It will simultaneously delist all derivatives contracts, including Nifty futures, which were based on a partnership with the National Stock Exchange of India Ltd. What it did not spell out, but is apparent from a circular it sent to its trading members, is that SGX will continue to offer trading in Nifty futures and options, but only by a different name.
The new products will be called India futures and India options, and SGX will use the closing Nifty price to settle its new contracts.
“The reference value (to settle the new India contracts) will be the average of the final settlement prices of futures contracts traded on relevant exchanges that each: (i) references a broad-based India equity index covering 50 stocks listed on National Stock Exchange of India, which captures approximately 65% of its float-adjusted market capitalization; and (ii) has the same last trading day as the expiring SGX India Futures Contract. The Relevant Exchanges are: (i) NSE; and (ii) NSE IFSC Exchange," SGX’s circular said, carefully avoiding the use of the word Nifty, for which NSE has a trademark. However, it’s evident the reference is to Nifty, which is made up of 50 stocks and captures approximately 65% of NSE’s float-adjusted market capitalization .
In a joint statement on 9 February, Indian stock exchanges had decided to cancel licensing agreements for providing indices and securities related data feed services to foreign exchanges and trading platforms. The exchanges also terminated licensing agreements with overseas bourses. The move was triggered by SGX’s decision to introduce futures contracts on top 50 Indian stocks from 5 February, even as the Singapore exchange has gradually expanded its market share in Nifty futures trading to 52%.
“We are examining the announcement by SGX... We have asked for more details from SGX on the product structure and hope to have a conversation with the SGX team to get a better understanding of the product. Post that conversation and review of the material in the public domain and the announcement made by exchanges in February, we will need to make an assessment whether or not the products announced by SGX are compliant with the announcement made by the Indian exchanges... We will also have a discussion with other exchanges and the regulator once we have a better understanding and then determine course of action," Vikram Limaye, managing director and chief executive of NSE, said on Wednesday.
It is understood that SGX has the necessary regulatory approvals for launching its new set of contracts. “The US Commodity Futures Trading Commission’s approval for direct market access to the India Futures and India Options in the US has been obtained. These contracts may be offered and sold to persons in the US," its circular states.
The development came as a surprise to Indian exchanges as SGX was in talks for a connect with GIFT City, a person familiar with the thinking at Indian exchanges said on condition of anonymity.
Meanwhile, SGX has the best of both worlds. Its clients can continue to punt on Nifty futures, and it doesn’t even need to pay NSE any licensing fees.
“It’s a nifty move by SGX," said an executive at an international exchange, asking not to be identified.
Kunal Nandwani of U Trade solutions says SGX’s solution is simple and elegant. “Institutional investors who take exposure to the Indian market via SGX may be satisfied with such a product and could trade in it. Though only time will tell how much trading volume and open interest SGX can capture," he says.
SGX said in a release that it is continuing to work with NSE to try and establish a connect between Singapore and GIFT City. However, it is understood that a GIFT connect by August was not realistic. Since the arrangement to use the Nifty trademark will end in August, SGX has gone ahead with a new set of contracts, to ensure continuity for market participants.
NSE may well choose to litigate, although when New York Mercantile Exchange (Nymex) dragged Intercontinental Exchange Inc. (ICE) to court on the use of its settlement prices for over-the-counter (OTC) derivative contracts, the judge ruled in the latter’s favour. Judge John G. Koeltl said that Nymex’s settlement prices were not copyrightable works, and this is often cited in exchange circles as an established principle.
“Stock market indices are just combinations of other publicly available numbers (stock prices and market caps). They are not some secret formula for something like Coca Cola," Sanjay Bakshi, adjunct professor at Management Development Institute, Gurgaon said in an exchange on Twitter.
“We will have to see the construct of the index whether it is mirroring Nifty before we can comment. As far as our price arrangements go, they are all approved/licensed and are not based on reference prices," said Limaye.
Nandwani said that traders on SGX would form their own prices, based on market participants’ view, demand and supply, market makers’ bid-offer prices, and projected future values for the index.
“It will look to NSE Nifty’s closing price on expiry for reference only, for settling its contracts," he says.