Members of RTAS;
Rubber industry friends from around the world;
Distinguished guests, ladies and gentlemen.
1 The RTAS dinner is a gathering of industry stalwarts and old friends. As one who is new to the industry, I am honoured that the RTAS has graciously given me this chance to address you this evening.
2 The past year has been a turbulent year for most markets. According to a recent Deutsche Bank Global Market Research report, among the asset classes of bonds, foreign exchange, emerging markets, equity and commodities, commodities has been worst affected in 2008, with total returns falling by 46%.
3 The impact of this is far-reaching. The fall in the price of rubber has seen players suffer and brought to greater focus the problem of counterparty risk. As the arbitration centre for physical rubber, SICOM has seen more default cases in the physical market requiring our arbitration assistance. This is perhaps, symptomatic of how market players are unprepared for the unprecedented price volatility.
4 In our conversations with industry players, we hear that in the old days, default cases would not escalate like this because business was done within a smaller group of traders who understood the code of honouring contracts. This is admirable, as integrity and reliability are fundamental to the proper conduct of any business. As the Chinese saying goes, 人无信,不立 (ren wu xing, bu li), meaning that a person without honour cannot stand. SICOM is supportive of efforts at the association and governmental levels, to uphold good business ethics.
5 The good old days of trading amongst a small number are fast disappearing, as the trade extends to large emerging markets which we cannot afford to ignore. Indeed, they are essential to the continual growth of the trade. In recent months, SICOM has seen the entry of a number of new participants who have been contributing to volumes and open interest. New business usually comes with new challenges and risk which market players must prepare themselves for.
6 In SGX, we have seen similar situations in the oil and freight markets. When we launched AsiaClear, an over-the-counter (OTC) clearing platform, in 2006, people did not really see the need to bring their energy transactions to the exchange. After the collapse of Lehman Brothers in August 2008, the world has changed. Even large oil producers who had previously only traded bilaterally, are looking to clear their trades on the exchange. In the financial markets, exchanges are racing to clear OTC credit default swaps to meet the demand. We believe that such a platform will prove to be useful for the rubber market as well, and urge the ASEAN Rubber Business Council and other trade associations to encourage their members to seriously consider this option. In an OTC clearing platform, market participants can register their physical transactions with SICOM through SICOM members. SICOM then stands as the central counterparty of the transactions. SICOM will margin and settle open positions using the settlement price established in SICOM’s rubber futures. This allows market players to reduce counterparty risk significantly; anchor the price of their physical transactions; and further reinforces SICOM’s rubber contract as the benchmark.
7 SICOM is well-placed to provide an OTC clearing platform because SICOM’s rubber price is widely used and accepted as the benchmark for the physical market. It is imperative to protect this benchmark position. We have good market depth in SICOM’s rubber market, as indicated by rising open interest in the near and far month contracts. Open interest rose to more than 105,000 tonnes at the end of 2008, which is comparable to that in Tokyo. Just yesterday, it has continued to rise to more than 116,000 tonnes, a record for the last decade. Open interest is indicative of latent demand for trading the futures and the potential of greater volume which is crucial to cement our position. Higher volumes can only come about with wider distribution and greater transparency. We are working to widen SICOM’s distribution to SGX’s international broking community and their clients, through a trade transfer facility in the coming months. With this, SGX members will be able to trade and clear SICOM rubber contracts seamlessly.
8 SICOM aims to be a multi-product commodity exchange. Its vision is to be the price discovery centre for commodities produced, consumed and traded in Asia. SICOM plans to introduce new products in the agricultural, precious and base metals space. This will not only benefit rubber traders as economies of scale drive costs down; it will also position Singapore as a commodity trading hub.
9 SICOM is where it is today because of your support and passion. I would like to take the opportunity to thank all the industry stalwarts for your relentless efforts. We need your continual support for SICOM to be a key institution of the rubber industry and to bring it to greater heights.
10 I thank you for your kind attention and join you in wishing that the year of the Ox will usher in better fortune for us all.