SMX off the blocks, focuses on getting it right

Siow Li Sen


Wed, Sep 01, 2010

The Business Times

(SINGAPORE) The Singapore Mercantile Exchange (SMX) finally began operations yesterday, after some two years of planning and preparation.

The commodities exchange went live with four contracts: two crude oil benchmarks (euro-denominated Brent Crude, and West Texas Intermediate or WTI); a currency pair (euro-US$ currency futures contract); and the first gold futures contract in Singapore to be settled via physical delivery.

Two more contracts, both currency pairs - US$-Australia dollar and US$-yen - will be launched next, said SMX chief executive Thomas McMahon at a press conference.

SMX founder and vice-chairman Jignesh Shah said the initial focus is on setting up the ecosystem and getting the processes, risk management, research and systems right.

Liquidity will then follow, said Mr Shah, to the key question why SMX will succeed when commodities trading on its rival, the Singapore Exchange (SGX), has met with mixed fortunes.

He said SMX is not setting any volume targets in its first year.

'What's important is not to be chasing the volume; the foundation of any exchange is to have the right regulatory framework, the right risk management processes and systems,' he said.

'Just to share our Indian experience: for the first year, we were among the first 50 but in the sixth year, we are now sixth largest in the world,' said Mr Shah.

The Multi-Commodity Exchange (MCX), set up in 2003 by Mr Shah's Financial Technologies group, today commands about 80 per cent of India's commodities futures market. Last year, it became the world's largest exchange for trading in silver (in terms of the number of futures contracts traded); the second largest for gold, copper and natural gas; and the third largest for oil.

Mr McMahon added SMX is focused on creating the right contracts which meet specific market needs of Asian industry players.

For instance, its gold futures contract is the first physical contract to be settled in Singapore.

He is also confident that SMX's two crude oil contracts will meet market demand, given that Singapore is the third largest oil refining centre in the world.

He noted that, currently, oil traders here could be trading in New York and London but, increasingly, financial sector reform will lead to more scrutiny of cross-border flows.

That means 'splitting the collaterals' will become more difficult as regulators impose more rules, he said.

Mr McMahon also disclosed that 68 firms have expressed interest in becoming SMX members.