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Asia Pacific exchanges eye growth in retail, ESG derivatives

Despite lingering COVID-19 challenges, exchanges continue to see record volumes

7 December 2021

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The outlook for Asia Pacific derivatives exchanges is bright as the year closes out with continued growth in many markets across the region. Speaking during FIA’s Asia-V conference on 7 December, representatives from major exchanges observed that two trends are likely to drive growth in 2022: an increase in institutional use of ESG-related products and a continued rise in retail trading.

The rise of retail investing

Ravi Varanasi, group president at the National Stock Exchange of India, the country's largest derivatives exchange, noted that many brokerages in India “had to get their act together” in the wake of the pandemic and the persistence of remote work, and that regulations were in flux as government officials had to put urgent changes in place.  “But once we were able to get all that going,” Varanasi said, “we saw volumes significantly increase with almost 2x growth in cash market volumes and almost 1.5x growth in derivatives volumes.”

Varanasi said that retail has always been a large part of India’s investing makeup, but that this segment really came into its own across 2020 and 2021. He added that 23 million new investors have traded on NSE since March 2020.

Denise Huang, senior vice president at Taiwan Futures Exchange, noted a similar boom in retail investor participation as both cash and futures market volumes have hit record levels at Taifex. She commented that many new account openings are from investors 30 years old or younger, and that interest from this growing retail segment has been particularly strong in single stock futures, which are seeing two to three times the volumes of prior years.

Sustainability and ESG issues in focus

Representatives from CME Group and Intercontinental Exchange, two of the largest derivatives exchanges in the developed world, pointed to an opportunity to address the appetite in the Asia Pacific region for investments that meet environmental, social and governance (ESG) standards.

Christopher Fix, managing director and head of Asia Pacific for CME, said the exchange's flagship ESG contract, which is based on a filtered version of the S&P 500 index, boasts $3 billion in open interest and has emerged as a popular way for investors, even in Asia, to access ESG-related strategies. Fix also commented on the impact of concerns about sustainability on its commodity futures and options, and said CME has improved the tracing of agricultural commodities and related products to provide end-users across Asia with a better understanding of sourcing issues.

In the carbon trading space, ICE continues to build on its experience with Europe’s deep and liquid emissions trading scheme by offering a suite of related products to Asia investors. However, the exchange is also focused on moving beyond regional markets to a truly global benchmark for CO2, said Jennifer Ilkiw, head of ICE Asia Pacific.

“An interesting fact I read is that over the next 30 years, experts expect our energy needs to double as our carbon usage is supposed to be reduced by half,” said Ilkiw. “So you need a lot of price transparency in the carbon space going forward and the future is in a truly global benchmark instead of just trading in European emissions allowances or California cap-and-trade.”

Extended hours and education

The exchange officials also pointed to the continued work on China’s draft Futures and Derivatives Law as a potential catalyst for long-term growth. Even though the drafting process is a long way from being finished, the law has the potential to provide certain legal protections that many institutional investors see as essential conditions for greater participation in onshore markets. In the meantime, existing products that offer US and European investors exposure to the region continue to see strong demand – leading some exchanges to extend the trading hours for these legacy futures contracts to include more of the Asian day.

Mezhgan Qabool, head of market development APAC and head of equity and index sales APAC for Eurex, pointed to the MSCI emerging markets Asia equity index futures contract on her exchange as a popular way to gain exposure to the region. Roughly 44% of the equities represented in the index are in China, she notes, and the futures feature deep liquidity with nearly $23 billion in open interest.

“About 31% of trading now takes place during core Asian hours after we extended the product’s trading window,” Qabool noted.

Given the wide variety of products that investors in the region now have access to, exchanges are also investing heavily in education. CME's Fix estimated that in 2018, his firm only had eight educators in the region. As of this year, the exchange boasts more than 40, with educational materials in Japanese and Korean as well as Chinese.

NSE's Varanasi also noted a significant investment in investor education across India, driven in large part because of the new investors now using cash and derivatives markets.

“We are a little worried because these new investors haven’t yet seen a downturn, so education is key to ensure they know what they are buying,” Varanasi said. “But my sense is that the retail boom is here to stay, and they will continue driving this market going forward.”

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