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Singapore Exchange Limited - MANAGEMENT REPLY: Will investigating committee call for heads to roll?

19/11/2014 – 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 mln and S$340 mln while technology related capital expenditure is expected to be between S$50 mln and S$55 mln.

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% to S$169 mln
Profit: -16% to S$78 mln
Cash flow from operations: S$94.6 mln vs S$109.2 mln
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 mln contracts, mainly from the China-related contracts such as the China A50 futures and Iron Ore derivatives.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question
Question

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.

Question
Question

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 mln and S$55 mln in this fiscal.

(Read the full story to get all 6 questions)

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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