The National Stock Exchange (NSE) is milking its Nifty index rather well. It has licensed the index to Chicago Mercantile Exchange (CME) for listing dollar-denominated Nifty futures contracts. Singapore Exchange (SGX) has been providing Nifty futures to its members for around 10 years now. Such licences typically involve a royalty payment to the owner of the index.
NSE has said that the agreement with CME is exclusive within the Americas and Europe, implying that they won’t compete with SGX. But both these exchanges have global trading platforms, with investors across the globe accessing their products. Some of CME’s products, for instance, trade for 23-and-a-half hours a day. It’s hard to see how the two won’t compete in trying to capture overseas investors’ interest in Indian equities.
Considering that many overseas investors are still not registered with the Indian regulator to participate directly in the Indian market, a Nifty futures product traded on CME and SGX provides a good alternative. It would be tremendously cheaper than buying a participatory note and would also have the advantage of avoiding currency?risk. This, coupled with the competition between CME and SGX, will lead to increased volumes for the Nifty in overseas markets.
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Of course, volumes will be much lower than the domestic market. Currently, SGX’s Nifty futures account for around 8-9% of domestic turnover in value terms. Nifty futures traded in the domestic market will always be the most liquid, given that the local investor base is here and the fact that arbitrage activity with the spot market can happen only here.
But as pointed out earlier, cross-listing is a good way for an exchange to milk its successful products and Indian exchanges are taking the right steps in this regard. According to reports, Bombay Stock Exchange will list its contracts on Eurex.
It’ll be a while before US equity indices are traded on NSE, even though CME has given permission for trading in futures contracts on S&P 500 and Dow Jones Industrial Average. The regulatory approval process may take some time. Current rules specify that for an index to be eligible for derivatives trading, around 80% of the constituent stocks should be permitted for derivatives trading. The regulator may choose to waive this for overseas indices, since the constituent stocks don’t trade here. But that creates a dilemma of its own. If overseas indices can be excused, why should the 80% criteria apply to indices created with Indian stocks.
Even so, NSE’s cross-listing initiative is an exciting development for the Indian financial markets. The exchange also has a proposal to have a bilateral securities trading link with SGX to enable investors in one country to seamlessly trade on the other country’s exchange. Such initiatives will stretch policymakers and force them to revisit existing guidelines.
Graphic by Yogesh Kumar / Mint
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