SGX Fuel Oil 380cst Futures MPA Bunker Forum Elena Sng Senior Vice President Clearing and Commodities Business Singapore Exchange Ltd 3 May 2010
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Introduction Singapore Exchange (SGX) is an integrated securities and derivatives exchange established in 1999 following a merger of the Stock Exchange of Singapore (SES) and the Singapore International Monetary Exchange (SIMEX) There are more than 750 companies from around the world listed on SGX Mainboard and Catalist SGX Securities Market also trades corporate bonds, Exchange Traded Funds, REITS and Business Trusts SGX Derivatives Market trades a wide range of financial derivatives, covering stock index futures and options, interest rate futures and options and structured warrants SGX launched the SGX Fuel Oil 380cst Futures on 22 Feb 2010 3
SGX Fuel Oil 380cst Futures Physically delivered bunker grade Fuel Oil 380cst launched on 22 Feb Developed in consultation with oil industry participants 13,100mt of physical oil has been delivered for the Apr 2010 futures contract A further 25,600mt due for delivery for the May 2010 futures contract 4
Key Benefits Flexible hedging instrument to lock in bunker revenue or cost Additional avenue for sourcing supplies to be delivered as 380cst marine fuel Price transparency through centralized market place Alternative pricing formula to floating price formula Better position management using SGX s daily mark-to-market and margin system 5
Key Features of the SGX Fuel Oil 380cst Futures 6
Specifications of SGX FO 380cst Specification Unit Min Max Density at 15AC kg/m3 -- 991 Kinematic Viscosity at 50AC cst -- 380 Flash Point AC 60 -- Pour Point AC -- 30 Carbon Residue % m/m -- 18 Ash % m/m -- 0.15 Water % V/V -- 0.50 Sulphur % m/m -- 4.5 Vanadium mg/kg -- 300 Total Sediment Potential % m/m -- 0.10 Aluminium + Silicon mg/kg -- 80 *Zinc mg/kg -- 15 *Phosphorous mg/kg -- 15 *Calcium mg/kg -- 30 Specifications comply with ISO 8217 RMG grade, catering to the marine bunker market 7
SGX FO 380cst Futures Key Features Trading unit: Minimum trading lot size: 100 mt per lot Minimum delivery size: 2,000 mt (20 lots) Price quotation: USD per mt Minimum price fluctuation: US$0.10 equivalent to US$10 per lot Trading hours (Singapore time): 9.30am 6.30pm (T session) 7.30pm 1.00am (T+1 session) 8
SGX FO 380cst Futures Key Features Contract months: 12 consecutive months starting with current month Last trading day: 5th business day prior to the 1st day of the Delivery Month E.g. Last trading day for June 2010 futures is on 24 May 2010 Real-time prices information: Price vendors such as: Bloomberg, CQG, Globalview, SIX Telekurs, Quick and Thomson Reuters Free prices on SGX Website: www3.sgx.com/live/dt/ibm_dtfuture.asp?fbfe 9
SGX FO 380cst Futures Key Features Global access via electronic trading: SGX Clearing Members in-house developed systems Trading software developed by Independent Software Vendors (ISVs) 10
SGX FO 380cst Futures Key Features Price Limits: Initial Price Limits - 15% above or below the previous settlement price Expanded Price Limits - 20% above or below the previous settlement price Cooling-off periods of 15 minutes each when the above limits are reached. No further limits after the cooling-off period at the expanded price limit. 11
SGX FO 380cst Futures Key Features Physical delivery methods: FOB Singapore Designated Approved Installations Inter-tank transfer Alternative Delivery Procedure (ADP) executed outside the Exchange prescribed delivery procedure as mutually agreed by the matched buyer and seller 12
Designated Approved Installations 1. Chevron Singapore Pte Ltd Penjuru 2. ExxonMobil Asia Pacific Pte Ltd Jurong Island 3. Helios Terminal Corporation Pte Ltd Jurong Island 4. Horizon Singapore Terminals Pte Ltd Pulau Banyan 5. Oiltanking Singapore Ltd Pulau Seraya 6. Shell Eastern Petroleum Pte Ltd Pulau Bukom 7. Singapore Petroleum Company Ltd Pulau Sebarok 8. Singapore Refining Company Pte Ltd Jurong Island 9. Tankstore (PB Tankers Ltd) Pulau Busing 10. Universal Terminal (S) Pte Ltd Jurong Island 11. Vopak Terminals Singapore Pte Ltd Pulau Sebarok 12. Vopak Terminals Singapore Pte Ltd Pulau Banyan 13. PowerSeraya Ltd Jurong Island 14. Tuas Power Ltd Tuas 13
SGX FO 380cst Futures Enhanced Trading Facilities OTC-like facilities for buyers and sellers to privately negotiate the transactions: Negotiated Large Trade (NLT) Exchange of Futures for Physical (EFP) Exchange of Futures for Swaps (EFS) Futures leg of the transactions are reported to the Exchange Clearing House for clearing Provide users with more flexibility and control in managing their futures, physical and swaps positions 14
How to Get Started 1. Select a SGX Derivatives Clearing Member 2. Open a futures trading account 3. Fund the account 4. Start trading On-line trading or phone-in trading 15
SGX Clearing Members 1. Barclays Bank PLC 2. Barclays Capital Futures (Singapore) Private Limited 3. Citigroup Global Markets Singapore Securities Pte Ltd 4. CLSA Singapore Pte Ltd 5. Credit Suisse Securities (Singapore) Pte Limited 6. Daiwa Securities SMBC Futures Pte Ltd 7. DBS Vickers Securities (Singapore) Pte Ltd 8. Deutsche Futures Singapore Pte Ltd 9. Fortis Bank Global Clearing N.V. 10. Fortis Clearing Singapore Pte Ltd 11. Goldman Sachs Futures Pte Limited 12. HSBC Futures (Singapore) Pte Ltd 13. JP Morgan Securities Singapore Private Limited 14. MF Global Singapore Pte. Limited 15. Merrill Lynch (Singapore) Pte Ltd 16. Mizuho Securities (Singapore) Pte Ltd 17. Morgan Stanley Asia (S) Securities Pte Ltd 18. Newedge Financial Singapore Pte. Ltd. 19. Nomura Securities Singapore Pte. Ltd. 20. OCBC Securities Private Limited 21. Ong First Tradition Pte. Ltd. 22. Phillip Futures Pte. Ltd. 23. The Royal Bank of Scotland PLC 24. UBS Futures Singapore Ltd. 25. UOB Bullion And Futures Limited 16
Thank You For further information or a no obligation presentation on physical delivery mechanism at your office, please contact: SGX Contacts: Kenneth Ng, Tel 6236-8388, E-mail: kennethng@sgx.com Brenna Koh, Tel: 6236-8827, E-mail: brenna.koh@sgx.com 17
Examples on using SGX Fuel Oil 380cst for hedging 18
Example 1: Manage bunker cost using SGX Fuel Oil 380cst Futures Assume that: You have a term contract to sell bunker at US$480 per mt for 3 months. However, you purchase from oil majors at spot prices. Solution (assuming intention to purchase 10kt): May Spot price: US$470 June Spot price: US$490 What if spot prices next month increase to US$490? Buy 100 lots (10kt) of FO380 June Futures @ US$475 per mt Through SGX electronic trading platform or phonein trading You take delivery of 10kt at US$475 even though spot price is US$490 Through SGX physical delivery mechanism Note: You sell 10kt at term price of US$480 You have hedged the risk of price increase to US$490 in the cost of your bunker - The above example is for illustration purpose only - It is very difficult to achieve perfect hedge - Basis risk exist between the spot market rate and the futures market 19
Example 2: Exchange of Futures for Physical On 20 Mar A shipping company is expected to have a ship arriving in Singapore in early May. During its stop at Singapore, it will be taking 1,500mt of MFO380cst. The shipping company feels that the bunker price may rise in Apr/May because of expected supply tightness. In order to hedge it s May 10 bunker purchase against possible price increase, it decides to buy 15 lots of SGX May Fuel Oil 380cst Futures at the prevailing market price of US$450 per tonne. On 15 Apr The shipping company decides to secure its physical bunker (MFO380cst) at the prevailing market price of US$483 per tonne from a Bunker Supplier who is willing to take over the Shipping Company s May Fuel Oil Futures position under a EFP (Exchange of Futures for Physical) with the Shipping Company. ( The Bunker Supplier sees merit in taking on the May long Futures as a hedge against the possible price increase of its supplies to be lifted later. ) The Exchange of Futures for Physical (EFP) is executed and the transaction reported to SGX for registration. 20
Exchange of Futures for Physical Shipping Co (SC) ( Price in US$ / mt ) 20 Mar Buy 15 lots of SGX FB May Futures to establish a hedge at US$450 Bunker supplier (BS) 15 Apr EFP: EFP: Agree to buy physical 1,500 mt from BS Agree to sell physical 1,500 mt to SC at US$483 delivered to ship early May at delivered price of US$483 in early May Exchange 15 lots of SGX FB May Futures Take over 15 lots of SGX FB May at at US$481 for above Physical with BS US$481 in exchange for physical delivery to SC Net effect: Secured physical MFO380cst at Sold physical MFO380cst at US$483 per mt equivalent FOB US$449: delivered to SC s ship - Physical delivered price US$483 Long 15 lots of SGX FB May Futures at - Less differential (barge charge) 3 US$481 - Equivalent FOB 480 Action: Sell Futures when market rises - Futures profit 31 Net FOB cost of MFO380cst $449 EFP is an off-exchange transaction and can be traded as a price differential between the SGX Fuel Oil Futures and physical. In the above example, the differential is US$1.00 (US$481 vs US$480). Once an EFP transaction is concluded, the 2 customers will inform their respective futures clearing member to register the futures leg for clearing on SGX. 21
How margin system works 22
Margin Requirement Initial Margin - Amount of funds required in an account to hold a contract Maintenance Margin - Minimum amount of funds required to be maintained in an account for each outstanding contract or open position Daily Marked-to-Market - Daily revaluation of an open position to the daily settlement price - Profits & losses are adjusted daily for each account Effect - No debt system of daily settlement of price changes/volatility - No build-up of large losing positions without settlement 23
How Margin System Work Initial margin (per lot): US$2,640 Maintenance margin (per lot): US$2,200 Margin balance Margin Call 24
How Margin System Work Day 1 : Account balance = US$ 4,500 Margin required for 1 lot of SGX Fuel Oil 380cst Initial margin = US$ 2,640 per lot Maintenance Margin = US$ 2,200 per lot The trader buys 1 lot (100mt) of Jun 10 SGX Fuel Oil 380cst Futures at US$ 500/mt. The settlement price at the end of day 1 = US$ 505 (price is up) Hence, unrealised profit for day 1 = (US$ 505 - US$ 500) x 100 = US$ 500 The account balance for day 1 = US$ 4,500 + US$ 500 = US$ 5,000 Account balance is above maintenance margin of US$ 2,200. No margin call. 25
How Margin System Work Day 2 : Account balance from day 1 = US$ 5,000 The settlement price at the end of day 2 = US$ 490 (price is down) Hence, the unrealised loss for day 2 = (US$ 490 - US$ 505) x 100 = - US$ 1,500 The account balance for day 2 = US$ 5,000 US$ 1,500 = US$ 3,500 Account balance is above maintenance margin of US$ 2,200. No margin call. 26
How Margin System Work Day 3 : Account balance from day 2 = US$ 3,500 The settlement price at the end of day 3 = US$ 465 (price is down) Hence, the unrealised loss for day 3 = (US$ 465 - US$ 490) x 100 = - US$ 2,500 The account balance for day 3 = US$ 3,500 - US$ 2,500 = US$ 1,000 Account balance is below maintenance margin of US$ 2,200. A margin call will be initiated by the clearing member and the trader is required to top up the margin from US$ 1,000 to US$ 2,640. (i.e. US$1,640). 27