Derivatives to account for half of SGX's group revenue in 2019: analyst

It’s set to haul $444m in revenue as rattled investors continue to seek risk management solutions.

Market volatility and heightened demand for risk management solutions may further boost the Singapore Exchange’s (SGX) derivatives business which is set to rack in $444m in revenue in 2019 and make up 50% of SGX's group revenue, according to a report by OCBC Investment Research (OIR).

SGX’s derivatives posted the largest increase in revenues of 35% YoY to $112.9m, contributing the most to the local bourse’s earnings for Q2. Equity and commodities revenue also grew 23% as total volumes increased in tandem to 60 million contracts compared to 48.6 million contracts the year before, SGX highlighted in its financial statement.

“We achieved a second consecutive quarter of record performance in our derivatives business with robust institutional demand for our risk management and hedging tools, including our MSCI Net Total Return index futures and FX futures contracts,” SGX’s CEO Loh Boon Chye said in a statement.

This was echoed by OIR’s report, which cited derivatives as SGX’s ‘star performer’, accounting for 50% of the local bourse’s overall revenue and overtaking its other businesses.

SGX’s securities trading and clearing business also saw its revenues dip 13% YoY to $45.2m from $51.8 MAS securities daily average traded value (SDAV) dropped 14% YoY to $980m from $1.14b.

Also read: SGX Q2 profits up 9% to $96.5m

“As expected, equities and fixed income fell 12.3% YoY to $85.6m, and accounted for about 38% of revenue now versus 48% a year earlier,” OIR analyst Carmen Lee stated in the report. “A Q2 dividend of $0.075 was declared, bringing the H1 dividend payout to $0.15 versus $0.10 a year ago.”

Based on management’s full year guidance for operating expenses and H1 total expenses of $213m, this means that operating expenses will go up in H2 to around $232m to $242m, Lee said in the report. “With lingering market concern over the ongoing trade war, cut in economic growth forecasts, and the potential impact on corporate earnings and outlook, volatility and risks will remain this year,” she added.

Whilst this may mean bad news for some, SGX can peg its hopes on volatility to further boost its derivatives and overall revenue. "We are bullish on derivatives volume numbers," RHB Research analyst Leng Seng Choon added. "We believe market volatility will keep derivatives volume firm, though we have conservatively assumed FY19 derivatives average daily contract (DADC) of 897,000 versus Q2 FY19's 938,000 and H1 FY19's 900,000."