Trading in Nifty futures on the Singapore Exchange (SGX) had picked up considerably after Indian policymakers imposed a ban on the issuance of equity derivatives-linked participatory notes, or PNs, last October.
The reversal of the ban now seems to be leading to a drop in demand for the offshore equivalent of the National Stock Exchange’s top-traded equity derivatives contract. Last month, 0.65 million contracts traded on the Singapore Exchange, 60% lower compared with volumes of at least 1.6 million in July this year. Volumes fell a bit in August and September, but most of the drop has happened since October, after markets regulator Securities Exchange Board of India (Sebi) reversed the PN restrictions. Between July and November, NSE’s Nifty futures volumes have instead risen, helping it regain share.
While Sebi may be responsible for this turn of events, NSE is also taking steps to ensure it maintains its vast lead.
Earlier this month, it launched futures and options contracts on the Defty index, which measures the return on investment made in the Nifty in dollar terms. The contracts on the Defty will be settled in rupees, as are all other contracts traded on NSE, but since the underlying index itself is adjusted for dollar-rupee movement, investors can take a view on Indian equities without worrying about exchange rate fluctuations. This is very similar to the contract traded on SGX, which offers futures contracts on the Nifty index that are settled in dollars. Of course, there will be slight differences because the two contracts are settled in different currencies, but by and large the launch of the Defty contract will help NSE bridge the gap in the two contracts owing to the currency differential.
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With the PN restrictions out of the way and the dollar-linked contract, investors who are not registered to trade in India can be expected to shift their trades to the onshore market. They would not only be able to trade the Nifty here but also sectoral indices, individual stocks and so on.
Another gap NSE seems to be aiming to fill is that of trading hours: The Singapore Exchange opens at 6.30am Indian time, three-and-a-half hours before trading in India commences. For traders who want to express their view in the markets based on how the US markets behaved overnight, SGX is the preferred platform because of the time differential. NSE has approached Sebi to advance the markets’ opening time to 8am only for Nifty contracts. This will narrow the gap to an hour and a half.
One school of thought is that the move should be only allowed if the entire market opens at the same time, so as to ensure the alignment between futures prices and spot prices. But then SGX has had a liquid Nifty futures contract trading at hours when the spot market in India is closed, and so this doesn’t seem to be a necessary condition. Some market participants have complained about the the extra trading hours, citing the shortage of manpower many brokers face. But as NSE’s managing director, Ravi Narain, has rightly pointed out, the world is moving to system of trading for 23 hours 30 minutes, and that this is a step in that direction.
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Both exchanges and brokers would have to invest in infrastructure and people to adapt to this change. If the Indian market doesn’t require it, the practice may soon die down. But such assumptions shouldn’t stop the regulator from not allowing extended trading hours. In fact, experts say such decisions are best left to exchanges. They are the ones making the large investments to enable longer trading hours, and if the strategy flops, it’s they who lose the investment.
Talking of extended trading hours, Sebi would do well to not look at the Nifty futures case in isolation, but also allow MCX Stock Exchange freedom in deciding the number of hours it wants to keep its currency futures segment open. MCX already has the expertise in keeping markets open for long hours in the evening in the commodity space, enabling traders to express their view at a time when the US markets are open. It should be able to replicate this in the currency futures segment as well. As pointed out earlier in this column, Sebi shouldn’t be making decisions on issues such as trading hours and product design. These decisions are best left to the exchanges and the market, which will adopt what is best suited to the needs of participants.