SGX launches first derivative-portfolio compression service in Asia

Stock ticker at SGX building on Shenton Way; taken October 2018.Stock ticker at SGX building.

In a first for an Asia-based exchange, Singapore Exchange has extended its portfolio compression service to include listed derivatives as well as over-the-counter (OTC) products, the Singapore market operator said Wednesday.

Portfolio compression is a process of replacing multiple offsetting derivatives contracts with fewer deals carrying the same net risk to lower the notional value of a portfolio, according to Risk.net. SGX said the service lowers capital costs.

SGX said its new service will be launched in a tie-up with Capitalab, which is part of Nasdaq-listed BGC Partners.

“SGX and Capitalab are responding to market participants’ need for an efficient service to optimize their outstanding positions with increased capital and cost savings,” Michael Syn, head of derivatives at SGX, said in the statement.

“In 2014, SGX was the first Asian exchange to run compression on OTC derivatives. Today, we are again leading the way by extending portfolio compression onto listed Asian derivatives,” Syn added.

David Bachelier, co-founder of Capitalab, said the deal marked his company’s entry into the equity derivatives segment where there was “much to be done” on optimizing notional exposures and margins.

SGX will offer the portfolio compression service for the listed Nikkei contracts, including the SGX Nikkei 225 Index Options, the SGX Nikkei 225 Index Futures and the SGX Mini Nikkei 225 Index Futures, the statement said.

The service has already been widely used by OTC derivatives market participants, SGX said.

Over 2014-17, SGX ran compression exercises for OTC financial derivatives, tearing up a total US$135 billion, or around 39 percent of outstanding positions, the statement said.

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