Vibrant futures market expected to arise from revamped STI - Jun 07, 2007 (ST)

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The Straits Times / The Business Times News On SPH

Vibrant futures market expected to arise from revamped STI

Investors eagerly await opportunities likely to open up as index slims down.

By Goh Eng Yeow
Jun 07, 2007
The Straits Times


THE local financial derivatives market looks set to get a big shot in the arm once the revamp of the 40-year-old Straits Times Index (STI) is completed.

Fund managers and investment bankers are already eagerly eyeing the immense investment opportunities which are likely to open up, as the STI is trimmed to 30 stocks from 49.

Derivatives are instruments such as warrants, options or futures contracts, whose prices are linked to the value of underlying assets such as stocks.

For a start, these financial industry hotshots expect a vibrant futures market to be built around the STI. This could be similar to the phenomenally successful futures market on the Hang Seng Index in Hong Kong.

This may then trigger heavy trading of popular financial instruments such as STI covered warrants, whose popularity has surged since last year. It may also spawn a host of new products linked to the STI.

On Tuesday, Singapore Press Holdings (SPH), the Singapore Exchange (SGX) and the British-based FTSE Group signed a cooperation agreement to overhaul the STI - its first major makeover in nine years.

The move will make the STI a blue-chip index of Singapore's largest listed stocks and ensure it continues to be the local market's key barometer for both local and global investors. It will be accompanied by the launch of a family of 18 new indexes known as the FTSE ST Indexes.

The move has sparked hopes that the appetite of international fund managers and investment bankers will be whetted - and that they will create investment products for the new indexes.

BNP Paribas' head of retail listed products sales for Singapore and Hong Kong, Mr Simon Yung, said yesterday: 'In Hong Kong, when people trade index futures, they naturally go for the Hang Seng. The same scenario will apply to Singapore if it has a good STI futures contract.'

As a rough guide to the size of the futures market which could eventually be developed on the STI, he noted that about HK$52 billion (S$10 billion) worth of Hang Seng contracts change hands daily. This is almost equivalent to the total daily turnover of Hang Seng component stocks.

Mr Yung also noted that the volume of the popular STI warrants 'may even triple', as more banks could now hedge their risks using the STI futures contract.

Others say a vibrant futures market will also throw up a host of other opportunities for investors. Deutsche Bank vice-president Sandra Lee said that arbitrage traders and hedge fund managers will try to replicate the new STI with a basket of stocks.

They will then 'arbitrage' or trade between this basket of stocks and the STI futures contract, whenever there is a big price difference between the two.

This will improve the liquidity of the STI futures market and, in turn, attract more market players.

One other type of financial instrument which may take off is the exchange traded fund (ETF). These are traded on a share markets just like stocks, but they track the performance of a market index, commodities or bonds, and have lower overheads.

For a start, the thinly-traded STI ETF may be given a big boost because the index becomes more liquid as it is slimmed down.

Mr Sammy Yip, State Street Global Advisors' ETF head for the Asia-Pacific, said that more professional traders may be attracted to use the STI ETF as an arbitrage tool.

'This will improve the underlying demand for the STI ETF, and, in turn, spur real investors which have been discouraged by its lack of liquidity,' he said.

Yesterday, the STI ETF fell 14 cents to $35.89 on a volume of 5,400 shares.

And State Street is seriously considering a stock split of the STI ETF to make it more affordable to retail investors.

'This is an excellent opportunity for the two things to come together - a stock split for the ETF coinciding with the STI revamp,' he said.