavily used in the manufacturing and energy industries to hedge raw material price / energy fluctuation and interest rate derivatives are also sometimes used to counter interest rate risks.

Monthly statistics on market volume / open interest of derivatives and commodities traded in SGX February, 2014

ITEMS YEAR ON YEAR CHANGE FEB 2013 – FEB. 2014

Financial Derivatives

Total SGX derivatives market volume including futures, swaps and options Decrease 7%

Total open interest for SGX derivatives Increase 6%

China A50 futures market volume Increase 10%

MSCI Taiwan futures trading market volume Increase 19%

Mini Nikkei 225 futures activity market volume Increase 14%

MSCI Indonesia futures market volume Increase 51%

Commodities

SGX AsiaClear Cleared Swaps – OTC IHS Indon Sub Bit Coal Increase 330%

SICOM TSR20 Rubber Futures volume Increase 25%

SGX AsiaClear OTC Iron Ore Options volume Increase 118%

Source: SGX, 2014

MARKET TRENdS | 6

For financial firms, different market participants have different purposes of trading OTC derivatives. Dealers, as the largest group of market participants, aim at generating profits through speculation and hedging. Commercial banks utilize derivatives to manage assets, liabilities and structural positions. Hedge funds use derivatives to generate alpha returns and central banks use FX swaps for domestic liquidity management and to shift settlement forward in time.

Globally, as market demand for derivatives has been increasing, access to a variety of both OTC and exchange traded derivatives has become very important as investors look to arbitrage, hedge and speculate in markets. As a result, an integrated technology platform built on solid hardware and robust software is pretty much a must-have for any buy-side or sell-side participating in the derivatives markets.

Source: Wall Street Journal, 2013

Total Value of New Listingson SGX 2011–2013 ($bn)

Other Countries

Singapore Local9.759%

6.841%

ASSET ClASSES iN SiNgAPORE | 7

SGX TRADED FINANCIAL PRODUCTS

Securities

Stocks Securities borrowing & lending

Mineral, oil and gas stocks Stapled securities

American depositary receipts Certificates

Business trusts ETFs

Company warrants ETNs

Global depository receipts Extended settlement

REITS Structured warrants

Derivatives

Equity index

Dividend index

Interest rate

Fixed Income

Issuers: supranational bodies, governments, corporatesTypes: fixed and floating rate bonds, convertible & exchangeable bonds, covered bonds, asset backed securities, loan participation notes, commercial papers, hybrid capital securities and structured products

Commodities

Rubber

Energy

Metals

AsiaClear

Rubber FX forwards

Bulk commodities Interest rate swaps

Freight Oil

Source: SGX, 2014

CLEARTRADE EXCHANGE PRODUCTS / DERIVATIVES

Containers

Fertilizers

Forward Freight Agreement (FFAs)

Fuel Oil

Iron Ore

Steel

Source: Cleartrade, 2014

To support its role as a center of finance and commerce in Asia, Singapore’s capital markets offer a variety of asset classes including equities, derivatives, fixed income and commodities products.

ASSET CLASSES IN SINGAPORE

The Singapore FX MarketIn the Bank of International Settlements’ 9th triennial survey, Singapore was ranked third in total FX turnover, Singapore’s average daily FX turnover volume grew 44 percent to US$383 billion in April 2013, compared with US$266 billion in April 2010. Major market participants include commercial banks (both client driven and speculative), FX brokers, commercial clients and the MAS. About 85% of the FX trading volume is related to the USD. Most trading is spot trading, with swaps and forwards trading taking about one-third of total trading volume.

ASSET ClASSES iN SiNgAPORE | 8

The table below illustrates the largest FX trading centers in the world. Singapore’s FX trading volume took about 5.7% of the world trading volume, exceeded Japan, and ranked 3rd globally.

Total Foreign Exchange and Foreign Exchange Derivatives Volume – Total Monthly Volume

INSTRUMENT APRIL 2013 (US$ MN) OCT 2013 (US$ MN)

Spot transactions 2,210,047 1,939,457

Outright forwards 1,351,420 1,086,926

Foreign exchange swaps 3,718,917 3,181,845

Total foreign exchange turnover 7,280,384 6,208,228

Currency swaps 540,968 825,630

Foreign exchange options 800,403 524,788

Total foreign exchange derivatives turnover 1,341,371 1,350,418

Source: The Singapore Foreign Exchange Market Committee, 2014

Source: Bank of International Settlement & Kapronasia, 2014

FX Centers Ranking 2013

COUNTRIES PROPORTION OF WORLD VOLUME

COUNTRIES PROPORTION OF WORLD VOLUME

United Kingdom 40.90% Switzerland 3.20%

United States 18.90% France 2.80%

Singapore 5.70% Netherlands 1.70%

Japan 5.60% Germany 1.70%

Hong Kong 4.10% Denmark 1.50%

SINGAPORE MERCANTILE EXCHANGE (SMX), MERGED WITH ICE IN 2014

Commodity

Financial Derivatives

Source: Products provided by ICE

The major OTC derivatives trading platforms in Singapore are the SGX-ST (Singapore Exchange Securities Trading Ltd), CME’s Globalex and Bloomberg E-Bond. Industry observers also indicated that Goldman Sachs, JPMorgan Chase, and Morgan Stanley were also interested in opening up trading platforms in Singapore.

ASSET ClASSES iN SiNgAPORE | 9

Singapore OTC MarketSingapore has one of the largest OTC markets in the world, providing interest rate, FX and index derivatives trading. SGX began clearing OTC derivatives in November 2010 through their SGXClear / AsiaClear group, but the AsiaClear system does not serve all the OTC trading as it is not yet mandated for some asset classes.

Singapore is setting itself up to be an international OTC hub. A large number of transactions are booked out of Singapore from global entities because of Singapore’s mature infrastructure giving it an advantage as a trading center. For instance, both HK and Taiwan-related indices are offered in the Singapore OTC market.

OTC Traded Products

FX

Spot

Forwards

Options and NDF (non-deliverable forward)

Swaps

Interest Rate Products

Equity Linked

Commodities

CDS

Source: SGX, 2014

REGULATORS AND REGULATIONS

REgulATORS ANd REgulATiONS | 10

Monetory Authority of Singapore (MAS)The MAS is the central bank of Singapore. Their mission is to promote sustained non-inflationary economic growth, and a sound, yet progressive financial center.

MAS’ Functions

• To act as the central bank of Singapore, including the conduct of monetary policy, the issuance of currency, the oversight of payment systems and serving as banker to and financial agent of the Government

• To conduct integrated supervision of financial services and financial stability surveillance

• To manage the official foreign reserves of Singapore

• To develop Singapore as an international financial center

The MAS now administers the various statutes pertaining to money, banking, insurance, securities and the financial sector in general. Following its merger with the Board of Commissioners of Currency on 1 October 2002, the MAS has also assumed the function of currency issuance.

industrial Organizations Singapore Foreign Exchange Markets CommitteeThe Foreign Exchange Markets Committee aims to foster the growth of the Singapore financial market as a leading international center for transactions in foreign exchange, money market, fixed income and derivatives instruments.

ExchangesSGX (Singapore Exchange) – Main boardSGX claims to be the most internationalized exchange in Asia as over 40% of the listed companies on the SGX are foreign companies. In addition, the SGX has the largest offshore equity futures market, centered on China, India and Japan. Relatively complete asset classes and financial instruments are covered by SGX including securities, fixed income products, commodities and derivatives.

SESDAQ (Stock Exchange of Singapore Dealing and Automated Quotation) – SME board, subsidiary of SGX

Singapore Mercantile Exchange The Singapore Mercantile Exchange (SMX) is the first pan-Asian multi-product commodity and currency derivatives exchange. Located in Singapore, SMX offers a comprehensive platform for trading a diversified basket of commodities including futures and options contracts on precious metals, base metals, agriculture commodities, energy, currencies and commodity indices.

Early in 2014, SMX was acquired by Intercontinental Exchange (ICE) and will re-launch the exchange and clearing house in the second half of 2014.

Cleartrade Exchange (CLTX)Regulated by MAS, CLTX provides electronic trading for commodity futures and OTC cleared derivatives. LCH.Clearnet Ltd (LCH.Clearnet), NOS ASA and SGX Asiaclear provide clearing services for CLTX. The European Energy Exchange (EEX), the leading Energy Exchange in Europe, and Cleartrade Exchange (CLTX), a Singaporean Futures Exchange founded in 2010, announced that an investment deal has been concluded. EEX has become the new majority shareholder, with a 52% holding in CLTX.

Clearing HousesAccording to the SGX, SGX-DC adopts two different clearing engines that are specifically designed to support the clearing of different asset classes: SGXClear and Calypso®. SGX AsiaClear is claims to be Asia’s pioneer provider of central counter-party clearing services and offers clearing services for OTC derivatives.

However, AsiaClear is still small compared to other more mature OTC clearing houses, so there is large potential for growth. Various financial instruments traded in OTC markets are cleared through AsiaClear including bulk commodities derivatives, freight derivatives, containers derivatives, oil derivatives, petrochemical derivatives, Oil spreads derivatives and agricultural derivatives.

Large International Exchanges and Clearing Houses in the Singapore MarketLCH.Clearnet Ltd (LCH.Clearnet), the world’s leading independent clearing house, was set to clear for Cleartrade Exchange, the first regulated execution venue for OTC cleared freight and commodity derivatives in Singapore in 2011.

Intercontinental Exchange (ICE), as an international exchange, entered into the Singapore market through the acquisition of Singapore Mercantile Exchange (SMX) in February, 2014. The main products traded on SMX are financial and commodity derivatives, which gives ICE significant control over financial and commodity derivatives’ trading and clearing in Singapore.

CME Group have a strategic alliance with SGX through a Mutual Offset System (MOS), and this agreement allows futures positions opened on one participating exchange to be liquidated on the other by creating a single, 24-hour marketplace between them. Currently, it offers 5 contracts:

• Euro/dollar futures

• Euro/yen TIBOR futures

• Yen - Denominated Nikkei 225 futures

• Dollar-Denominated Nikkei 225 futures

• E-micro S&P CNX Nifty (Nifty 50) futures contracts

ASX once planned to merge with SGX in 2011; however, this was vetoed by the Australian government, which made ASX reconsider its approach to the Singapore market. By 2014, ASX had started to recruit staff in Singapore to open-up an office in there. The strategy to expand abroad was largely because of the stagnant Australian local market and the large inflow of hedge funds, seeking opportunities in Asian markets.

Deutsche Börse is also looking to open a Singapore clearing house in 2014. The group’s Clearstream Banking subsidiary was also pursuing a collateral management service with SGX according to the Financial Times. Similar to ASX, the fast growing Asian derivatives market is the primary attraction for the DB to expand into Singapore.

Regulations Securities and Futures ActIn Singapore, there are regulations and legislation for commercial banks, merchant banks, finance companies, insurance companies, securities, futures and fund management, financial advisors, money brokers, money changing and remittance businesses, business trusts, trust companies and payment and settlement systems.

The regulations such as CFTC/Dodd-Frank Act and EMIR compliance in US and Europe may not directly impact the regulations of Singaporean regulations because of country differences. However, although not being a member of G20, the Singapore government still refers developed markets’ legislation when making their own regulations for the OTC derivatives. MAS released a consultation paper on the ‘Proposed regulation of OTC derivatives’ on February 13, 2012. Mandated central clearing of OTC derivatives and trade reporting are the most important points that Singapore regulators adopted from the international financial regulatory trends.

REgulATORS ANd REgulATiONS | 11

TECHNOLOGY / CONNECTIVITY

TECHNOlOgy / CONNECTiviTy | 12

Improved Electronic Trading Capabilities of OTC DerivativesFrom our analysis, the electronic trading level for CDS and IR products is currently less than for other products. For CDS, about 7% of the contracts are traded electronically and about 16% of the IR products. Compared to the 60% electronic trading level of OTC FX products, there is still large potential for further development.

The situation in Singapore is quite similar to Hong Kong: as the OTC trading and clearing are moving towards exchanges, the electronic trading level of different OTC derivatives such as IR, FX and CDS will increase dramatically in the future. So there are requirements for the financial infrastructure and technology such as faster network connectivity, data integrity and more sophisticated services to accommodate the fast increasing electronic trading level of financial markets.

In addition, as FX and CDS trading will increase over time in Singapore, it is likely that we will start to see swap futures and more ETDs that look and trade like swaps.

Connectivity DemandIn 2013, there were 45 trading members and 28 clearing members in the SGX derivatives market. In addition, there were 12 Clearing Members for the clearing of OTC-traded financial derivatives that operate on SGX AsiaClear. The brokers and clearing members have huge demand for financial infrastructure innovation and expansion to strengthen their connectivity.

For instance, on Dec 1, 2013, SGX welcomed the Sunrise Brokers (Hong Kong) to its derivatives market as a trading member. Simon Harman, the Managing Director of Sunrise Brokers said that they are pleased to broaden their offering to their clients in the Asian region and beyond, and they will continue to invest in the financial infrastructure and technology aspects to enhance their service qualities to their clients. Sunrise’s demand is only the tip of the iceberg of the aggregate demand by exchanges, brokers, dealers and clearing houses. Financial infrastructure providers who can ensure connectivity with the widest global coverage will be highly sought after.

Estimated Electronic Trading Level of OTC Derivatives in Singapore 2013

70%

60%

50%

40%

30%

20%

10%

0%CDS IRS

7%

16%

FX

60%

Source: Kapronasia, 2013

SUMMARY

With the global trend of centralizing OTC derivatives trading clearing functions, we believe that the credit risk of OTC derivatives trading will be mitigated and the derivatives contracts will be standardized and regulated. As there are so many asset classes and financial derivatives including commodities, equities, FX, ETDs and others, with good liquidity in Singapore market, it is very attractive for multiple types of asset management companies and dealers.

In addition, with strong ties to China and South-East Asia, Singapore’s position as a platform for investing in Asia market will be strengthened in the long term and the financial services industry will continue to grow and develop. Finally, increased demand from businesses will require a platform that is able to bring together resources to provide high connectivity to other global markets. The global connectivity requirement will drive the need for increased local connectivity as CCPs, clearing members, buy-side companies, trade repositories and dealers continue to work more closely, and solutions providers continue to provide technology products and solutions to help develop the industry.

SuMMARy | 13

About KapronasiaKapronasia is a leading provider of research-based advisory and consulting services focused on the Global Financial technology industry. Through market-leading research and customized strategy, we partner with financial institutions and financial technology providers around the world to identify their highest-value opportunities in Asia and help them to achieve and sustain a competitive advantage in the market.

For more information about Kapronasia, please email: info@kapronasia.com

www.kapronasia.com

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