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

Equity Bottom-Up

Maxis Nikkei 225 Index Fund / Equity Bottom-Up

<ul>
<li>Japan and Taiwan have strong economic and trading relationships, maintaining developed markets that have seen an 84% correlation in the day-to-day moves of their respective stock markets over the past five years. &nbsp;</li>
<li>The unfastened parallel in stock market performances has provided opportunities to focus risk-to-reward on price ratio spreads of SGX Nikkei 225 Futures (“NK”) and SGX FTSE Taiwan Index Futures (“TWN”) with 61% inter-commodity margin credit for 2 NK to 5 TWN. &nbsp;</li>
<li>Between 3 and 12 August, the price ratio of the underlying indices for NK and TWN converged from two standard deviations to one standard deviation of the six-month mean. Traders that anticipated such convergence would have generated an indicative 33% return on initial margin requirements after applying the 61% credit for Long 2 Sep NK and Short 5 Aug TWN.</li>
</ul>
&nbsp; Back in May, Japan’s 2020 Diplomatic Bluebook referred to Taiwan as an "extremely important partner" which was seen as an upgrade from the "crucial partner and an important friend" reference in 2019. The same month, Taiwan’s Ministry of Economic Affairs affirmed Japan was Taiwan’s third largest trading partner, while Taiwan was Japan's fourth largest trading partner. Bilateral trade between Taiwan and Japan totalled US$67.3 billion US dollars in 2019. Two key Indices – the Nikkei 225 and the FTSE Taiwan RIC Capped Price Return Index have maintained an 87% simple correlation in day-to-day close prices over the past 12 months, up from an 84% correlation over the past five years. Hence there has been enough general directional correlations and deviation between the two Indices for spread trading in the futures market.&nbsp;&nbsp; Traded in a ratio of two SGX Nikkei 225 Futures (“NK”) to five SGX FTSE Taiwan Index Futures (“TWN”), the inter-commodity margin credit is 61% of the combined initial margin requirements. Hence the initial margin required for such a position would be JPY660,660 for the NK (39% x 2 x JPY847,000) + US$4719 for the TWN (39% x 5 x US$2,420) = US$10,952 on an assumed USD/JPY exchange rate of 106. The USD/JPY rate is assumed for the workings of this educative example of spread trading. Note that margin reviews are conducted on a regular basis and the most recent margin schedule can be found <a href="https://www.sgx.com/derivatives/risk-management" target="_blank" rel="noopener">here</a>. Nikkei Stocks Outpaced Taiwan Stocks by 1.2% in Eight Sessions, after trailing by 10% for Preceding Six Months&nbsp; 
&nbsp;
<ul>
<li>On 3 August, the price ratio spread of the Nikkei 225 Index to the FTSE Taiwan RIC Capped Price Return Index moved from below two standard deviations from the six month mean (on 31 July) to above two standard deviations from the six month mean. In terms of numbers, the price ratio spread of the Nikkei 225 Index (22,195) to the FTSE Taiwan RIC Capped Price Return Index (1,110) moved to 19.99, closer to the six month mean price ratio of 21.19, and from below to above the level of two standard deviations from the mean which was 19.58. &nbsp;</li>
<li>On 12 August, the price ratio spread of the Nikkei 225 Index to the FTSE Taiwan RIC Capped Price Return Index moved to less than one standard deviations from the six month mean. The price ratio spread of the Nikkei 225 Index (22,844) to the FTSE Taiwan RIC Capped Price Return Index (1,123) moved to 20.34, closer to the moving six month mean price ratio of 21.04 and above the one standard deviation level from the mean which was 20.25.</li>
</ul>
&nbsp;
Price Ratio Spread of +2 Sep NK/-5 Aug TWN Between 3 August and 12 August&nbsp; Had the trader taken a price ratio spread that anticipated the Nikkei 225 Index would outpace the FTSE Taiwan RIC Capped Price Return Index once the price ratio spread moved from below to above the two standard deviation level, the trader could have bought 2 September NK contracts and sold 5 August TWN contracts. This delta ratio would qualify the position for margin credit, which based on current margin rates would have required an initial margin requirement of US$10,952 as discussed above.&nbsp;
<table class="table table-striped">
<tbody>
<tr>
<td colspan="2">
3 August 2020
</td>
<td>
Notional Value in USD
</td>
<td colspan="2">
13 August 2020
</td>
<td>
Notional Value in USD
</td>
<td>
Indicative Return in USD
</td>
</tr>
<tr>
<td>
Buy 2 Sep NK
</td>
<td>
22,105.00
</td>
<td>
$208,538
</td>
<td>
Sell 2 Sep NK
</td>
<td>
22,890.00
</td>
<td>
$215,943
</td>
<td>
$7,406
</td>
</tr>
<tr>
<td>
Sell 5 Aug TWN
</td>
<td>
1,101.75
</td>
<td>
$220,350
</td>
<td>
Buy 5 Aug TWN
</td>
<td>
1,120.75
</td>
<td>
$224,150
</td>
<td>
-$3,800
</td>
</tr>
<tr>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
Net Return:
</td>
<td>
$3,606
</td>
</tr>
</tbody>
</table>
Had the trader closed the spread position when the price ratio spread of the two Indices moved to within one deviation of the mean on 12 August, the net result would have been a return of US$3,606. Note this is assuming a USD/JPY exchange rate of 106 and a purely indicative return based on closing prices of the two futures contracts at the time. The educative example shows that in just over a week a 33% return was made on the spread margin requirement. Note this educative example also excludes any transaction fees.
&nbsp;
For more details on NK – click <a href="https://www.sgx.com/derivatives/products/nikkei225futuresoptions?cc=NK" target="_blank" rel="noopener">here</a>.
For more details on TWN – click <a href="https://www.sgx.com/derivatives/products/twnfc?cc=TWN" target="_blank" rel="noopener">here</a>.


Japan and Taiwan have strong economic and trading relationships, maintaining developed markets that have seen an 84% correlation in the day-to-day moves of their respective stock markets over the past five years. &nbsp;
The unfastened parallel in stock market performances has provided opportunities to focus risk-to-reward on price ratio spreads of SGX Nikkei 225 Futures (“NK”) and SGX FTSE Taiwan Index Futures (“TWN”) with 61% inter-commodity margin credit for 2 NK to 5 TWN. &nbsp;
Between 3 and 12 August, the price ratio of the underlying indices for NK and TWN converged from two standard deviations to one standard deviation of the six-month mean. Traders that anticipated such convergence would have generated an indicative 33% return on initial margin requirements after applying the 61% credit for Long 2 Sep NK and Short 5 Aug TWN.

&nbsp; Back in May, Japan’s 2020 Diplomatic Bluebook referred to Taiwan as an "extremely important partner" which was seen as an upgrade from the "crucial partner and an important friend" reference in 2019. The same month, Taiwan’s Ministry of Economic Affairs affirmed Japan was Taiwan’s third largest trading partner, while Taiwan was Japan's fourth largest trading partner. Bilateral trade between Taiwan and Japan totalled US$67.3 billion US dollars in 2019.  Two key Indices – the Nikkei 225 and the FTSE Taiwan RIC Capped Price Return Index have maintained an 87% simple correlation in day-to-day close prices over the past 12 months, up from an 84% correlation over the past five years. Hence there has been enough general directional correlations and deviation between the two Indices for spread trading in the futures market.&nbsp;&nbsp;  Traded in a ratio of two SGX Nikkei 225 Futures (“NK”) to five SGX FTSE Taiwan Index Futures (“TWN”), the inter-commodity margin credit is 61% of the combined initial margin requirements. Hence the initial margin required for such a position would be JPY660,660 for the NK (39% x 2 x JPY847,000) + US$4719 for the TWN (39% x 5 x US$2,420) = US$10,952 on an assumed USD/JPY exchange rate of 106. The USD/JPY rate is assumed for the workings of this educative example of spread trading.  Note that margin reviews are conducted on a regular basis and the most recent margin schedule can be found here.  Nikkei Stocks Outpaced Taiwan Stocks by 1.2% in Eight Sessions, after trailing by 10% for Preceding Six Months&nbsp; 
&nbsp;

On 3 August, the price ratio spread of the Nikkei 225 Index to the FTSE Taiwan RIC Capped Price Return Index moved from below two standard deviations from the six month mean (on 31 July) to above two standard deviations from the six month mean. In terms of numbers, the price ratio spread of the Nikkei 225 Index (22,195) to the FTSE Taiwan RIC Capped Price Return Index (1,110) moved to 19.99, closer to the six month mean price ratio of 21.19, and from below to above the level of two standard deviations from the mean which was 19.58. &nbsp;
On 12 August, the price ratio spread of the Nikkei 225 Index to the FTSE Taiwan RIC Capped Price Return Index moved to less than one standard deviations from the six month mean. The price ratio spread of the Nikkei 225 Index (22,844) to the FTSE Taiwan RIC Capped Price Return Index (1,123) moved to 20.34, closer to the moving six month mean price ratio of 21.04 and above the one standard deviation level from the mean which was 20.25.

&nbsp;
Price Ratio Spread of +2 Sep NK/-5 Aug TWN Between 3 August and 12 August&nbsp;   Had the trader taken a price ratio spread that anticipated the Nikkei 225 Index would outpace the FTSE Taiwan RIC Capped Price Return Index once the price ratio spread moved from below to above the two standard deviation level, the trader could have bought 2 September NK contracts and sold 5 August TWN contracts. This delta ratio would qualify the position for margin credit, which based on current margin rates would have required an initial margin requirement of US$10,952 as discussed above.&nbsp;




3 August 2020


Notional Value in USD


13 August 2020


Notional Value in USD


Indicative Return in USD




Buy 2 Sep NK


22,105.00


$208,538


Sell 2 Sep NK


22,890.00


$215,943


$7,406




Sell 5 Aug TWN


1,101.75


$220,350


Buy 5 Aug TWN


1,120.75


$224,150


-$3,800




&nbsp;


&nbsp;


&nbsp;


&nbsp;


&nbsp;


Net Return:


$3,606




Had the trader closed the spread position when the price ratio spread of the two Indices moved to within one deviation of the mean on 12 August, the net result would have been a return of US$3,606. Note this is assuming a USD/JPY exchange rate of 106 and a purely indicative return based on closing prices of the two futures contracts at the time. The educative example shows that in just over a week a 33% return was made on the spread margin requirement. Note this educative example also excludes any transaction fees.
&nbsp;
For more details on NK – click here.
For more details on TWN – click here. 

Recent Nikkei 225 & FTSE Taiwan Spread Trading Opportunity    