19 January 2019
Reto Francioni says the decision to establish a clearing house in Singapore is mainly to optimize its business operations. Photo: Bloomberg
Reto Francioni says the decision to establish a clearing house in Singapore is mainly to optimize its business operations. Photo: Bloomberg

German exchange picks Singapore over HK for clearing house

Deutsche Boerse A.G., which operates the fourth largest exchange in the world by market capitalization, has decided to establish a clearing house in Singapore rather than expand its clearing and settlement operation in Hong Kong.

“Our decision to set up a clearing house in Singapore is mainly for [business] optimization,” chief executive Reto Francioni told EJ Insight in Frankfurt.

The German exchange operator already has a representative office in Hong Kong which offers clearing and settlement services, a derivatives platform and financial news through Market News International. The latter also has a Singapore presence.

The expansion will help increase net annual revenue to as much as 2.7 billion euros (US$3.7 billion) within the next four years, Bloomberg quoted Francioni as saying in February.

Deutsche Boerse is setting its sights on Asia after the European Commission blocked its purchase of NYSE Euronext, owner of the New York Stock Exchange and London’s Liffe futures market, in 2012.

The European Union has agreed to increase competition among derivatives exchanges, weakening the control of the largest operators.

“We compared Hong Kong and Singapore and figured that Singapore is more suitable for us in terms of legal and regulatory framework which is much similar to that in continental Europe,” said Eric Muller, managing director and head of group strategy, treasury and investor relations of Deutsche Boerse.

“We want to bring European products to Asia and Asian products to Europe… we are still discussing with local regulators the product scope, timing and all sorts of things,” Muller said.

The group plans to offer clearing of existing Eurex contracts through the new Singapore clearing house and also hopes to offer clearing services for other exchanges as well as the Asian over-the-counter derivatives market, a good chunk of which is set to be pushed through clearing houses as a result of new rules under the G20 post-crisis reform agenda.

The German exchange is aiming to double its Asia revenue by 2017. It is about 100 million euros at present, Muller said. That compares with less than 50 million euros in 2007.

To achieve its revenue target, the group is looking to strengthen its business ties in China.

China story

Earlier, Deutsche Boerse signed a strategic partnership with Bank of China Ltd. (03988.HK, 601988.CN), which would see one of China’s bigest state-owned banks become a trading and clearing participant, allowing Chinese issuers and Asian investors to directly access German and European capital markets.

“The cooperation did not go very well not because of Bank of China. It is about the regulatory framework, legal system, accounting and so on,” Francioni said.

He said the cooperation is a good opportunity but the company needs to better understand the market.

The group is looking to be part of its the opening up. “We want to set up the whole value chain in China,” Francioni said.

“We have set up a partnership with the Shanghai Stock Exchange in market data and services as well as technology, and with Bank of China in the capital market, including the cash and derivatives market, and we are working on other areas as well,” Francioni said.

Deutsche Boerse signed a memorandum of understanding with the China Financial Futures Exchange in 2012.

Other areas of the value chain include clearing, settlement, custody, collateral management and indices.

“We are in talks with the China Futures Association and the Shanghai Clearing House on a partnership arrangement,” Francioni said.

Deutsche Boerse is keen to take a role in fixing a reference price for offshore yuan in euros in Frankfurt, where the European Central Bank and Bundesbank, the largest clearing bank in Europe, are based, media reports quoted Andreas Preuss, vice chairman of Deutsche Boerse as saying.

“We expect the pace of China’s renminbi internationalization to accelerate and Deutsche Boerse hopes to take part in it as a market infrastructure provider,” Muller said.

The group is looking to grow revenue by 50 million euros to 100 million euros by 2017 from over-the-counter clearing and by 100 million euros from collateral management and another 50 million euros to 75 million euros from market data and services.

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Ayishah Ma is a financial reporter on Greater China issues.

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