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REST IN PEACE SGX NIFTY

Feb 26, 2018(13:11)
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By the end of this summer, Dalal Street traders will no longer get Nifty figures from Singapore with the sip of their morning tea. In the past week, National stock exchanges of India have decided to cancel licensing agreements for providing indices and securities-related data feed services to any foreign exchange. The bourses have decided to stop giving data to exchanges in Singapore and Dubai which means the popular SGX Nifty futures contract will cease to exist, after a six-month notice period which expires in August 2018.

SGX Nifty, also known as Singapore Nifty is a derivative product of Indian Nifty index officially traded in Singapore stock exchange. The underlying of SGX Nifty is our benchmark index Nifty. Its important to understand that not all stocks that Nifty comprises of are traded in SGX. Over the past two decades, Singapore Exchange has become the most popular way for foreign investors to bet on Indian equity index, mainly through the popular SGX Nifty 50 index futures that track the NSEs main index. The Nifty is the largest traded derivate index of the world in the off-shore market and a top volume generator on the SGX.

 

Why SEBI, Exchanges and Government are worried?

The trigger for the move appears to be SGXs decision to launch futures contracts on the top 50 Indian stocks starting 5th February. While its market share in Nifty futures has expanded over the years to 52% at last count, its the decision to launch single stock futures that has made the local participants to worry if the stock future volumes too will move to SGX. The stock futures contribute about 85% to the futures turnover on local exchanges. The launch of stock futures contracts in Singapore would have resulted in a shift in activity overseas like the way volume moved in Nifty future to SGX Nifty. The move could also be aimed at kick-starting activity in the recently launched Gujarat International Finance Tec (GIFT) City.

Why it matters:

  • Nifty 50 stocks account for nearly 36 percent of the total daily futures turnover on the NSE.
  • FPIs account for more than 26 percent of the total futures turnover.
  • FPIs contribute nearly 40 percent of the open interest in NSE futures market.

 

Impact on Foreign Players:

Foreign traders worried over compliance norms of India and tax hassles used the SGX and DGCX to trade and generated huge volumes. SGX and DGCX traders face far lower statutory costs, taxes and compliance requirements. A move by Indian exchanges to stop licensing its products and data to bourses abroad will likely force foreign investors into a tough option: migrate their trading onshore to India, with its uncertain regulatory environment and higher taxes, or give up their exposure to a hot emerging market.  For foreign investors, trading derivatives in Indian exchanges implies paying higher taxes and factoring in currency risks for rupee-based contracts. India also requires all foreign investors to register with regulators. One option for foreign investors is shifting trading to new international finance centre of India in the western state of Gujarat, which offers dollar-based derivatives contracts, low taxes and good infrastructure.

Singapore – Why Nifty is important:

Singapore has become a hub of offshore trading for many markets including China, Japan and Indonesia. Several analyst notes were published after announcement by India, with at least three banks cutting their rating on SGXs stock. The shares of companys fell as much as 8.8 percent in early trading, the biggest decline since November 2008. The stock was down 7 percent the very next trading day. The NSEs decision could mean a cut of at least a 4 percent to SGXs total revenue, said Sharnie Wong, a Bloomberg Intelligence senior industry analyst.

 

Below is the graphical data showing price & open interest activity from the year 2010 which clearly depicts increase in the activity in the SGX Nifty Futures:

increase

Conclusion - Not an easy go through for the Indian Exchanges:

It should be understood that eradication of SGX from getting access to Indian price data is not going to solve the problems of Indian exchanges. The bureaucrats sitting at North Block should know that imposing numerous taxes will not only result in foreign money using other markets to tap India but also Indian finance companies going abroad. By making the passage to India more difficult for asset managers, government is practically daring MSCI to cut the 9 percent weightage in its global emerging markets index, which is followed by portfolio managers with some $1.6 trillion to invest. On the other hand, Beijing has no problem letting SGX make a killing on its China benchmark: More than 67 million FTSE China A50 Index Futures contracts were traded on the Singapore exchange last year, compared to 21 million on Nifty 50 Index. Practically, India is trying to attract foreign stocks and indices to be traded in India through the GIFT (Gujarat International Financial Tech) based International Financial Services Centre (IFSC) in the coming months. If other foreign exchanges chose to do what the Indian exchanges have done to SGX, GIFT city, as the financial hub is called would become a ghost town.

 

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