The turnover of the Singapore structured warrants market averaged SG$1.39bn per month in the first quarter of 2018 setting up a new record since 2008, according to Barnaby Matthews (pictured), head of equity derivatives products at Macquarie. The exchange's turnover from warrants was also up 50%, compared to the same period last year.

"The higher turnover has been accompanied by an increase in retail investors trading warrants and demand for structured warrants across stocks and indices," Matthews said.

In the first quarter of 2018, Singapore warrant investors showed preference for short-dated warrants with a tenure of one to three months over broad indices, and with a slightly longer tenure of six months for stock warrants, according to Matthews. "The underlyings that were of interest in the first three months of 2018 included broad indices such as the Hang Seng Index, Straits Times Index and S&P 500 as well as Singapore banks," he said.

The exchange also recorded a pick up in activity and demand for structured put warrants "with investors who feared sharp pullbacks buying short-term protection via puts, when markets traded at record high levels in January 2018", according to Matthews.

"Warrant turnover has been quite evenly split between call and put warrants, versus a ratio of 70:30 in the first quarter of 2017, for example," said Matthews, adding that the jump in market volatility in the first quarter of 2018 has been one of the driving factors behind the increase in demand for structured warrants. "Investors used call warrants to leverage on potential price rebounds after large pullbacks," he said. "Whilst put warrants have been bought by investors wanting to protect their portfolio against short-term risk on the downside."

Additionally, the expectation of higher interest rates has had a big, positive impact on the share price performance in Singapore banks, which investors believed to be beneficiaries of rising rates, Matthews noted. "This has in turn revived demand for structured call warrants over the Singapore banks, and we have reacted by listing more warrants over these names," he said.

Despite the increase in trading activity, the Singapore warrant market continues to be dampened by the Monetary Authority of Singapore's (MAS) requirement of an specific investment products (SIP)-certification for investors wanting to trade structured warrants, according to Matthews. "While turnover and interest have picked up, the number of active warrant investors is still a far cry from that seen before the SIP requirement in 2012," he said. "We also note that the increased trend of algorithm trading has negatively impacted the efficiency of warrant markets."

SRP data shows that in the first quarter of 2018, there were 48 structured products in Singapore worth SG$270m (US$203m). About 85% of them, 41 products worth SG$46m, were structured warrants. The distributors of structured warrants include Macquarie with 35 products, Vontobel with four, JP Morgan with two and OCBC with one. Compared to the same period last year, issuance of structured products increased by 14% from 36 products, 25 of which warrants, while sales volume went up by 11% from SG$243m.

The top distributor of warrants in the first three months of 2018 in Singapore was Macquarie with 35 warrants worth SG24m, according to SRP data. About 50% of those (18 products) were linked to the Hang Seng Index and five products to DBS. Compared to the same period last year, issuance went up 105% from 17%, while sales were down 41% from SG$41m.

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