National Stock Exchange (NSE) has thrown a spanner in the works of Singapore Exchange (SGX), which was all set to list new India equity derivative products—essentially Nifty futures and options by another name. NSE filed for and was granted an injunction by the Bombay high court against SGX’s planned 4 June launch. The court said the two exchanges are at liberty to raise all their contentions, including on “jurisdiction and/or arbitrability" in an arbitration process.
If justice S.J. Vazifdar, the arbitrator, can get the exchanges to see eye to eye, it will be nothing short of a miracle. NSE is upset with SGX because of its decision to launch single stock futures earlier this year, and later try to thwart its ban on Nifty futures trading by launching so-called surrogate products. SGX, too, is miffed that NSE took the extreme step of terminating the licence it had granted SGX for Nifty futures trading, and end a relationship that lasted nearly 18 years. In short, neither side can be expected to budge.
SGX may well seize the foothold the court has given and contest the case on jurisdiction, citing that the new contracts are being launched in Singapore. NSE, too, stands on fairly solid ground. Its existing agreement with SGX is enforceable in Mumbai, and it has claimed in its petition that SGX’s decision to launch new contracts violate the existing contract. The new contract mimics the existing one without the burden of having to pay NSE any licence fees, as it needs to in the ongoing contract.
Apart from the fact that the new contracts will use NSE’s settlement prices for Nifty contracts, another giveaway is that SGX said it will allow its customers to migrate outstanding positions in the existing Nifty futures contract to the new India futures contract. NSE can point out in the courts that this is possible only when there is an apples-to-apples comparison between the two products, which essentially means that SGX’s new product is a clone of the earlier one. Perhaps, if SGX’s launch was after its contract with NSE expired in August, and it had avoided a straightforward migration of outstanding positions, the latter may not have succeeded with an appeal in Mumbai. Of course, it remains to be seen how SGX responds and whether the fight stays in Mumbai.
At some point, the legal debate will centre on the question whether public prices such as those of equity indices are copyrightable works, and the related question on whether the exercise of data collation involved in the creation of an equity index needs to be protected from so-called misappropriation. This column has pointed out earlier that the legal precedence in such matters is a bit mixed. When the New York Mercantile Exchange (NYMEX) dragged the Intercontinental Exchange Inc. (ICE) to court on the use of its settlement prices for some over-the-counter (OTC) derivative contracts, the judge ruled in the latter’s favour, saying that NYMEX’s settlement prices were not copyrightable works as a matter of law.
In a later ruling, however, the Illinois appellate court ruled in favour of the Chicago Board Options Exchange (CBOE) and McGraw-Hill Companies, Inc., prohibiting International Securities Exchange from listing options on either the S&P 500 or the Dow Jones index, on which CBOE had exclusive licences from McGraw-Hill. The order heavily cited an earlier ruling in The Board of Trade vs Dow Jones & Co. case by the Supreme Court of Illinois, which had prohibited the board from launching contracts linked to the Dow, citing it would amount to misappropriation given that “the publication of the indexes involves valuable assets of the defendant (Dow Jones), its goodwill and its reputation for integrity and accuracy".
Needless to say, NSE can be expected to hold dearly to this ruling while arguing its case.
But it must be noted that the above ruling has been criticized by legal commentators, and, indeed, by three of the court’s own dissenting judges. Justice Seymour Simon wrote in his dissent note, “Unless the creators of intellectual property have some protection against the appropriation of their ideas by others, they will be discouraged from producing them; on the other hand, unless society can demand that the owners of intellectual property allow it to be appropriated by people who have developed novel and productive uses for it, the pace of innovation will slow."
Even if justice Vazifdar arrives at this right balance in the NSE vs SGX case, it is highly unlikely both sides will see the wisdom. This is just the beginning of a long-drawn legal battle