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5 Material Factors That Will Affect The Business Of Singapore Exchange Limited

Singapore Exchange Limited (SGX: S68) is a company in Singapore’s stock market that enjoys a monopoly in its business – it is the only stock exchange operator in Singapore.

In its latest annual report (for its fiscal year ended 30 June 2016), the company outlined five material factors that can affect its business.

Given that Singapore Exchange has placed such significance on the five factors by naming and explaining them in its annual report, it will be useful for current and prospective investors in the company to pay attention to them.

Here are the five factors:

1. Talent

According to Singapore Exchange, the exchange sector “is a specialised industry relative to other financial services.” For its business to run well, Singapore Exchange requires talent and expertise that are “not readily transferable from the wider financial services industry.”

As such, the company thinks that its ability to attract, develop, retain and engage high-calibre talent will be key to its future success.

2. Changes in Global Regulatory Landscapes

Ever since the global economy was engulfed in the financial crisis that erupted in 2008, stock exchange operators and other financial institutions around the world have been subjected to increasing levels of regulation.

Singapore Exchange is of the view that “stronger regulations will ultimately result in a more sustainable global financial system.” But, the company is also worried that increased regulatory requirements may lead to higher operating costs and slowdown the industry’s development in the near term.

As such, it is vital for Singapore Exchange to continue adapting its business operations to changes in the regulatory environment to ensure that it can remain competitive in the long run.

3. Global Macroeconomic Conditions

Singapore Exchange mentioned that the “single most critical factor” influencing its business performance in the “near to medium term” is volatility in the Asian financial markets. This is in turn affected heavily by volatility in the global economy.

The company went on to explain why that’s so. “Higher market volatility often leads to increased demand for trading and hedging, and may create additional opportunities for arbitrage and speculation. Conversely, sustained periods of low volatility, especially in bearish conditions, may result in lower levels of market activity.”

4. Competition

Singapore Exchange may have a monopolistic position in Singapore. But that doesn’t mean it is free of competition.

In fact, the company’s Equities and Derivatives businesses face competition from regional and global exchanges. And, the company commented that heightened competitive forces may lead to “either lower volumes or lower margins,” both of which will “negatively impact” its business performance.

Singapore Exchange thinks it offers unique value in the market – it is the “leading single-point access platform into Asia across all major asset classes.” But, the company’s not resting on its laurels.

For instance, in response to global exchanges expanding into adjacent businesses and undergoing mergers and acquisitions, Singapore Exchange acquired The Baltic Exchange, a provider of maritime market information.

Singapore Exchange thinks that the acquisition allows it to “achieve a vertical integration of the entire value chain, from provision of market data to the trading and clearing of freight derivative contracts, while taking advantage of Singapore’s location as a maritime hub.”

5. Technology

The last factor that Singapore Exchange highlighted in its annual report is technology. The company describes technology as “both a key enabler as well as a potential source of significant disruption” to its business model over the long run.

As such, the company’s approach is continually invest to refresh and upgrade the technology that is crucial to its success as a “systemically important financial infrastructure of Singapore.”

One example of such investment for the near to medium term can be seen in how Singapore Exchange working towards an integrated platform where a broad range of products are easily listed and traded, including products that were traditionally traded over the counter.

When it comes to longer term projects, Singapore Exchange is actively monitoring and participating in the development of new disruptive technologies, – such as Blockchain – to keep up with the technology-driven evolution of the business landscape.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.