Singapore Exchange Ltd

SGX:S68

Earnings Call Transcript 2018-Q2

[Lay Chew Chng, executive]

Hi. Good evening to everyone here and to those on the webcast. Thank you again for taking time to join us for this results briefing for our second quarter FY '18. I will start off, as usual, with a presentation on the financial performance. And then Boon Chye, our CEO, will present a business update.

So let me just begin with some of our key financial highlights. So we earned a net profit of $88 million for the quarter, comparable to the same quarter a year ago. Our revenues increased by 3% to $205 million. And if you look at our 3 main businesses: Derivatives and Market Data and Connectivity recorded higher revenues; our Equities and Fixed Income business recorded just marginally lower revenues compared to a year ago.

Looking at our market activities. Both our securities and derivatives market experienced higher activity this quarter compared to a year ago. Our securities traded value was up 3% to $72 billion, and our derivatives volume was up 18% to 49 million contracts.

Expenses increased by 5% to $102 million. And if you look at our first half, our first-half net profit was $179 million, up from -- up 4% from a year ago. Our JAW was flat for the first half, with revenue and expenses each increasing by 5%. Our earnings per share is $0.082 for the quarter. And the Board of Directors has declared an interim dividend of $0.05 per share, in line with our dividend policy.

This next slide shows the quarterly trend for revenue, expenses, operating profit and net profit for the past 5 quarters. If you look at the chart on the left-hand side, top line quarterly revenue shows a positive upward trend. Revenue for the quarter increased marginally from that of the previous quarter. Quarterly expenses have been managed to a very narrow range. The $108 million that you see in the fourth quarter FY '17 is due to seasonality and several one-off professional fees for corporate activity during that particular quarter. For the quarter-on-quarter, you see a $4 million increase from the first quarter, and that's partly due to the seasonally -- seasonality factor, the first quarter normally has lower expenses. Operating profit and net profit for the quarter is above the average for the last 5 quarters.

Next is a half year picture, and it shows just the trend for the past 3 half years. Our revenues, again, shows an upward trend, reflecting the growth in market activities for the period as well as our efforts at engaging with our market participants and widening our distribution. Similarly, operating profit and net profit show an upward trend as well, and it reflects also the cost discipline that has been exercised by management over the period. Again, so last half year, revenue was comparable, while expenses declined by 4% due to a decline in discretionary expenses. Net profit grew by 6%. This is a chart on -- a waterfall chart for revenues for the quarter year-on-year. As I mentioned earlier, revenue was $205 million.

Going into the individual business lines.

Equities and Fixed Income. They earned revenues of $98 million, a slight dip of 4% against a year ago. And the business continued to be our largest contributor in terms of revenues at 48%. Within the EFI business, Issuer Services revenue increased 4% to $20 million. We had higher new bond listings as well as corporate actions.

Securities Trading and Clearing revenue was comparable at $52 million. Our SDAV increased by 4%, and total traded value up by 3%, and that reflects really the improved sentiments that all of you have seen in the securities market and the initiatives taken by SGX to further engage with market participants. Average clearing fee declined to 2.75 basis points, and that's partly due to 2 things: a higher contribution by a higher percentage of structured warrants within our traded value; as well as a larger number of higher percentage of market makers contributing to the SDAV. These have lower yields compared to our regular contracts.

Post Trade Services. The revenues declined $4 million. That's expected due to the declines in our contract processing revenue. I had mentioned in previous quarters that the brokers are migrating progressively to their own back-office systems. And in fact, we now have 2 more, and they are expected to complete their migration by the end of this calendar quarter.

Derivatives recorded 11% higher revenue of $83 million as the total volumes rose 18%. Blended average fee was lower at $1.07 compared to $1.16 a year ago due to higher proportion of volumes from trading members who enjoy lower clearing fees. Collateral management income increased 18% due to higher yields. And our Derivatives business, second largest business that we have, contributed 41% to our total revenues.

Market Data and Connectivity, our steady business, accounted for 12% of total revenues and continue to show steady growth, registering a 4% increase year-on-year in revenues to $24 million.

Next, we look at the expenses. So expenses increased $5 million, as I mentioned earlier. That's mainly due to higher staff costs and technology costs. The increase was partially offset by lower discretionary expenses.

Total staff costs increased by $4 million to $85 million. Fixed staff costs increased mainly due to the annual salary increment as well as a higher provision for variable staff costs. Our average headcount for the quarter was comparable year-on-year. I think we have been very careful and very targeted in our recruitment. It stands at 789 headcount for the group. Technology expenses increased by 9% to $32 million. We have had increases in systems maintenance and depreciation from the implementation of new systems. Professional fees declined by almost $3 million to $1.3 million, mainly due to the absence of fees relating to the acquisition of the Baltic last year.

This is a look at the revenue on a half-year basis compared to that a year ago. Equities and Fixed Income, the half year generated $197 million in revenues and accounted for 48% of our total revenues. Issuer Services increased 3%. There were 636 bond listings for the half year versus 343 a year ago, that is almost -- well, that is almost double, we have 13 IPOs this half year compared to 11 last year. Securities trading revenue rose by 4% to $103 million, and SDAV grew 11%. Post Trade Services, the decline is due to the contract processing revenue, as I mentioned earlier. And for our Derivative business, it recorded 12% higher revenues to $164 million as our total traded volumes rose 16% for the half year. Market Data, it grew 7% year-on-year in terms of revenues to $48 million.

In terms of expenses for the half year, total expenses were $201 million. It's up 5%, mainly due to gained staff and technology costs. It also included the consolidation of Baltic Exchange, which we acquired in November of 2016. So this increase was partially offset by lower discretionary expenses.

This is really -- I'm coming to the last slide, and this is on our key indicators. And basically, I want to note that you'll see continued high operating profit margin and ROE. They averaged 50% and 37%, respectively, over the last 5 quarters.

So I'll now turn over the floor to Boon Chye.

[Boon Chye Loh, executive]

Good evening, everyone. Thank you for attending this Friday evening. And it was a rainy weather out there, so I really appreciate your attendance.

Before I show you and discuss the business highlight for our second quarter of financial year 2018, I thought it's good to recap calendar year 2017. Indeed, a busy, active and yet fulfilling year in calendar year 2017 for our 3 core businesses.

For the securities market, there were more issuers raising record funds at attractive valuations. There was active secondary trading, with new products being launched. We also had a strong IPO performance, the highest number of listings and funds raised from the primary market since calendar year 2015, a total of 25 listings, 5 more than what it was in 2016. And the total funds raised were almost $5 billion, double what it was in 2016. Also, market cap from new listings was 15% higher than it was in 2016.

And more interestingly, amongst the listings, there were several notable ones. First, NetLink Trust was Southeast Asia's largest IPO in 2017. Cromwell European REIT was Asia's first euro-denominated pan-European REIT. MindChamps IPO closed at 38x valuation. RE&S had an oversubscription rate of 38x. Clearbridge listed at over 190x revenue. And we also had a successful relisting of APAC Realty 5 years after it was delisted from SGX but came back at a higher market cap and valuation.

We also had a very strong secondary market fundraising environment, where we raised close to SGD 9.5 billion, 65% more than what it was in 2016. The increase in secondary trading also saw last launched new products. We had Asia's first Daily Leverage Certificate. And also, we launched 2 REIT ETFs.

In Derivatives, we had record volumes for FX and some of our MSCI products. The trading volume for FX futures on SGX increased by 60%. The EDV for Indian rupee and the CNH contract now consistently cross over USD 1 billion daily. And also, sustained growth in MSCI products, in particular, SiMSCI and Taiwan, with annual record volumes. SiMSCI was up 30% year-over-year, Taiwan was up 6% year-over-year.

And also, we saw a good growth in our key commodities' volumes and over -- open interest, with stronger market share across -- I hope you are now familiar with our steel mill value chain. And let me break it down what it is. In iron ore, our market share averaged 96% for the calendar year 2017. In coking coal, which we relaunched, market share is now over 90% compared to 33% a year ago. And in freight, our global share has increased to now 41%.

For our index business, it grew and has good momentum. We now calculate and are a provider for 15 -- sorry, 150 customized index, a healthy pipeline of index licensing to some of our clients. Some of the branded indices that we currently license out under the SGX brand: the APAC REIT, India access, Indonesia access and even the iron ore indices.

On fixed income, you'll be pleased to know that we had more than 100 clients or customers signing up. And you'll be seeing this for the first time, almost over USD 1 billion of matched orders on the back of USD 2 billion of order.

And just to share, in terms of the record trading in FX futures, in CNH, the volume grew almost 2x year-over-year, with now a [ semicon ] market share for us at 75%. Indian rupee grew 66% year-over-year and now a market share of 45%.

And also, we have widened our geographical reach and network with strategic partnerships to strengthen the funding pathways for companies. We opened our Chicago office. We also had greater international participation in the markets. One measure is to look at our derivatives market in terms of what we call the T+1 volume. Year-over-year, all key contracts saw the increases in the T+1 volume, in particular, up 33%.

Now let me go into some of the business highlights for the second quarter of the financial year 2018. Riding on the positive momentum we saw the previous quarter, revenues were up. I think 3 things to highlight here, really: in Derivatives, you heard from Chng, revenue grew 11%; Market Data and Connectivity grew 4% on higher reported data usage and increased demand for co-location; while Equity and Fixed Income revenues were down 4%. It is really from the migration out of contract processing, but that's obviously overcome in some way by the increase in trading activity that we saw in the equity markets. We'll continue to reinforce our position as a leading market infrastructure provider in Asia; and for the quarter, earned an award from Energy Risk as the Exchange of the Year in Asia.

Now I'll walk you through the different segments in Equity and Fixed Income, starting off with listings, 7 for the quarter, 3 are Mainboard and 4 on Catalist. I think you'll be pleased to know that the total funds raised from new listing in the first half of 2018 was almost 6x, 6x what it was first half FY 2016 2 years ago. And we expect more equity listings in the balance of this financial year, and the expectation is to outperform FY 2017.

The other strong performer that we saw, as Chng highlighted, was the Fixed Income listing, continuing to see strong performance. Close to 300 bonds were listed for the quarter, raising SGD 100 billion. This represents a 42% increase in the number of our listings.

But I think what is more interesting to note is our ability to reach out to more geographies. So in that quarter, we actually saw a wider spread of issuers. And I think, in particular, we saw some issuers from the Latin American countries, such as Mexico, Brazil, Chile, Argentina and Colombia. And also, right at home, in Asia, we had our first komodo bond. For those of you who are not familiar, this is really IDR, Indonesian bond on the global format. It was issued by an Indonesian company, Jasa Marga. This is a state-run toll road operator listed in December last year. We expect increase in popularity of the komodo bonds, supported, obviously, by the growth story in Indonesia and the significant funding requirements for infrastructure projects.

In the Securities Trading and Clearing, comparable revenue but higher SDAV by 4%. And the increase in the traded value in the other product segment largely attributed to warrants and DLCs, Daily Leverage Certificates. Since launch in July of 2017, it has generated a total turnover of SGD 1.6 billion.

In Post Trade, the securities settlement continues to be a significant portion of the Post Trade revenues, 88% for the quarter. The fees were down. But as part of the migration into the new system, very pleased to report that 20 out of the 23 brokers have now migrated. We expect the remaining to complete by the end of this quarter. Clearly, a right step in terms of direction for the marketplace as brokers will now be able to offer differentiated services. And based on their clients' investment portfolio, brokers can now provide additional information, insights that could be of interest to their clients. And I think this will deepen the broker-client relationship and really enhance the relevance to their clients.

In Derivatives, the next segment, a very healthy increase in volume, 18%, but I think more importantly, a year-on-year increase across all our key equity index futures product: Nifty, up 7%, A50, up 15%, Nikkei, up 15%; our very own SiMSCI, up 36%; and Taiwan, up 7%. Clearly, that's a result of SGX being a beneficiary of the growth in the Asian Derivatives business, something that we've been doing for the last 10 years. And also, if you trace back to the history of that, which is really SIMEX almost 33 years ago, but we are very confident of thriving in this increasingly competitive environment.

I'll share with you later on some our product plans to meet the demands and needs of the marketplace as well as to play an increasingly evermore important role in terms of an international leading risk management center for our clients. And to do this, we'll be broadening our distribution strategy; we will acquire and continue to work hard at growing our derivatives trading and clearing membership; we'll continue to acquire new derivatives institutional clients; and also, working hard with our overseas offices. You'll be pleased to know that in the first half of the financial year, we acquired more than 150 derivatives institutional clients and 4 new derivatives trading members.

Breaking down in terms of the sub-product category for Derivatives, starting off with the equity index futures. We can see from the bar chart the arrow, clearly, higher trading volumes across all the key contracts. A50 anchored our volumes. And we'll continue to achieve high liquidity and maintain our market share across this product.

And we'll show you the different market share segments, starting off with A50, declined slightly to 36%. Onshore activity has clearly increased with the rally. Despite lower market share, total volume was up 22% for us. In Nikkei, market share increased slightly to 17%, and we benefited from a higher market volume, where our volume went up by 17%. In rupees, up 5% market share to 52%; Taiwan, slightly down to 20% as there was increased retail onshore participation on TAIFEX.

Moving on to commodities. In iron ore, we continued to maintain a very significant market share. And for the quarter, in particular, that reached 98%. And also, a very healthy growth in freight to 46% as we double -- triple our efforts to attract volumes from LCH members, following their decision to close their freight clearing services. We're confident of further growth in the steel value chain given the value of integrating risk management between cargo and freight and, clearly, made possible by the acquisition that we had of the Baltic Exchange.

In FX, tremendous growth. If you look at the 2 key contracts, CNH and INR, CNH grew almost 2x; INR, 66%. And our market share in CNH now is 75%; and in INR, 45%. It's not just about market share. But I think what's think important to note that our ability to couple FX and commodity contracts in our cross-sell effort is now beginning to show results. We now have increasing numbers of participants, hedging currency exposure while seeking iron ore trading opportunities. And this, in particular for the increasing INR volumes, correlate very well with increased flow of FDI into India.

Last but not least, on Market Data and Connectivity. Higher revenue in data on higher reported usage; but I think also, in connectivity, what is useful to note is the continued growth in co-location. Co-location relates to relevance of the exchange in offering, risk management services and solutions to our client. And as a subsegment of the MDC business is our very own index edge. I talked about it earlier in terms of now calculating over 150 customized indices, and we'll increase our presence in this space in Asia Pac. And also, we'll be developing a proprietary custom index engine to allow us to scale up promptly as our business grows.

Next, you've heard quite a bit in our last few quarterly updates, I thought we'll share in greater detail in terms of our initiatives. 6 points -- buckets to highlight.

First, we will continue to build on our goal to be a global multi-asset exchange that covers all major asset classes in the Asian time zone. This will allow us, obviously, to progress on a number of fronts.

Let me start off with expanding our equity index products. You'll have read about our intention to launch the Indian Single Stock Futures. Yes, that clearly will broaden not only our Indian suite, from currency index sectors to now single stocks. And this complements all the other equity indices that we have. Any participant today can gain exposure to 95% of the equity markets in Asia. And this really not only caters to a vertical trading and clearing market infrastructure. We say vertical because that means you do pre-trade, trade, post-trade, through the whole entire suite of the market infrastructure, but it connects across different asset classes. And India is clearly an important market for global asset allocators. In particular, institutional investors' interest in passive investing, in MSCIEM, where India occupies a 9% weightage.

We will further cement our position in commodities. SGX pioneered the iron ore -- this market many years ago and now truly seeing a very significant market share in that of over 90% consistently in the last 3 years. We have worked very closely over the years with the iron ore OTC community, including traders, IDBs to grow the market as a whole. And at 90% and over market share, ability to collaborate and work with the ecosystem to grow the market is a very important feature. How can you grow beyond 100%? Not possible, and that's where we see the ability to work with IDB, traders, players to try in the market and grow. And today, that market is 1.2x the physical market. And our offering will be broader, and we'll continue to build on the virtual steel mill thematic.

On FX, we will be looking to explore ways to offer our clients the benefits of the OTC market, which really means flexibility; and exchange-traded products, which really means security, confidence of a CCP and, thus, a product development that we'll look at in the current calendar year.

SGX Bond Pro. I talked about 2017. In 2018, in terms of the calendar year, we're on track to achieve more than USD 1 billion of matched volumes and, obviously, multiple times of debt in terms of our orders through the system. How to achieve it? We'll be continuing to build functionalities onto our platform. And with that, we could support the growing business, partnership with people signing up and increase the stickiness of our customers on our platform.

Dual class shares. SGX will allow companies with dual-class share structure to be listed. In our decision to allow DCS, we have kept a few things in mind. Singapore is making huge efforts to transition into the new economy, and we are already recognized as the leading hub for start-ups. Some of these companies may need a capital structure that supports a rapid scaling up of their business. The DCS is one way, not the only way, it's one way to do so. We expect to have our rules out end of this quarter and expect our first listing thereafter.

Just as how the committee on the future economy has laid out its report for new economy enterprises to scale up, more patient growth and long-term capital which brings along ideas and expertise are needed. SGX has to move on with the times and support this need as a fundraising platform.

Also, you'll be pleased to know that as we continue to expand our business through strategic investments and collaboration, we intend to establish a Euro Medium Term Note program to provide us with the flexibility to fund organic and inorganic growth when the need arises. When planning for our future growth, we must be prepared to be resourced to support and embark on these plans well. So while we have cash balances of SGD 700 million, as you see on our balance sheet, but if you take out the year-marked dividends, committed funds for clearing, the unrestricted cash balance is about SGD 200 million. So with that in mind and looking at expanding and growing our business, we'll be looking to establish an EMTN program of about SGD 1 billion to SGD 2 billion going forward. And we'll be able to invest strategically as we grow our business. And this move will offer us flexibility and ability to act promptly and timely whenever opportunities arise.

So let me round up in terms of a summary and looking ahead. Activity and listings are expected to improve. You can expect new products to further strengthen our Asian derivatives franchise. We'll commence trading of the Single Stocks Futures for the Indian market next month, further build on the FX suite, importantly, giving participants the flexibility between OTC and exchange traded through the CCP; implementing a dual-class structure and growing our business further with global connectivity and strategic investments and collaborations.

And for the FY 2018, we are guiding our operating expenses lower by $50 million to between $410 million and $420 million, with unchanged CapEx expected at $60 million to $65 million.

That concludes my presentation. Can I invite my colleagues up here, and we'll do a Q&A. Thank you very much for your attention. Yes, and your first question? Yes, Nick?

[Nicholas Lord, analyst]

Can I just ask you about your new cost targets?

[Boon Chye Loh, executive]

New?

[Nicholas Lord, analyst]

Cost targets.

[Boon Chye Loh, executive]

Cost targets.

[Nicholas Lord, analyst]

Cost guidance.

[Boon Chye Loh, executive]

Cost guidance.

[Nicholas Lord, analyst]

Cost targets. And obviously, there's a lot of quite interesting stuff that you're talking about at the end in terms of new things you're doing. So I guess, 2 questions. First of all, I presume that cost guidance includes all of the initiatives you're doing, and maybe if you could just talk about how much those are costing you. And obviously, I guess, linked to that, because we're halfway through the year, these things will last more than -- more than a year. Obviously, cost management now for 2 years has been very impressive. Can you do that for a third year, or will it be more challenging in full-year '19?

[Boon Chye Loh, executive]

Yes. I will give you the forecast. But one thing about the SGX side of thing and, yes, and the exchange space, in general, is the operating leverage. So clearly, in a lot of the platforms, interesting new products doesn't really carry with it a lot of additional new costs. But key for us, which we obviously -- I have to bake in, in our planning exercise is I talk about broadening our distribution. This is something we'll do. And that obviously will carry costs, but we will have to bake that in. And clearly, improving distribution is part of the strategy. It may take time in terms of throughput, but I think if you look at the first half, I mentioned additional institutional clients, clearing members. We did open up a Chicago office, so all these are in the plan.

[Nicholas Lord, analyst]

And sorry, while I've got the mic. Yes. I mean, obviously, SGD1 billion to SGD 2 billion of Euro Medium Term, that is quite a lot of money. Can you elaborate on what you might use that for?

[Boon Chye Loh, executive]

Well, I've talked about, in the last few quarters, really being the -- Asia's leading multi-asset exchange. I talk about FX. You have heard that quite a bit. I talk about fixed income. We're sharing the numbers for the first time. I talk about entrenching, cementing the commodities business. So along with that, the organic build is important, but I've also said that we will evaluate businesses, platforms that could scale those for us, adding to the momentum we have with our organic efforts. So I can't talk about specific, but I've choreographed that with the market in terms of where we are focusing on in terms of the areas to grow.

[Nicholas Lord, analyst]

So not necessarily equities then?

[Boon Chye Loh, executive]

Say again?

[Nicholas Lord, analyst]

Not necessarily equity markets, it'd be other asset markets?

[Boon Chye Loh, executive]

Possibly. But that could come from private markets. We're really in the first step. We have a stake in Capbridge. In private markets, as we talked about before, this really is an extension of the public markets.

[Unknown Executive]

Okay, I've got a question from Phillip Securities, Jeremy Teong. He said -- he has asked that the U.S. banks have reported their recent earnings, and they've shown a decline in the FICC business. And yet SGX has said, we are doing a lot better in this area. Could you explain the dynamics on this divergence and what are your expectations going forward?

[Boon Chye Loh, executive]

Yes. So generally, the global banks have seen a decline in the FICC so-called revenues, but I think more particularly FIC, so not so much the other C, which is commodities. So I think there's a mixed picture there. But I think generally, equity revenues for global banks held up or were marginally better. So low vol is clearly one factor, but the SGX proposition really centers around access to Asia, 95% of Asia's GDP. And also, after a tough generally EM performance in the last few years, it's clearly a turnaround of inflows into Asia, which, clearly, we saw benefited the equity markets in Asia and clearly benefited Asia. And that was demonstrated in the 18% year-on-year increase in derivatives volumes. Harsh?

[Harsh Modi, analyst]

It feels like your focus is shifting consistently over years towards non-equity asset classes. And if I am looking at the cost base also, is there some breakthrough technology, blockchain comes to mind, which basically allows you to significantly put most of your equity business and build off a straight-through processing, reduce costs significantly, and that becomes a bit of an autopilot, and then you start focusing more on these multi-billion opportunities that you're looking at? Is there any big moon chart which you are looking at potentially or anything which can be transformative over the next couple of years?

[Boon Chye Loh, executive]

In terms of costs or...

[Harsh Modi, analyst]

In terms of reshifting the entire way some of these businesses are run simply because it feels like equity has become -- and is increasingly becoming a much smaller part. If I look at the turnover growth across different markets, SGX doesn't stack up very well in the last 12, 18 months. So is there something which you can do structurally different here to manage the costs and also refocusing all of that into places where you are getting real growth?

[Boon Chye Loh, executive]

Yes, I will say not in terms of a lesser business for us because if you look at the half full when you add more asset classes to what you have in equity, you -- can say equity become less, or you can say it's a multi-asset. And we are very clear, it's a multi-asset that we want to achieve. And also equities, even in the current -- I mean last 2Q, 40% are top line, right? The revenues haven't really declined. But also, in terms of whether could you structurally really change that, technology is one. And everyone likes to talk about DLT, digital -- the distributed ledger technology. Yes, we can build, but the next -- not to the next participant, they will have to build and connect. They may do that, we may do that for them, but the customer of DS will need to do that. So it's not one where you can do that easily, the technology works. But what we are doing, I think differently, is network and connectivity. You saw the announcement we have in NASDAQ, and I've talked a lot about collaboration, partnership. So that's the journey we are going on in terms of connecting the access into markets. And it's a very deliberate strategy to try and offer, I like to say, 100% of access into Asia, but it's now 95%. So through derivatives, you're going to get the benefits in equities. I talk about ETFs in terms of the 2 REITs. We now have 150 customized index working with the sell side. It's gaining traction, so we could introduce more under our cash market.

[Harsh Modi, analyst]

Right. And if I could just push that point a bit more, what I'm trying to understand is, so let's say, if -- as you said rightly, that even if you get that technology in distributed ledger, the entire supply chain is not there yet. But by the time the supply chain evolves and if you have not exactly gone ahead, there is a risk you'd lose out. So would you take that moon shot and say, you know what, I'll just build it; and if the system evolves, I'll be the first mover? Or will you take a couple of years and then try to build up as soon as possible when it's viable? And it's a tough one, but how do you manage that?

[Boon Chye Loh, executive]

So key for us in preparation for that is to know that it works, and you can do that. And both -- we tick it because we have done that in terms of proof of concept for fixed income. Why fixed income? The same point that in a newer business relative to -- our fixed income is newer, it's easier to work that with your participants because you're all coming together, working on a new asset class, new business at the same time. So being -- knowing that it works, you can do it. I think it puts us in a very good position. One second, we'll get you the mic.

[Unknown Analyst]

So if I could ask 2 questions, simple ones. It looks like your cost guidance reduction, can I just check, how much of this is because of revenue related, and how much of it is because costs has been -- [indiscernible] costs has come in lower than expected?

[Lay Chew Chng, executive]

Well, can I...

[Boon Chye Loh, executive]

Yes.

[Lay Chew Chng, executive]

Yes, I'll take that one. The -- there is, of course, a small part of it that's variable costs related, where we had higher expectations of volumes. So although volumes have gone up year-on-year significantly, it fell short of our own aspirational targets. The other parts of it are really more in terms of the fixed costs. So fixed staff costs contributed to this reduction in our cost guidance. And you will see our headcount really hasn't grown significantly year-on-year. In fact, it's quite comparable. And we have really been quite focused and targeted in terms of where we hire to make sure that they are in places that really make a difference to the organization.

[Unknown Analyst]

Okay. And if I could ask another question, with regards to your dual-class targets, I think you mentioned that you're looking at startups. Just wondering whether you could give a bit more information, because, actually, I was expecting more of the targets being still like midsized corporates instead of startups, yes.

[Boon Chye Loh, executive]

Yes. So you refer to the dual-class share structure, not necessarily a startup, but this is really to embark on supporting the new economy -- companies. And as I said, we will be having our rules ready this quarter, so very soon, and you will see in terms of suitability and guidance that will lay it out.

[Unknown Executive]

Okay, I have 2 questions from York Pun on the derivatives market. The first, you said that lower average derivatives clearing revenues was experienced, and this was due to a higher proportion of trading members. Is this going to be a lasting trend? The second question is the turnover of iron ore has dropped, and the growth has also seemed to have slowed down. Can you share the outlook on iron ore?

[Boon Chye Loh, executive]

I think Mike wants take that, yes.

[Unknown Executive]

Let me address the first question. While I can't make forecasts as to composition because, really, it's client-driven, there is nothing in what we've seen in the past quarter, past half, that indicates that the quality of business that we're seeing and the quality of flow is going down. In fact, we see the quality of flow as going up. And as the CFO indicated, the reason for the headline drop in fee per contract is 2 factors: one is that some contracts have a higher fee per contract, some have lower; but importantly also, there's been a significant amount of growth in volume from our members. So these are members of SGX, particularly trading members, who enjoy a more competitive fee versus omnibus clients. And a lot of the growth has come from them in this past quarter. So we will see in the coming months what the quality of this volatility growth is. I think the last quarter, just to expand on that point, has been very interesting because volume growth has come in so many different ways. It came in Japan because the Nikkei 225 broke through new levels. It came in MSCI Taiwan because there's a conjunction there between the Apple story and maybe the bitcoin story. So this was not one of these across-the-board expansions and volatility because that's exactly what's not happening in the equity markets. This was very idiosyncratic to Nikkei, to Taiwan, to FX. So with this growth across the board, we feel that this is a good quality of growth because it speaks to the strength of the portfolio. So we'll see again in the next quarter what happens, the average fee per contract; but to repeat, there's nothing in what we've seen so far that indicates that the quality of growth is somehow worse or lower. On your second point, on iron ore, last quarter was special because there was the Chinese National Party Congress, ahead of which, there was a basic slowdown in activity and, in particular, a cleaning up of polluting sources of power. So steel mills got directly impacted by both of these things: first of all, the stilling in industrial activity, to figure out what's industrial policy going to be; secondly, the cost of producing steel went up because you have to stop consuming dirty coal. And then there has been a change in the usage of ore to make steel in China. The need for steel is no less, but the inputs into steel have changed. Higher quality of iron ore is needed because you want to have the best quality inputs. You want to use as little energy as possible. So temporarily, we feel that this market has paused over the past quarter. It has been a very volatile market for the past year. We think the market is settling down to a good trading range. And we feel quite confident that across the steel value chain, freight, coking coal, iron ore, they will continue to be, again, high-quality growth across the franchise.

[Boon Chye Loh, executive]

Any more questions from -- [indiscernible]?

[Unknown Analyst]

Just a couple of questions on -- so firstly, on dual class shares, can you share a bit about the balance you struck between addressing corporate governance concerns and this one in one share one vote, kind of idea? Second, on -- just on the Euro Medium Term Note program, can you just be a bit more specific on the kinds of companies you are currently looking at, in terms of technologies or things you are looking at?

[Boon Chye Loh, executive]

Can you take that, Boon Gin?

[Boon Gin Tan, executive]

Maybe let me first say a few words about the process. So the next step will be for us to publish a response to our consultation. And in our response, we'll be explaining the reasons for our decision as well as the key features of the framework that we have chosen to adopt, right? At the same time, we will be consulting on the rules that will be required to implement this DCS framework. So I think it's more appropriate for me to take the questions at that time. And as with the timeline, Boon Chye has already addressed that. I will say this, though, that the majority of the respondents to our consultation supported implementing a DCS structure and that the final shape of our framework will be driven by this market feedback.

[Boon Chye Loh, executive]

On your question on EMTN, what kind of companies that we could potentially look to extend with our growth. I mean, I've consistently said in the asset classes that build upon the multi-asset thematic, so FX, commodities, fixed income, those are the areas we'll look at. But also, even in the space of exchanges, and you've seen our consistent growth in our Market Data and Connectivity. So how do you use data platforms that could be linked to some of these 3 areas are something that one should also think about. Anything that adds to our platform to allow participants to get access to Asia is clearly a part of our focus. I mean, I clearly can't share specific, but you can think about those areas.

[Unknown Executive]

On the topic of dual class shares, we've got a question from HSBC Hong Kong. Could you -- how do you compare what you are doing with Hong Kong Exchange's attempt in this area?

[Boon Chye Loh, executive]

Well, our key focus is really to help, assist companies transitioning, helping Singapore transition into the new economy. And as part of that, as I said, DCS is one but not the only structure to do that, and that's really our primary focus. And as Boon Gin has mentioned, we'll publish the results of the consultation and the rules that will shape around to assist companies, will come out of that, and this will be out soon.

[Boon Chye Loh, executive]

Any other question in that -- yes?

[Unknown Analyst]

I'm not sure if I missed it earlier, but can you just give us a sense of the IPOs outlook for 2018, what's in the pipeline?

[Boon Chye Loh, executive]

Yes. So by the financial year, we end in June of this year better than what it was. By calendar year, it'll be better than what it was in 2017. So...

[Unknown Analyst]

[indiscernible]

[Boon Chye Loh, executive]

In terms of what numbers?

[Unknown Analyst]

I mean, just in terms of sectors [indiscernible]

[Boon Chye Loh, executive]

Yes, sector shows us that.

[Lay Chew Chng, executive]

[indiscernible] So I think you've seen 2017, which was quite a watershed for us, beyond just the very solid recent infrastructure type transactions, which has been successfully raising capital on our markets not only from the region but also as far as Europe and America. We continue to see that follow through in this very strong sector that we have, arguably, our presence globally, not only in Asia. But 2017 was also a little bit of watershed, as Boon Chye elaborated, to begin with. We've got consumer companies doing views at a reasonably good, attractive valuations steady at times with [indiscernible]. We've got companies that pre-profit coming out at 200x revenue in the healthcare sector and very high-growth sectors. So those areas that we have been focusing on and building, aggregating the liquidity, getting the primary market coming through, consumer, healthcare have been bearing fruit. We certainly expect to see more of that coming through. Consumer, F&B and education have been certainly good spots for us. But also, quite interesting, as -- which I elaborated earlier, we've also started to see the cycle turn a little bit. We've got relistings coming to the market and some very successful as well. So I think the markets could be looking for a very exciting year, with choice for investors, new place as well as growth companies and different sectors coming in.

[Unknown Analyst]

In terms of value, you are expecting more value [indiscernible] a little bit more, more assets, et cetera?

[Boon Chye Loh, executive]

Yes, more -- we are expecting more foundries, more companies.

[Unknown Analyst]

Is this significantly more, or just a little bit more?

[Lay Chew Chng, executive]

Well, obviously, I'll put it this way. We are 3 months into the year. We had a fantastic start with, you know, a second Myanese company, where international investors were looking into Myanmar, they come through Singapore as in tourism. It has a very good post-IPO performance. Last year, we've had year-on-year 9% on calendar year increase in turnover. That momentum appears to be filtering through. We had, of course, a change of our GLP. But since then, the turnover is up 10%. So we can't promise what's going to happen for the next 11 months of the year. The will market decide that. But certainly, if you're asking about mandates and pipeline, the spread of choices are growing, building on our core competencies that we have been focused on, with the ecosystem at large, and that's coming through. It's an operating leverage business. To Harsh's point earlier, we can always continue to be very disciplined on cost, which we have been. We can have some great progress with certain use of technologies, but it's an operating leverage business for us, and the momentum is there.

[Boon Chye Loh, executive]

[ Andrea ]?

[Unknown Analyst]

Could you share a bit of color about the appetite for our dual class shares and how many companies you expect to be listed this year? You mentioned that you expect the first listing soon after as well.

[Boon Chye Loh, executive]

Yes. So expect the first listing thereafter.

[Unknown Analyst]

Could you give a bit of color about this company and also how many more in the pipeline?

[Boon Chye Loh, executive]

Well, I wouldn't want to share the pipeline. You hear me talk about better pipeline, better -- more IPOs, higher expected potential proceeds. And -- but more importantly, part of our thinking around DCS is really to help companies and for companies to help Singapore transition into the new economy.

[Unknown Analyst]

I might have missed this earlier, but is there a launch date for the Indian Single Stock Futures?

[Boon Chye Loh, executive]

Yes, we had informed our members today. So we're expecting to launch it on 5th of February .

[Unknown Executive]

On that note, is there a risk of the potential delay in the launch of the Indian SSF?

[Boon Chye Loh, executive]

I think if you look at the history of our equity index suite, whether there's Taiwan, Nikkei or India, and then if you then look at India, we have a long-standing partnership with our partner. We started off with Nifty, and that's almost now 10 years. And then we added sectors about now 2 years. So it's a good partnership not just with our India partner in NSE but across some of the other providers. So we have informed our members, as of 5th of February , this is what we're targeting.

[Unknown Executive]

Also from UBS, what kinds of volumes are you expecting out of this single stock futures in India?

[Boon Chye Loh, executive]

Well, part of our decision to add to the India suite, the equity suite, is really on the back of client demand. So all our participants and clients who had really expressed the interest in terms of an additional risk management tool, we would really welcome you to carry forward with what you had told us.

[Unknown Executive]

Okay. Specific question from a global investor group for -- regarding the single stock futures. Will you be offering an incentive program for this? And how will this fit into, specifically, the type of customers that you have?

[Unknown Executive]

So that's not the first thing on our minds when we launch a new product that's driven by a client demand. So I would say that, in order of priority, what's most critical now is operational readiness, to make sure that the service works as promised. And secondly, as with all product launches, every hockey stick begins at the beginning. And we have good confidence that with the amount of inflows into emerging markets, specifically MSCI Emerging Markets, where India has a 9% weight, that there is going to be a lot of risk management demand for the India component of emerging markets. Of course, this rally will go on until it stops going on, but for now, it's a very powerful rally. The theme of MSCIEM is very, very strong. So that passive investment, that tracking of Asia within the EM basket, today, 70% of EM is Asia, that's a very powerful secular driver for many of the things that we're doing, including for access into India.

[Boon Chye Loh, executive]

I mean, also, it's, I think, useful to note, there is an implied -- -- I wouldn't want to use the word incentives, but implied efficiency because any new related product we have, in this case, single stocks, you have sectors, you have your index, you have your currency. So they are margining efficiency just like built into incentives. And I think that's very important. And also, if you just look at the ability, the -- to trade not just on a price return, we now have a whole suite of MSCI, India included, MSCI net total return. And that's just the beauty of the ability for us to work with participants on risk management solutions. Any other last question?

[Unknown Executive]

One question from York Pun, HSBC Hong Kong. ASX announced the replacement of chess using blockchain technology. How do you see this? And can you share what are your latest moves on fintech?

[Boon Chye Loh, executive]

Ramu will take that.

[Muthukrishnan Ramaswami, executive]

We've been working on replacing our backends, and we are well on the program. We've got 2 more brokers to migrate out of our old CAS system. So by the end of this year, we will be on a new platform. So that platform can then cope with any new technologies that emerge much better than what our old platforms could. So in one way, we would -- we've kind of done what I would call the conversion from a legacy to a platform that is current. Separately, on the blockchain and the distributed ledger, we've been experimenting and participating with MAS on the Ubin -- or the Project Ubin, as they're called. So those tested out the ability to settle currencies in a tokenized form, to mimic the RTGS system, MEPS system over here as well as the ability to settle fixed income instruments. So those pilots were reasonably successful. So if at any point, we see the need or the opportunity to adopt these new technologies, we would not be far off in terms of the ability to adopt. So that's kind of how we are playing this. We don't want to pull our securities industry through another migration given that they are just going through a migration from the existing old system into what is now called the new post-trade system.

[Boon Chye Loh, executive]

Okay? Yes, [ Andrea, ] the last question?

[Unknown Analyst]

Could you share a bit of color of -- on how the Indian exchanges and the Indian community has taken to the news of SGX expanding the SSFs?

[Boon Chye Loh, executive]

Well, as I said earlier is that our decision to introduce futures on single stocks was on the back of market demand, market need. And this cut across different type of users and different countries. So as with any product, it's not -- it's taken -- obviously, as we need product launch, good work by the team, but it's something we can always do with any product, but it's really on the back of demand.

[Unknown Analyst]

Product demand, [ you would say ]?

[Boon Chye Loh, executive]

Well, if there's demand, clearly, there will be acceptance. All right? Thank you very much. Enjoy your Friday evening. Appreciate you all being here. Thank you.