The Possible Negative Impacts To Singapore Exchange Limited’s Business From China’s Stock Market Debacle

Local bourse operator Singapore Exchange Limited (SGX: S68) had enjoyed some healthy growth in its fiscal year ended 30 June 2015 (FY2015) with its total revenue increasing by 13.4% from S$687 million to S$779 million.

The bulk of that growth’s powered by huge gains in its derivatives business segment. In FY2015, revenue from Singapore Exchange’s derivatives segment leapt by 42% year-on-year from S$209 million to S$296 million on the back of a 55% surge in the number of derivative contracts traded to 161 million.

In fact, the segment’s growth was so impressive that it accounted for 95% of the total revenue growth that Singapore Exchange had enjoyed in the year through 30 June 2015. This is where a potential problem may lie.

The China-linked SGX FTSE China A50 Index futures contracts, which saw volume in FY2015 spiking by 220% year-on-year to 78 million contracts, was responsible for nearly all the contracts-growth in Singapore Exchange’s derivatives segment. A breakdown of the numbers will make this clear.

In absolute terms, Singapore Exchange saw an increase of about 57 million derivative contracts for the fiscal year in question; meanwhile, there was a 54 million increase in the number of A50 Index futures.

The outstanding increase in interest in the A50 Index futures was most likely due to the huge rally experienced by the Chinese stock market over the year through June 2015. Many China related exchange-traded funds in Singapore, such as the United SSE 50 China ETF (SGX: JK8), also experienced a big jump in volumes.

But, as you may have heard, the Chinese stock market had suffered a fierce decline in the middle of June which carried on through most of July. Today, China’s main stock market benchmark, the Shanghai Stock Exchange Composite Index, is down by more than a quarter from its closing-peak of 5,166 points that was reached on 12 June.

This development may well lead to a drop in interest and trading volume on China-related financial instruments.

The Singapore Exchange had experienced something similar during the Great Financial Crisis of 2008-09. During that episode, the bourse operator’s revenue tumbled by 23% year-on-year in FY2009 as many stock markets around the world collapsed, Singapore’s included (the local market benchmark, the Straits Times Index (SGX: ^STI), had fallen by two-thirds from peak-to-trough). It took Singapore Exchange seven years to break its revenue-high of S$769 million that was achieved in FY2008.

Foolish Summary

As we’ve seen above, the collapse of the Chinese stock market might be a source of risk for Singapore Exchange’s derivatives business. That’s something to note given that the derivatives segment accounted for 38% of the bourse operator’s total revenue in FY2015.

That being said, this does not mean that Singapore Exchange will definitely be facing a difficult time in its current fiscal year (FY2016). After all, the derivatives business is only one segment of the company’s overall business and the contracts related to the Chinese market is also just another piece of the pie within the segment.

It would be interesting to observe how Singapore Exchange’s business will perform this fiscal year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.