KUALA LUMPUR, Nov 19 — The Singapore Exchange has approved the terms of reference for a committee tasked to investigate a long disruption of its markets on November 5.

It will oversee investigations into the facts and circumstances leading to the breakdown.

The committee will also review the findings of the investigations, SGX’s decision making process, incident management and responses, and communications with market participants and the general public.

Thereafter, it will recommend appropriate improvements to prevent recurrence and to enhance processes in crisis management.

Trade on its securities exchange was disrupted by three hours, and its derivatives market by almost five hours on November 5.

SGX said the outage was due to multiple power supply issues, affecting SGX’s hardware that provides market participants connectivity.

The outage did not arise from a cyber-attack.

The Chairman of SGX’s Risk Management Committee, Quah Wee Ghee, will lead the board level inquiry committee, which will also consist of SGX Chairman Chew Choon Seng, and directors Kevin Kwok and Lee Hsien Yang.

A statement says independent experts with specialist knowledge and experience of data centre and exchange market operations will be appointed for the investigations.

Market participants were disconnected at 14:18 hours and SGX declared a formal trading halt at 14:51 hours.

No trades were executed between 14:18 hours and 14:51 hours.

The outage comes at a difficult time for the exchange operator.

It highlighted in its Q1 briefing some days earlier that the outlook for both the domestic and global markets remains uncertain amid recent turbulence.

So, the business environment is challenging.

Nevertheless, SGX says it is committed to its long term strategy and will continue to invest in people, as well as in new products, expanded distribution and technology.

Operating expenses for FY15 are expected to be between S$330 million (RM850 million) and S$340 million while technology related capital expenditure is expected to be between S$50 million and S$55 million.

OCBC Research has maintained a HOLD rating with a target price of S$7.26 as it expects Q2 to be muted, and it sees no drivers to raise projections for FY15.

CIMB Research has also maintained a HOLD rating with a target price of S$7.12 as it expects market volumes to remain subdued in the near-term, especially given that Q2 is the seasonally weakest quarter.

The company earlier announced earnings for Q1 FY15:

Revenue: -8 per cent to S$169 million

Profit: -16 per cent to S$78 million

Cash flow from operations: S$94.6 million vs S$109.2 million

Dividend: 4 cents per share vs 4 cents per share

SGX’s securities market revenues continued to slide, mainly due to low volatility.

The Q1 presentation highlighted that trades for stocks priced below S$5 suffered a decline YoY, while there was a slight increase in the trading activity of stocks priced above S$5.

Derivatives revenues continued to soar, with total traded volume of 29 million contracts, mainly from the China-related contracts such as the China A50 futures and Iron Ore derivatives.

Investor Central. We keep your investments honest.

1. Will the investigating committee call for heads to roll?

SGX clarified that outage on November 5th was due to a malfunction in the uninterruptible power supply (UPS) systems deployed at the SGX data centre.

Power is supplied to the data centre from two separate substations.

These sources are in turn connected to individual UPS systems providing four layers of redundancy.

Resulting from a momentary fluctuation in power supply from the substations, the UPS systems switched to its internal power source.

However, the internal power source in both UPS systems malfunctioned.

While this leaves the question open as to why this happened, one wonders why we need a board level committee to investigate it.

It’s as though the independent directors on the committee are not just looking at what was at fault, but who was at fault.

The final report might very well apportion blame, which would at least result in a censure, if not an outright sacking.

SGX has faced other technical glitches in recent years, one in April 2013, and the other in April 2014.

2. Is technology capex likely to exceed this fiscal year to protect itself from future outage?

The outage on November 5th makes us wonder whether SGX could spend more on technology to protect itself from such event in future.

The technology related capital expenditure is expected to be between S$50 million and S$55 million in this fiscal.

3. Can Nikkei 225 volumes recover at the SGX?

Volumes for Japan Nikkei 225 futures were 7.7 million contracts in Q1 FY11, 8.1 million in Q1 FY12, 6.4 million in Q1 FY13, 7.7 million in Q1 FY14 and 5.8 million in Q1 FY15.

There is a clear trend of declining volumes.

In addition, on October 31, the Bank of Japan surprised the financial markets by its decision to pump more Japanese yen into the financial system to boost spending.

It increased its annual target for expansion of the monetary base from up to ¥70 trillion to 80 trillion.

This may lead to further declines in Japan Nikkei 225 volumes at the SGX.

4. What risk does it foresee from Japan’s intention to join the equity-trading link between Hong Kong and Shanghai?

On November 5, Bloomberg reported that Japan Exchange Group wants to join the planned equity-trading link between Hong Kong and Shanghai.

Japan Exchange Group opened an office in Hong Kong this month with the aim of expanding its operations.

Prime Minister Shinzo Abe and China’s President Xi Jinping are both attending the Asia Pacific Economic Cooperation summit in Beijing.

Osaka Exchange Inc.’s CEO Hiromi Yamaji was quoted saying “I hope that at the APEC meeting in Beijing, Mr. Abe is going to see Mr. Jinping” [sic].

He also said “We are quite open-minded to establish those kinds of relationships with exchanges in China, but at this moment we don’t have any imminent plans to do it.”

This makes us wonder whether SGX foresee any risk from this partnership.

Tokyo Stock Exchange owns 5 per cent of the SGX.

5. Is the new office in India showing any prospects so far?

It is too early to ask this question, because SGX only opened a liaison office in India in July.

However, it would be an additional insight to know how the prospects from India are looking so far.

6. How are brokers contributing to regaining retail investors’ confidence?

Securities revenue was down 29 per cent to S$49 million following a 27 per cent decline in securities daily average traded value (SDAV) to a historical all-time low of S$970 million.

Of course, if volatility, which has more than halved to 6 per cent from 14 per cent a year earlier, increases then trading in securities might increase.

SGX has made efforts to transform securities market with the introduction in June of market makers and liquidity providers.

In January 2015, it will introduce 100-share board lots and in March 2015 it will implement a minimum trading price of S$0.20 for its Mainboard shares.

In addition, it also provides SGX StockFacts to help investors search for stocks across 20 screening criteria.

The Securities Investors Association (Singapore) hopes brokers can provide more advice to retail investors to spur retail participation in the stock market.

Management Reply: Our latest announcement on the 5 November incident was issued yesterday and is found here.

We understand that you are interested in more details and we will provide an update when more information is available.

We appreciate your patience.

We thank the SGX for their kind reply.

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