Singapore to Beat Hong Kong as Synthetic ETF Center, Celent Says
January 19, 2012, 8:18 PM ESTBy Benjamin Garvey
Jan. 19 (Bloomberg) -- Singapore may displace Hong Kong as Asia’s hub for synthetic exchange-traded funds due to regulatory changes, Boston-based financial research and consulting firm Celent said in a report.
The market in Singapore for the investments, which produce returns through derivative contracts rather than through underlying securities, may rise to $5.5 billion by 2014 from $1 billion, Anshuman Jaswal, Celent’s Bangalore, India-based analyst covering financial services, said by e-mail on Jan. 17.
Hong Kong may shrink to $4.5 billion in the same period from $8 billion, if the city’s Securities and Futures Commission “comes down strongly” on the funds, Jaswal said. The regulator last year announced new requirements on synthetic ETFs incorporated in the city to increase transparency and protection for investors.
Societe Generale SA’s Lyxor Asset Management plans to delist all 12 of its Hong Kong-listed synthetic ETFs in March, Herman Chen, the company’s head of ETF distribution in Asia, said by phone in Hong Kong today. Lyxor announced its intent in December. The decision was not in reaction to the new regulations, Chen said.
“It is possible that trading volumes are insufficient to make Lyxor’s ETFs cost-effective in light of the new measures,” Celent said it its Jan. 12 report. The company is part of the Oliver Wyman Group, a management consulting firm.
Lyxor has 26 synthetic ETFs in Singapore. It plans to add two this quarter, and possibly list more later this year, Chen said.
ETFs in Asia
Hong Kong has 70 ETF listings, while Singapore has 44, according to data compiled by Bloomberg as of today. Synthetic funds account for 11 percent of the $100 billion ETF market in the Asia-Pacific region, according to the report.
Apart from Hong Kong and Singapore, markets in the region do not have a high level of synthetic ETF activity, according to the report. Two such funds in Australia were converted to regular ones after coming under pressure from regulators, and the Japanese and Korean markets are dominated by regular ETFs, it said.
Deutsche Bank AG and Lyxor are the main synthetic ETF providers in the area, according to the report.
Recent Approvals
The Hong Kong regulator approved six Deutsche Bank synthetic ETFs at the end of 2011, the first in 18 months. Soon after, it sanctioned seven from Enhanced Investment Products Ltd., a Hong Kong-based asset manager.
“It would be difficult to say that Singapore will overtake Hong Kong” due to the recent authorizations, said Johnny Yu, managing director for equity derivatives sales at UBS AG, in a telephone interview Jan. 16.
While the differences in regulations between the two Asian cities are not big, Hong Kong is stricter, Marco Montanari, the head of Deutsche Bank’s ETF business in Asia, said in a telephone interview on Jan. 17.
In Hong Kong, the funds must have zero counterparty risk, meaning that investors’ money has to be completely secured in case a derivative provider goes bankrupt, Montanari said. “In Singapore you can have up to 10 percent counterparty risk.”
--Editors: Andrew Monahan, Beth Thomas
To contact the reporter on this story: Benjamin Garvey in Hong Kong at bgarvey8@bloomberg.net.
To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.
