SGX to continue to offer trading in Indian derivatives despite NSE ban

The Singapore Exchange (SGX) will continue to offer trading in Indian derivatives even as its partner National Stock Exchange (NSE) has decided to terminate licensing agreements for providing indices and securities-related data feed services to the foreign counterpart.

The exchange said it would introduce proprietary Indian equity derivatives products in June 2018 and would simultaneously delist existing Nifty-based derivatives contracts.

This comes after the three domestic bourses — the NSE, the BSE and the Metropolitan Stock Exchange — in February announced that they would cancel licensing agreements with overseas exchanges.

SGX’s announcement on Wednesday suggests that the move may not yield the desired outcome of putting an end to offshore derivatives trading based on Indian products. On the contrary, the NSE and the other exchanges could lose out on the fees they had pocketed by licensing their indices.

The agreement between SGX and the NSE was to end in August. However, the Singapore bourse is pulling out months in advance. “In June, we will delist all SGX Nifty contracts and cease all licensing agreement with the NSE. We will migrate our client positions from Nifty to the new SGX India derivatives,” an SGX official said.

SGX offers trading in six different products based on Nifty indices. From June, it will offer trading in only three products — SGX India futures, SGX India options and SGX India Bank futures.

“We will need to make an assessment whether or not products announced by SGX are compliant and legally permissible,” an NSE spokesperson said.

SGX Nifty is one of the most-traded derivatives products on the Singapore bourse. The new SGX India futures will be designed on lines similar to the Nifty, with 50 blue-chip stocks covering nearly 65 per cent of the India’s free-float market capitalisation. 

Shares of SGX ended 1.1 per cent higher on Wednesday.

“We will continue with our India equity derivatives products, which international portfolio investors need to maintain their exposure to the Indian market,” said Michael Syn, head of derivatives, SGX.

The exchange said it would continue to provide its existing India single-stock futures offering, which is witnessing a steady uptick in volumes.

The decision to offer trading based on Indian products is despite the domestic exchanges refusing to share real-time price feeds. “There is no live price feed required by an exchange for derivatives trading. The prices are not set by the exchanges but the buyers and sellers, who might refer to prices on the Indian exchanges,” said an industry expert, adding trading in SGX Nifty goes on during a large part of the day when the Indian exchanges are shut.

SGX said it was working with the NSE to start a “joint trading and clearing” model in the Gujarat International Finance Tec-City, an international financial services centre. It said implementation of a model that meets its clients’ regulatory requirements would take significantly longer.

Termination of licensing agreements with overseas bourses was triggered after derivatives volumes of Indian products on overseas exchanges, such as SGX, piped volumes on domestic bourses. The government and the regulators saw this trend affecting tax collections and domestic liquidity.

Overseas exchanges maintain that foreign portfolio investors use their platform for hedging their underlying India exposure. Any measures to prevent offshore derivatives trading would restrict access to the Indian markets at a time other countries such as China are taking a step forward in improving access to foreign investors. This could affect overseas flows into India, they said.