SGX: SIMSCI Futures springs back to action in the first month of 2016 as volatility increases

OREANDA-NEWS. Rocky start for 2016

Markets across the globe had a rocky start to 2016 with a number of macroeconomic news announcements and policy measures. Market moving events included PBOC’s liquidity easing, IMF’s downward revision of its global outlook, ECB’s additional easing and BOJ’s surprise move on its negative interest rate policy.  The start of the year has also been marked by concerns over China’s slowing market, and the continued fall of oil prices.

Major indices ended January with a 30-day volatility of more than 20%, with the CSI 300 Index exhibiting the highest volatility of 47.9%. Similarly, the month-to-date return of most major indices ended in the negative range, and the MSCI Singapore Index^SM (“SIMSCI Index”) dipped below 300 index points on 14 January, declining further to 283.45, the lowest in five years, on 21 January. The last time the MSCI Singapore Index^SM dipped below 300 index points was on the 4 October 2011, when it fell to 291.08.

Performance of Major Indices

Source: Bloomberg (data as of 31 January 2016)

Performance of SIMSCI Index, SIMSCI Futures and Volatility

Trading of SGX MSCI Singapore Index Futures contract improves

Amidst weak sentiment and continued uncertainty, the average daily volume of SGX MSCI Singapore Index Futures contract (“SIMSCI Futures”) increased 42% during January, achieving a record daily volume of 31,365 lots.  Open interest also reached a record high of 136,298 lots on 26 January and closed with month-end open interest of 108,190 lots, 14% higher month-on-month. The robust trading of SIMSCI futures is an indication of the increased appetite for risk management tools in the context of market volatility.

Following the enhancement made to SIMSCI Futures in November 2015, interest continues to grow. As part of this enhancement, the contract size and tick size were reduced to half, allowing more precise hedging and more trading opportunities. During January, the average high-low range for SIMSCI Futures was 131 ticks a day, compared to 90 ticks for the November to December 2015 period.  January’s average bid-ask spread during T-session was approximately 3.08 bps (1 tick spread).

SIMSCI Futures provides an efficient access to broad movements of the Singapore market. Market participants with a portfolio of relevant Singapore stocks can hedge their directional exposure through this contract. Unlike equities, a futures contract permits the use of higher leverage and shorting. During a volatile period, futures contracts may be deployed to provide portfolio protection without selling the underlying shares. 

With more than 16 hours of trading, investors are able to make use of both the regular T session which runs from 8.30am to 5.15pm, Singapore time, and the T+1 session which runs from 6.15 pm to 2.00 am, Singapore time, to hedge against volatility during Asian, European and partial US time zones.