Will the Singapore bourse’s tactics work?

Ethical standards in the world of finance that were never too high to begin with, are plunging to new depths as can be seen in the ongoing skirmish between the Singapore Stock Exchange (SGX) and the NSE. Following the joint decision of the three Indian exchanges, including the NSE, in February to stop providing data feed to global exchanges, the SGX was initially willing to work towards a smooth transition of the users of the Nifty products to the exchanges on the GIFT International Financial Centre in Gujarat.

But somewhere along the way, SGX changed its mind, and made an announcement in April that it will introduce derivative products called SGX India derivatives that will replace the SGX Nifty group of derivatives.

The reason behind the launch of these products is ostensibly to ensure that investors and traders on SGX can continue to take an exposure to India. But the SGX appears to be more worried about the loss of a chunk of its revenue if trading shifts to the GIFT City. Other countries whose indices are licensed to SGX for trading could also be tempted to follow NSE’s example, thus affecting SGX further.

The manner in which SGX has gone about the launch of the new products clearly leaves a lot to be desired. But it has found acceptance in the laissez faire world of finance, where boundaries between right and wrong and legal and illegal are sadly blurred. The new SGX India derivatives will be tracking the Nifty and the Bank Nifty traded on the NSE, but they will be called by another name. A charade is likely to be played now with everyone trading the Nifty derivatives while stating that they are using a new product.

Ambiguity in law

The NSE has moved the Bombay High Court that has the jurisdiction to hear disputes between the NSE and the SGX, to try and stop the launch of the new India derivative products.

Going by rulings in previous cases there is no consensus opinion on copyrights on indices and the kinds of products that can be launched on these indices. Also while the unauthorised use of indices can be disputed, the traded price of any stock or index cannot be copyrighted and can be used by anyone.

In a recent case involving New York Mercantile Exchange and Intercontinental Exchange, a US court ruled that the unlicensed use of NYMEX’s settlement prices did not amount to copyright violation. The court held that settlement prices are no different from other traded prices and hence cannot be copyrighted.

SGX seems to have taken the cue from this ruling by using NSE’s settlement prices for its new derivatives. And it has gone one step further by using a final settlement price (FSP) that is the average of the price of contracts traded on the NSE and in the GIFT IFSC. By deriving its own reference price, SGX appears to be trying to deflect the accusation of using NSE’s FSP.

Nifty by another name

Also, the contract specification does not mention any underlying price for the three new contracts — SGX India Futures, SGX Options on India Futures and SGX Bank Futures. But there are ample hints to investors that they are traceable to Nifty. The SGX India Futures are said to be referenced to a broad-based India equity index covering 50 stocks listed on the National Stock Exchange of India, which captures around 65 per cent of its float-adjusted market capitalisation.

Similarly, the SGX Bank Futures are said to be referenced to an India equity index covering a maximum of 12 most liquid and large capitalised stocks from the banking sector listed on National Stock Exchange of India.

Changes in onshore trading

The Centre and the NSE have also been preparing for the transition of investors from offshore trading jurisdictions to Indian shores in recent times.

The most significant development is the Part 30 exemption order dated May 17, given by the Commodity Futures Trading Commission (CFTC) to the NSE. This allows institutional investors based in US to trade in Nifty futures in India. Earlier, these investors had to either route their investments through other offshore jurisdictions such as Mauritius or trade in Nifty futures on exchanges outside India. SEBI permitting exchanges to trade in derivatives till 11.55 pm is yet another concession being provided to overseas investors from the US.

The exemption of short-term capital gains tax on derivatives traded on the GIFT IFSC exchanges and providing an omnibus structure to foreign investors to invest in equity in GIFT is likely to remove some of the other reservations of overseas investors. Transaction cost on the GIFT IFS is also competitive compared with that on SGX.

The main problem with exchanges in the GIFT is the lack of volume. Making investors trade on the GIFT could prove to be an uphill task for some time, with talks between the NSE and the SGX on transitioning investors from Singapore to GIFT City breaking down.

Will investors bite?

The ground is prepped for a long-drawn battle. The key here are the investors on SGX. Are they likely to fall in line with the SGX and continue to trade on a product that is not supported by live data feed, but is dependent on prices flashed on the internet, that could be delayed by a minute or so? The uncertainty in trading these unlicensed products on the SGX might also make some larger investors think about shifting to onshore Indian derivatives.

The SGX now faces the risk of other countries such as Malaysia, Indonesia and Japan also following the NSE and withdrawing their indices from the SGX trading platform.

Earlier, with emerging markets being under-developed and tighter investment regulations restricting foreign flows, these countries allowed their products to trade on exchanges such as SGX to make them more popular.

With financial markets in other emerging economies becoming deeper and competitive in terms of cost of transaction and taxation, there is little reason why countries should allow their products to be traded in overseas exchanges, resulting in the market getting fragmented and the exchequer losing out on tax revenue.

While the last word has not been said on this issue yet, it has the potential to bring about a sea-change in financial markets in emerging economies.

Addendum

The NSE’s petition against the Singapore Stock Exchange (SGX) seeking urgent interim reliefs against the launch of SGX India Futures, SGX India Options and SGX India Bank Futures was heard by the Bombay High Court on May 29, 2018 when the Court reaffirmed the injunction granted on May 21 and the matter has now been referred to arbitration. The arbitrator, Justice S J Vazifdar, will hear both sides between June 12 and 16 and a decision on the injunction will be made by June 16, 2018.  

SGX has decided to continue listing SGX Nifty contracts until August 2018.

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