3 Big Risks Singapore Exchange Limited Is Facing, And How It Is Handling Them

Singapore Exchange Limited (SGX: S68) is the only stock exchange operator in Singapore.

Any company, big or small, faces risks that could damage its business. In Singapore Exchange’s annual report for its fiscal year ended 30 June 2017 (FY2017), the company discussed the risks it has to deal with.

I thought it’d be very useful to share Singapore Exchange’s discussion. Understanding Singapore Exchange’s risks and how it is addressing them will help investors better evaluate the company’s future profitability.

Regulatory risks and reputational risks

Singapore Exchange is a regulator of the Singapore marketplace and public companies. As such, it has to “maintain the highest reputation for supervision and for adherence to regulation.” The company believes that failure to do so will result in market participants losing confidence in it; this could eventually lead to a serious impact on Singapore Exchange’s competitiveness.

To manage these risks, this is what Singapore Exchange is doing:

“SGX strives for high regulatory standards in the oversight of listed companies and member firms to enable the operation of a fair, orderly, transparent and efficient marketplace.

SGX admission and listing requirements are benchmarked to be comparable with established jurisdiction standards and to address risks arising from changes in the business landscape and global environment.

Our market surveillance system detects trading irregularities. Where appropriate, SGX issues public alerts to investors.

In operating a disclosure based regime, transparency is crucial to maintaining trust in our markets. This includes transparency on the part of the regulator. SGX therefore seeks to provide a high level of transparency regarding its regulatory philosophy and actions. Market participants are similarly subject to high levels of transparency. This promotes a well-educated and informed market.”

Market risks

Market risks refer to changes in market conditions that could affect Singapore Exchange’s financial assets.

The good news here is that the company’s financial assets are primarily in cash or cash equivalents (such as term deposits across multiple commercial banks in Singapore), and not investments in risky securities. So, the company is pretty well insulated from market risks, except in the event of a member default.

A Foolish conclusion

The above are three important risks, and how they’re managed, that Singapore Exchange shared in its FY2017 annual report.

Given that risks and the management of risks are part and parcel of running a company successfully, it is important that investors understand them before investing in any company.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has a recommendation for Singapore Exchange.