Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Asia’s leading multi-asset exchange

SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Commodities

<ul>
<li>While broad 2Q20 market volatility saw the correlation of the FTSE China A50 Index and NSE Nifty 50 Index reach a 12 year high, the 120 day rolling correlation of the two Indices has returned to normalised &amp; minimal levels of 20% to 30%.&nbsp;&nbsp; &nbsp;</li>
<li>Less correlation of both Indices has seen price ratio of the SGX China A50 Futures (“CN”) to the SGX Nifty Futures (“IN”) fluctuate by as much as 9% within the past 3 months. Inter-Market spreads with a delta per spread ratio of 20 CN to 13 IN currently qualify for a 51% margin credit. &nbsp;</li>
<li>Between 25 Jan &amp; 2 Feb, the CN/IN price ratio declined from 1.32 to 1.26, from 2 standard deviations above the 3M average price mean to BELOW the 3M average price mean, with the mean reversion generating a 70% theoretical return on the Initial Margin requirement after applying margin credits. </li>
</ul>
&nbsp;
Among the world’s major economies, China and India are estimated to generate the strongest GDP growth rates in 2021. The stock markets of both countries have also outperformed global peers over the first five weeks of 2021, with 9% and 10% gains in USD terms. The China stock market maintains a total market capitalisation of US$11 trillion, compared to the India stock market with a total market capitalisation close to US$3 trillion. Both the FTSE China A50 Index and NSE Nifty 50 Index are comprised of 50 of the largest and most traded stocks of each country. While both indices have generated similar returns over the past five weeks, in January, the FTSE China A50 Index had outpaced the NSE Nifty 50 Index, with the latter Index declining by 2% for the month. After the 29 January India market closed, India’s Finance Minister Nirmala Sitharaman presented the national Budget, with significant spending and structural measures to stimulate growth (click <a href="https://www.indiabudget.gov.in/" target="_blank" rel="noopener">here</a> for more). This has seen the Financials mega-sector lead the NSE Nifty 50 Index in the February month-to-date, with the comparatively smaller sector of Industrials following suit. Financials maintain a 40% weight in the NSE Nifty 50 Index. Prior to the India’s national budget, the outperformance of the FTSE China A50 Index Futures (“CN”) to the NSE Nifty 50 Index (“IN”) had stretched to a 12-week high, with the price ratio of the Feb 2021 CN (“CNG1”) to the Feb 2021 IN (“ING1”) rising to 1.324 on 25 January, which was more than 2 standard deviations above the then moving 3-month price ratio mean at 1.260. The next four sessions that preceded the India budget saw the ING1 decline marginally less than CNG1, while the two sessions following the India budget saw ING1 outpace CNG1 by 5%.&nbsp; This saw the price ratio of CNG1 to ING1 revert back to the 3-month price ratio mean at 1.260.&nbsp;&nbsp;
<figure class="editor-figure mceNonEditable"><img src="https://api2.sgx.com/sites/default/files/2021-02/Capture_6.PNG" class="editor-image img-responsive"></figure>
<div class="content-caption">Price Ratio Spread of China A50 Futures/ India Nifty Futures</div>

The current delta per spread ratio to maximise margining credits on a CN/IN inter-market spread is 20 CN to 13 IN providing a 51% margin credit. Note these margin rates are updated regularly and Margin Schedules can be found <a href="https://www.sgx.com/derivatives/risk-management" target="_blank" rel="noopener">here</a>. Assuming the current 51% margin credit rate, the Initial Margin requirement to Sell 20 CNG1 and Buy 13 ING1 on 25 January was US$25,488. This is simply, US$1,210 x for 20 CNG1 + US$2,310 x for 13 ING1 = US$54,230 x 0.49 = US$26,573.&nbsp; Note the margin credit rate for the 20:13 delta per spread ratio was 53% at the time, however this is purely an educative example, applying the current rate. The market risk and potential return of the trade focused on the relative performance of the CN to IN inter-market. If the derivatives trader believed the CNG1 would outpace ING1, the derivatives trader would have conversely bought 20 CNG1 and sold 13 ING1.&nbsp; Between 25 January and 2 February, the CNG1 leg declined 252.0 points, equivalent to a US$5,040 return for the short position of 20 lots, while the ING1 leg gained 530.5 points, equivalent to a US$13,793 return on the long position of 13 lots. The theoretical return of the -CN/+IN inter-market spread excluding transaction costs was US$18,833, representing a 70% return on the initial margin requirement.
<table class="table table-striped">
<tbody>
<tr>
<td>
Trade Example
</td>
<td>
Lots
</td>
<td>
Contract
</td>
<td>
Price on 25 January
</td>
<td>
Price on 2 February
</td>
<td>
Points Return
</td>
<td>
Contract Multiplier
</td>
<td>
CCY
</td>
<td>
Return in $&nbsp; Value
</td>
<td>
Initial Margin
</td>
</tr>
<tr>
<td>
Short
</td>
<td>
20
</td>
<td>
CNG1
</td>
<td>
18,935.0
</td>
<td>
18,683.0
</td>
<td>
252.0
</td>
<td>
$1 
</td>
<td>
USD
</td>
<td>
$5,040
</td>
<td>
$24,200
</td>
</tr>
<tr>
<td>
Long
</td>
<td>
13
</td>
<td>
ING1
</td>
<td>
14,298.0
</td>
<td>
14,828.5
</td>
<td>
530.5
</td>
<td>
$2 
</td>
<td>
USD
</td>
<td>
$13,793
</td>
<td>
$30,030
</td>
</tr>
<tr>
<td>
Total
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
USD
</td>
<td>
$18,833
</td>
<td>
$54,230
</td>
</tr>
<tr>
<td colspan="4">
Initial Margin Requirement after Margin Credit
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
$26,573
</td>
</tr>
</tbody>
</table>
&nbsp;Note Individual traders need to be Specified Investment Products (SIP) qualified to trade Futures Contracts - click&nbsp;<a href="http://edm.sgx.com/a/hBfPJ%24KB86%24MfB92l9XAAAAAANm/link11" target="_blank" rel="noopener">here</a>&nbsp;for course details. SIPs are financial products with structures and features that may be more complex than others and require more knowledge to understand. Futures markets are also are also leveraged products and are hence for investors who are willing to accept the risk of substantial losses exceeding the principal investment amount, possibly within a very short timeframe. &nbsp;


While broad 2Q20 market volatility saw the correlation of the FTSE China A50 Index and NSE Nifty 50 Index reach a 12 year high, the 120 day rolling correlation of the two Indices has returned to normalised &amp; minimal levels of 20% to 30%.&nbsp;&nbsp;  &nbsp;
Less correlation of both Indices has seen price ratio of the SGX China A50 Futures (“CN”) to the SGX Nifty Futures (“IN”) fluctuate by as much as 9% within the past 3 months. Inter-Market spreads with a delta per spread ratio of 20 CN to 13 IN currently qualify for a 51% margin credit. &nbsp;
Between 25 Jan &amp; 2 Feb, the CN/IN price ratio declined from 1.32 to 1.26, from 2 standard deviations above the 3M average price mean to BELOW the 3M average price mean, with the mean reversion generating a 70% theoretical return on the Initial Margin requirement after applying margin credits. 

&nbsp;
Among the world’s major economies, China and India are estimated to generate the strongest GDP growth rates in 2021. The stock markets of both countries have also outperformed global peers over the first five weeks of 2021, with 9% and 10% gains in USD terms. The China stock market maintains a total market capitalisation of US$11 trillion, compared to the India stock market with a total market capitalisation close to US$3 trillion. Both the FTSE China A50 Index and NSE Nifty 50 Index are comprised of 50 of the largest and most traded stocks of each country.  While both indices have generated similar returns over the past five weeks, in January, the FTSE China A50 Index had outpaced the NSE Nifty 50 Index, with the latter Index declining by 2% for the month. After the 29 January India market closed, India’s Finance Minister Nirmala Sitharaman presented the national Budget, with significant spending and structural measures to stimulate growth (click here for more). This has seen the Financials mega-sector lead the NSE Nifty 50 Index in the February month-to-date, with the comparatively smaller sector of Industrials following suit. Financials maintain a 40% weight in the NSE Nifty 50 Index.  Prior to the India’s national budget, the outperformance of the FTSE China A50 Index Futures (“CN”) to the NSE Nifty 50 Index (“IN”) had stretched to a 12-week high, with the price ratio of the Feb 2021 CN (“CNG1”) to the Feb 2021 IN (“ING1”) rising to 1.324 on 25 January, which was more than 2 standard deviations above the then moving 3-month price ratio mean at 1.260. The next four sessions that preceded the India budget saw the ING1 decline marginally less than CNG1, while the two sessions following the India budget saw ING1 outpace CNG1 by 5%.&nbsp; This saw the price ratio of CNG1 to ING1 revert back to the 3-month price ratio mean at 1.260.&nbsp;&nbsp;

Price Ratio Spread of China A50 Futures/ India Nifty Futures

The current delta per spread ratio to maximise margining credits on a CN/IN inter-market spread is 20 CN to 13 IN providing a 51% margin credit. Note these margin rates are updated regularly and Margin Schedules can be found here.  Assuming the current 51% margin credit rate, the Initial Margin requirement to Sell 20 CNG1 and Buy 13 ING1 on 25 January was US$25,488.  This is simply, US$1,210 x for 20 CNG1 + US$2,310 x for 13 ING1 = US$54,230 x 0.49 = US$26,573.&nbsp;  Note the margin credit rate for the 20:13 delta per spread ratio was 53% at the time, however this is purely an educative example, applying the current rate. The market risk and potential return of the trade focused on the relative performance of the CN to IN inter-market. If the derivatives trader believed the CNG1 would outpace ING1, the derivatives trader would have conversely bought 20 CNG1 and sold 13 ING1.&nbsp;  Between 25 January and 2 February, the CNG1 leg declined 252.0 points, equivalent to a US$5,040 return for the short position of 20 lots, while the ING1 leg gained 530.5 points, equivalent to a US$13,793 return on the long position of 13 lots. The theoretical return of the -CN/+IN inter-market spread excluding transaction costs was US$18,833, representing a 70% return on the initial margin requirement.




Trade Example


Lots


Contract


Price on 25 January


Price on 2 February


Points Return


Contract Multiplier


CCY


Return in $&nbsp; Value


Initial Margin




Short


20


CNG1


18,935.0


18,683.0


252.0


$1 


USD


$5,040


$24,200




Long


13


ING1


14,298.0


14,828.5


530.5


$2 


USD


$13,793


$30,030




Total


&nbsp;


&nbsp;


&nbsp;


&nbsp;


&nbsp;


&nbsp;


USD


$18,833


$54,230




Initial Margin Requirement after Margin Credit


&nbsp;


&nbsp;


&nbsp;


&nbsp;


&nbsp;


$26,573




&nbsp;Note Individual traders need to be Specified Investment Products (SIP) qualified to trade Futures Contracts - click&nbsp;here&nbsp;for course details. SIPs are financial products with structures and features that may be more complex than others and require more knowledge to understand. Futures markets are also are also leveraged products and are hence for investors who are willing to accept the risk of substantial losses exceeding the principal investment amount, possibly within a very short timeframe. &nbsp;

Recent Move in the China A50 & Nifty Inter-Market