The proprietary trading firm and market maker for exchange-listed products expects a ‘few other’ derivatives exchanges in Asia to offer portfolio compression services ‘in the near future’
The Singapore Exchange (SGX) new portfolio compression service launched in collaboration with Capitalab, a division of BGC Brokers, is the first of its kind for listed derivatives in Asia, and includes Nikkei 225 Index Options, Nikkei 225 Index Futures and Mini Nikkei 225 Index Futures. The service aims to cut costs for investment banks and market makers which hold large options portfolios.
“[The service] allows us to decrease open interest while managing our portfolio risk changes in a controlled way,” said Gerben van Veldhuijsen, head of corporate strategy for Asia Pacific at Optiver. SGX has partnered with Optiver as well as BNP Paribas during the first run.
“Issuers of structured products [hedge their] products on an exchange such as SGX, and there is a cost to that hedge,” said Yujun Lin, head of North Asia equities, derivatives at SGX. “By making that portfolio smaller, we are saving them the cost of hedging over a period of time.”
The Nikkei index, for example, was the fourth most popular underlying this year for equity-linked products sold in South Korea, Asia’s largest structured products market. The country’s sales volume tracking the Japanese benchmark stands at roughly KRW18 trillion (US$15.3 billion) year-to-date.
The Singapore bourse, however, expects to work with all the major banks trading in its Nikkei options market going forward, as they all face the same challenges.
“As more participants join, we expect compression efficiency to increase,” said van Veldhuijsen. “This will materially decrease our Leverage Ratio exposure usage, which will in turn allow us to take on new positions in our capacity as a market maker each month.”
Capitalab has developed the algorithm which conducts the compression exercise of recommending which trades can be offset against each other across a pool of participants. It is the second firm globally to provide such service after CME.
CME completed its first compression cycle on S&P 500 and E-mini S&P 500 options contracts in November 2018. The derivatives marketplace said the service has compressed portfolios submitted for the first run by 22%.