The future's bright for SGX's rubber derivatives

THERE is an unmistakable bounce on the derivatives corner of the Singapore Exchange which has been outshining the bourse operator's securities business - thanks to markedly higher volatility in financial markets.

Yet, the story of its Sicom rubber contracts has been rather overlooked in the bigger scheme of things.

Rubber is one of the oldest commodities traded in Singapore and part of the city state's legacy as it developed into a major trading and economic hub in the 1900s.

SGX offers derivatives on two grades of natural rubber - Sicom TSR 20 (technically specified rubber 20) which is the most heavily traded contract and Sicom RSS3 (ribbed smoked sheet 3).

In late May this year, it launched the TSR 20 options contract, which marked a milestone as the futures contracts have been drawing sufficient liquidity; the rubber options is also the industry's first.

Setting the benchmark

Notably, SGX's Sicom rubber contracts, specifically the TSR 20, is gaining recognition as the world's pricing benchmark for natural rubber among giant consumers of the commodity, essentially tyre manufacturers (think Michelin, Bridgestone, Pirelli).

In some regard, it has overtaken the 68-year old Tokyo Commodity Exchange (Tocom), which introduced TSR 20 only a year ago although the Japanese exchange's RSS futures have been a benchmark for the Asian rubber market since it was first offered back in 1952.

Among tyre manufacturers - the largest consumers of natural rubber - the TSR grade, based on a block form, is their preferred choice as the quality of rubber sheets, which underpin Tocom futures, can be inconsistent.

It is understood that many countries from Africa, Southeast Asia, China, Europe, United States, Latin America to Canada and rubber-related companies refer to Sicom prices although certain consumers still look to Tocom to provide the pricing standard.

The SGX's rubber contracts are deemed more meaningful as they are primarily traded in the seaborne market. Another factor could be that Tocom's rubber contracts lack liquidity, which results in exaggerated price movements that make them less reliable as a reference.

If volume is anything to go by, SGX-Sicom's rubber contracts hold pole position in the international market and has caught up fast with its Japanese rival.

Between March to May this year, SGX's average volume market share accounted for 56 per cent of total international volumes that include Tocom and Thailand Futures Exchangebut exclude the Shanghai Futures Exchange, according to SGX data.

Boom time

Volumes are booming; from January to April SGX cleared almost 3.5 million tonnes, up 21 per cent over the same period last year.

In addition, the exchange's open interest market share as at the end of April this year stood at 87 per cent - a reflection of the amount of real institutional hedging interest and, by extension, the importance of the contract as a "benchmark".

Compared with 10 years ago, volumes in this space has jumped six times while open interest has grown about four times.

Naturally, none of that had happened overnight.

Sicom's rubber milestones is, in fact, steeped in Singapore's own history when the centre of gravity for rubber traders shifted from London to the city state in the 1970s to 1980s.

Sicom started out as the RAS Commodity Exchange in 1992 - the first formal over-the-counter exchange for phone trading, clearing and settlement of rubber.

Two years later in 1994, the RAS Commodity Exchange was renamed the Singapore Commodity Exchange (Sicom) and since then it has been hard at work to develop a credible pricing benchmark for the commodity for market participants to use as a point of reference for the physical cargo in order to manage risks.

As a result of the ongoing US-China trade tension over tariffs which could potentially impact products such as automobile plus further imbalances in the supply and demand dynamics of rubber - weather patterns, consumption trends and so forth - market participants have turned to futures trading to hedge their positions. In turn, this will further galvanise derivatives trading going forward.

If the SGX stays sure footed on its rubber strategy, it may not take long for the exchange to earn the status as the undisputed benchmark for tyre makers to price their purchases of the raw material.