A potential merger: Consolidation of the derivatives exchanges is still on the cards

One of the longest-running issues cited by capital markets watchers in Thailand is the issue of the country’s two derivatives exchanges, the Thailand Futures Exchange (TFEX) and the Agricultural Futures Exchange of Thailand (AFET).

Although trading volumes continue to increase and new products are in development, it has long been thought by many in the sector that these trading platforms would be better off being combined. This would allow for an improved count of some of the crucial metrics that determine the success of an exchange: enough investors, enough trading and enough securities options. Despite various considerations having presented insurmountable complications to merging the two exchanges in the past, the idea remains on the table.

TFEX: The TFEX is owned by the Stock Exchange of Thailand (SET) and is the home to non-agricultural derivatives trading. Activity began in 2006 with the trading of a futures contract based on the SET50, the country’s benchmark equities index. The bourse reported substantial growth in 2011, as the number of accounts surged 50% to 62,883 and trading volume more than doubled. That is in part due to new products, such as gold, silver and oil futures, but also thanks to a night-trading session.

However, several data points show a market that remains shallow. Out of all the single-stock futures, for example, five stocks accounted for approximately four-fifths of activity, and one, Krung Thai Bank, 55%. And although night trading and new products have been a success, full-year numbers for 2011 indicate that while activity went up heavily for gold and night trading, most of the increases in activity came in the months of August and September, following which trade volumes sank. In the case of gold, volume from October to December was lower than from May to July, for example.

AFET: AFET was formed in 2004 and at present, hosts contracts for rice, tapioca and rubber, which is the most active. Like at TFEX, there is good news in the numbers: trading revenue almost doubled in 2011, for example, increasing from BT3.89m ($124,091) to BT7.5m ($239,250). However, the problem at this bourse has always been costs. Expenses in 2011 reached BT96.34m ($3.07m), against revenues of BT19.96m ($636,724) REACTION: The idea to merge the two exchanges is based on the simple logic of economies of scale and liquidity. In the past, however, there has been opposition from both sides.

The Ministry of Commerce, which owns AFET, has argued in favour of its own control over the bourse, based on the notion that an exchange that is purely based on agriculture would provide greater reflection of agricultural markets and would therefore serve as a more useful tool for farmers to gauge prices and market trends.

On the other side of the negotiating table, from the perspective of SET officials, AFET continues to rely on funding from the government. In the event that the two exchanges were merged together, or were both brought under the supervision of the SET, the company would likely suffer a hit to its balance sheet after absorbing AFET’s debt.

As long as the current government remains in power, however, it has an influential supporter of the idea of a merger: Olarn Chaipravat, an advisor to the prime minister on issues concerning the economy and education. In the run-up to the 2011 general election, Orlarn said that the two should be merged. He has also tried to make it happen previously, in 2008, when he was deputy prime minister for approximately four months under the short-lived government of Somchai Wongsawat.

In the past, ministers at the two relevant government ministries, commerce and finance, have come from different political parties, which has created obstacles. However, currently both ministries are led by politicians from the ruling Pheu Thai Party.

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The Report: Thailand 2012

Capital Markets chapter from The Report: Thailand 2012

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