Trading charges

The NSE-SGX dispute raises several questions

The dispute between the National Stock Exchange (NSE) and the Singapore Stock Exchange (SGX) is coming up for a fresh hearing in the Bombay High Court on Thursday. The NSE is trying to prevent the SGX from launching new derivative contracts based on underlying Indian securities, such as the Nifty index. The court will have to consider multiple issues - intellectual property rights, public information and international licensing rights - bearing in mind that international investors need access to such products. After an 18-year partnership and a licensing agreement that allowed forex-denominated derivatives of the Nifty index to be traded on the SGX, the two exchanges fell out in early 2018.  The SGX wanted to launch single-stock derivative products for Indian equities. The NSE was unhappy and decided not to renew the licensing agreement, which expires in August. In February, three Indian equity exchanges, the NSE, BSE and MCX, stopped sharing data with foreign platforms. 

The SGX intends to launch a new set of derivative products with underlying Indian securities on June 4. It may use price data sourced from the US Commodity Futures Trading Commission (CFTC). The SGX logic is that it is offering a non-Indian product, it is just that the price is determined with reference to publicly available prices of Indian securities. This is where intellectual property rights come into play: The NSE has argued that SGX derivative products are similar to available Indian contracts. 

Indian exchanges feared overseas competition for several reasons. Both the SGX and Dubai's DGCX, which carries derivatives based on the BSE Sensex, had permission to offer forex-denominated derivative products to US-based institutional investors. This requires CFTC certification. The Indian exchanges did not have CFTC clearances, though the NSE has subsequently obtained it. In addition, overseas exchanges could offer hard-currency contracts. Dubai and Singapore are also open for longer hours than the Indian exchanges. Again this situation is due to change from August when Indian exchanges will be able to keep their derivatives segment open until midnight. 

The case raises several questions. Are share prices and trade volumes of listed companies and indices public data? The answer would be yes. However, the Nifty indices are also unquestionably proprietary products created and maintained by the NSE. Can a derivative based on publicly available price-volume data of a proprietary index be banned? Does an Indian court even have the jurisdiction to stop overseas trade of such a product? These are hard questions to answer and it is possible to make arguments in favour of either side. 

Whatever the High Court ruling may be, international traders need products that will enable them to hedge price movements on Indian bourses, and to manage currency risks as well. The long trading hours at the SGX are also useful since price-sensitive newsflow at odd times can be discounted.  Indeed, domestic investors would also be grateful for access to such products. The NSE is now well placed to launch competitive products. An offshore set-up at the GIFT could even enable forex-denominated versions. Rather than seeking judicial protection from overseas competition, it would make sense for the NSE to set up shop and target the same customer base. A lot is at stake here. Index provider MSCI has already hinted that it may reduce India's weight in its emerging market index. The outcome of the legal case may also establish new international jurisprudence on copyright issues surrounding pricing data.