In a bid to protect market liquidity, India’s national stock exchanges have decided to cancel licensing agreements for providing indices and securities-related data feed services to any foreign exchange or trading platform.
In a joint press statement issued on Friday evening, National Stock Exchange of India Ltd, BSE Ltd and Metropolitan Stock Exchange Ltd said that any existing licensing agreements with overseas exchanges will be terminated.
“The existing licensing agreements for licensing indices/ prices of Indian securities for trading derivatives on foreign exchanges and/ or trading platforms shall be terminated with immediate effect, subject to the notice period mentioned in the respective licensing agreements,” the exchanges said in a joint press statement.
This means the popular SGX Nifty futures contract will cease to exist, after a six-month notice period expires in August.
Mint first reported that Sebi could ask exchanges to stop data feeds to foreign trading platforms on 30 January.
The trigger for the move appears to be SGX’s decision to launch futures contracts on the top 50 Indian stocks starting 5 February. While its market share in Nifty futures has expanded over the years, to 52% at last count, it’s the decision to launch single stock futures that has led to the current action.
The exchanges, Securities and Exchange Board of India (Sebi) and the finance ministry were in discussions over the past month to counter SGX’s growing market share and concerns that foreign exchanges are becoming price setters for Indian securities.
SGX starts trading a few hours before Indian exchanges, and SGX Nifty futures are generally referred to by traders for early trading decisions.
“It is observed that for various reasons the volumes in derivative trading based on Indian securities including indices have reached large proportions in some of the foreign jurisdictions, resulting in migration of liquidity from India, which is not in the best interest of Indian markets,” the exchanges said in the statement.
Exchanges used to provide real-time data online through dedicated private, high-speed, leased line circuits. This will stop.
Overseas exchanges SGX and DGCX are trading single stock futures without access to any data feeds, said a person familiar with the operations of these exchanges. As such, these trades can potentially continue. “It needs to be seen how the new rules are enforced,” he said, declining to be named.
However, Vikram Limaye, managing director and chief executive of NSE counters this and says the exchanges will still need data from somewhere. “The exchanges will also have a clause in contracts with data vendors that any market data shared by the exchange should not be used to trade on foreign exchanges. For us Bloomberg and Reuters will be data vendors which will carry a similar clause in their contract that any data sharing which ends up being used for trading on overseas exchange in Indian securities will not be legally permissible,” he said.
This will hold true for the MSCI index and other index providers too.
However, experts seem sceptical.
“If you are a market making firm you will still have a real time feed that cannot be stopped. And the bar on market feed and licenses agreements does not stop foreign investors from using their data to trade on Indian securities through foreign jurisdiction,” said Hirander Misra, chairman and CEO of GMEX Group.
“In this move, the losers seem to the Indian exchanges, who will lose revenues they currently earn from licensing their indices,” said Susan Thomas, assistant professor at the Indira Gandhi Institute for Development Research, Mumbai.
Exchanges as business entities need to promote their products globally or earn index service fees from foreign bourses.
“The global exchanges do not require permission to trade derivatives on underlying Indian stocks. There is little to prevent global exchanges from creating derivatives on a portfolio based on the single stock futures. This move will not help to stop losing volumes on our products to global exchanges unless we simultaneously remove the barriers that global investors face in bringing their business onto Indian shores, and incentivise them instead,” said Thomas.