Photo: Mint
Photo: Mint

Opinion | Singapore-India connect: Who has  upper hand in NSE, SGX negotiations

Both exchanges have said they are discussing a potential collaboration in Gift City

Negotiation is a two-way street, provided, of course, there are two sides at the negotiating table. From the looks of it, while the National Stock Exchange (NSE) and Singapore Exchange (SGX) have agreed to sit and talk, they have company.

Securities and Exchange Board of India (Sebi) and the Monetary Authority of Singapore said in a joint press release last month: “Both regulators agreed that NSE and SGX would carry out necessary discussions to come up with a solution that is acceptable to both parties." Perhaps, the two exchanges were simply asked to thrash things out by their respective regulators. That can complicate matters.

For background, the two exchanges have just had a public and messy spat.

SGX wants to continue trading in Nifty futures, which is one of its top products. NSE wants it to stop.

It wants to consolidate all dollar-denominated trading on the Nifty index, in its own international exchange at Gift City in Gandhinagar, Gujarat.

NSE had even dragged SGX to court, after the latter announced the launch of a Nifty futures copycat to outmanoeuvre the Indian exchange’s decision to terminate its licence to trade Nifty products.

Now, the two exchanges have said that they are discussing a potential collaboration in Gift City. Past discussions suggest the two exchanges are considering a connect between Singapore and Gandhinagar. Is this feasible?

In a typical connect between two exchanges, investors can trade contracts of another market through the trading and clearing infrastructure of their home exchange. For the Nifty, the likely construct will be one that allows SGX’s customers to trade the dollar-denominated contract listed at Gandhinagar, but using the infrastructure at Singapore. SGX, in turn, will be connected with NSE’s exchange at Gift City. For all practical purposes, SGX will act as a trading member on it, and clear and settle trades on behalf of NSE.

If regulators agree, a connect can be a win-win for all concerned. NSE’s exchange in Gift City will get a boost when SGX’s liquidity pool starts interacting with its up-and-coming pool of liquidity.

The Indian side’s desire to see serious volumes and open interest in Gift City will be met. From SGX’s perspective, it needn’t shut down its Nifty contract. Its existing customers can transition to the new arrangement under the proposed connect, and continue dealing with an exchange and a jurisdiction they are comfortable with.

This is of course the rose-tinted view.

The connect proposal may be a win-win only on paper. To get the two exchanges as well as regulators on both sides to agree on a solution is no trivial matter, says an exchange official.

To start with, hard bargaining by the exchanges themselves could make the deal a non-starter.

SGX, for instance, can claim the upper hand, saying it is the preferred destination for offshore investors who don’t want to access Indian markets directly.

According to the head of a proprietary trading firm, the odds are stacked against India in attracting offshore trading firms that have tried their best to stay away and use offshore structures, such as participatory notes, and venues such as Singapore and Dubai.

Among other things, these investors have fears related to tax terrorism and a general discomfort with a new jurisdiction.

Indian regulators have recently approved an omnibus structure for investments in Gift City, but who knows if authorities will wake up one day to concerns about round-tripping and demand know-your-client details for those using this structure.

Knowing this backdrop, SGX wouldn’t want to easily give up the liquidity pool it has built over the years. If it agrees on a connect, it would try and extract its pound of flesh. Perhaps, it will aim for a deal that allows it to continue making similar revenues as it does now under the licence with NSE to trade Nifty futures in Singapore.

The Indian side may even be amenable to this, says an expert in market microstructure. For Indian policymakers, the primary goal will be to see a thriving market at Gift City, whether or not the deal with SGX is remunerative for NSE, he says.

It’s not that NSE has no bargaining power. After it terminated SGX’s licence to trade Nifty futures, volumes and open interest have reduced significantly at Singapore. Faced with uncertainty, traders have voted with their feet.

If Singapore acts too tough during the negotiations, remaining traders will have to live with the uncertainty of a court’s decision on the future of the SGX Nifty. Evidently, this isn’t something they will relish.

If things go against it in the courts, SGX will have to rely on building another product afresh. And in all likelihood, it may not have the luxury of transitioning existing positions to this new contract. As such, there are incentives for it to come to some form of agreement with NSE as well.

In the end, to borrow from Barry J. Nalebuff, it all boils down to whether NSE and SGX see this as an opportunity to create value together or capture value from each other. Nalebuff is a professor at Yale School of Management where he has taught negotiation, strategy and game theory.

A connect proposal is essentially a cooperation aimed at creating value together. Till about last year, the two exchanges had a reasonably well-functioning symbiotic relationship.

But since then, they have been hyper-competitive. Both sides will need to tone down their demands considerably if anything good has to come from the proposed connect between India and Singapore.

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