Singapore Exchange Ltd, which generates half of its revenues from derivatives business, could see a dent in its earnings following a move by the Hong Kong exchange operator to launch Chinese A-share futures contracts, analysts said.
Shares in SGX fell 1.6 percent on Tuesday after slumping 3.7 percent in the previous session when it clocked the worst slide in 13 months.
On Monday, Hong Kong Exchanges and Clearing (HKEX) unveiled a deal with MSCI to provide futures contracts on the MSCI China A Index, putting it in direct competition with SGX - a leading venue for offshore investors to track Chinese A-shares via its FTSE China A50 contracts.
HKEX has not said when it will launch the futures contracts, but the move will end SGX's dominance on offshore derivatives based on Chinese mainland shares.
"SGX's China A50 and HKEX's new futures are definitely competing products and we could see some migration away from Singapore to Hong Kong," said Michael Wu, an analyst at research firm Morningstar, but noting this shift would be more nuanced than institutions moving all their trading from one exchange to the other.
SGX is a major venue for international investors to hedge their exposure to the Chinese market. Its suite of equity, commodities and forex derivative products have helped power earnings growth, despite a subdued performance in its cash equities business.
But HKEX's China stock futures may be the first of a series of other competing products it is planning, as according to the bourse's recent strategy document it is planning to launch new commodities and fixed income and currencies products to build a renminbi-based derivatives market.
In the quarter ended December, SGX's derivatives revenue jumped 35 percent to account for half its total revenue.
Credit Suisse analyst Rikin Shah highlighted in a report that SGX's FTSE China A50 contracts were the biggest contributor to SGX's derivatives business, accounting for around 40 percent of its total derivatives volume.
Detailing the impact on SGX's profitability under different scenarios, Shah estimated that a 30 percent decline in A50 derivatives contracts could hurt SGX's net profit by 9.2 percent and revenue by 5.4 percent.
HKEX's new futures contracts, subject to regulatory approval, comes as SGX struggles to attract equity listings from large companies, excluding real estate investment trusts. SGX also had a dispute with the National Stock Exchange of India last year over the trading of its flagship Indian equity derivatives.
In an email on Tuesday, SGX welcomed steps to support China's internationalisation and increasing investor access to Asia's most important emerging market but said it was the main global venue to trade Chinese assets.
"SGX is recognised globally as the one-stop, multi-asset platform to trade Chinese assets and manage risks comprehensively, across equities, currencies and commodities," it said.
