Cutting off overseas trading may not bring liquidity back to Indian bourses
Even Singapore Stock Exchange's intention to offer investors solutions from NSE's international exchange in GIFT City may take a while due to lingering regulatory and jurisdiction issues, say experts
Mumbai: Ending overseas derivatives trading in India’s benchmark equity indices will not automatically bring back liquidity to the local exchanges, traders, investors and economists said.
India’s top two stock exchanges—National Stock Exchange of India Ltd (NSE) and BSE Ltd—on 9 February terminated agreements that allowed their index derivatives being traded on overseas exchanges. However, such trades may not immediately migrate to Indian exchanges or to the international financial services centre (IFSC) in Gujarat’s GIFT City, these officials said.
The development will mean an end to popular Nifty futures offered by the Singapore stock exchange (SGX); however, NSE and SGX are actively looking to start joint operations in GIFT City.
“We have had discussions earlier with SGX about moving liquidity to NSE-IFSC. NSE is considering all possible options to consolidate liquidity in India including continuing discussions with SGX in this matter," NSE’s chief executive officer Vikram Limaye said in an emailed response.
An SGX spokesperson declined to respond to an email seeking comment, although it has stated in two press releases over the weekend that it will look to offer solutions via NSE’s venture in Gift City.
“SGX is eyeing a GIFT connect, but it might take a while as some of their international investors have raised concerns on regulatory clearances, clear arbitration rules, jurisdictional issues and taxation, and that volumes on GIFT exchanges are mostly proprietary trading and there are concerns on liquidity," said a person close to the development on condition of anonymity.
“Trading in India has some inherent issues related to ease of access and predictability on taxation, and these issues are not yet resolved. This is equally true for GIFT. Till these are sorted, a meaningful movement of liquidity back to Indian markets is doubtful," said U.R. Bhat, managing director at Dalton Capital Advisors (India) Pvt. Ltd.
“To some extent, foreign investors who were holding Indian registration and had migrated to SGX because of the ease of access and simpler contracts are considering to restart direct trading in India. But how much of this will result in actual liquidity coming back to India is anybody’s guess," said a senior derivatives trader at a large domestic financial services firm. To be sure, SGX volumes also consist of arbitrage volumes with the onshore market, as well as from investors who don’t have direct access to India’s markets directly.
Ajay Shah, an economist at National Institute of Public Finance and Policy, wrote in a blog post about the possibility of overseas liquidity to move to the over-the-counter (OTC) market. “If SGX is prevented from having an effective exchange-traded Nifty product, the business will just go OTC," he wrote. Incidentally, a ban on certain participatory note issuances last year had led to an increase in demand for SGX’s services; the reverse may well happen, although it isn’t clear the participatory note segment will adapt with existing restrictions.
Even SGX’s intention to offer investors solutions from NSE’s international exchange in GIFT City may take a while due to lingering regulatory and jurisdiction issues. “As far as moving to GIFT City in the near term (is concerned), it is doubtful as it does not make sense at this point of time," the derivatives trader cited above said.
“Our clients and us are weighing the benefits of GIFT vis-à-vis the regulatory lack of clarity," the head of depository services at a foreign bank said on condition of anonymity.
Such investors and traders are concerned about the lack of a uniform regulator, and the fact that the new centre has a number of unknowns that are yet to be tested. Currently, entities in GIFT are regulated by sector regulators such as Securities and Exchange Board of India and Reserve Bank of India. This has led to delays in permissions and product clearances. The latest Union budget has promised to bring in a single regulator for IFSCs.
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