The legality of SGX’s Nifty (or should we say shifty?) move

A rose by any other name would smell as sweet. Perhaps, inspired by this Shakespearean quote, Singapore Exchange Ltd (SGX) has decided to continue offering Nifty futures trading to its clients, but by another name.

They will now be called India futures or, to be more precise, futures on “the index that comprises 50 stocks listed on the NSE and captures approximately 65% of the exchange’s float-adjusted market capitalization”. That is certainly not as neat as just saying Nifty, but SGX’s clients won’t be complaining at all. Everyone knows that ultimately they’ll be trading NSE’s Nifty index.

The National Stock Exchange (NSE), which attempted to ban the use of its indices by overseas exchanges in February, is naturally miffed. It won’t be surprising if the exchange pursues litigation, given SGX’s blatant disregard for its stated desire to consolidate liquidity in Nifty futures in India.

NSE certainly isn’t the first facing such a situation; a number of other exchanges have approached the courts to protect what they believed was an infringement of their copyrights and trademarks. The legal precedence is a bit mixed, and it isn’t surprising that NSE has said it will first talk to SGX before deciding its next course of action.

A landmark judgement in this regard came in the US 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. Judge John G. Koeltl said NYMEX’s settlement prices were not copyrightable works as a matter of law, and that ICE had not engaged in copyright or trademark infringement in referencing NYMEX’s publicly available settlement prices in its OTC derivative contracts.

The above principle is often followed by other exchanges as well. When MCX launched crude contracts with NYMEX prices as the reference, for example, it was precisely based on the above ruling. It had no partnership with the US exchange to use its data, although some years later it eventually entered into a partnership with the exchange.

It is understood that SGX will point to the principle while defending its stance. In GIFT City, BSE’s INX settles futures contracts on stocks, such as Apple and Facebook, using the closing price at Dubai Exchange (DGCX), which in turn states on its website that it uses home market prices for these stocks that are in the public domain.

“NSE has a licensing arrangement with LBMA for Gold/Silver and permission from NASDAQ for using their prices for settling single stock futures contracts on Global securities.” said a NSE spokesperson.

Critics of Judge Koeltl’s ruling point out that another judge decided differently while hearing Euronext’s trademark infringement lawsuit against The Order Machine aka TOM. But the judge’s ruling, in Dutch, has caused confusion, with both Euronext and TOM claiming victory. Importantly, the ruling said, TOM could continue offering options on Euronext’s AEX index, but by another name. SGX may well have studied this ruling well, as it has been very careful in avoiding NSE’s trademark, Nifty, in the specifications of its new contract.

Interestingly, TOM, once referred to as a parasite exchange by a commentator, is now defunct, because of lack of funding. SGX, which depends to a large extent on products created in other jurisdictions, is sometimes similarly referred to as a parasite exchange by critics.

SGX supporters say that it isn’t being shifty and it isn’t exactly stealing NSE’s data. “The prices at which the new India futures contracts will trade will be determined by the demand and supply in SGX’s order book,” they point out.

Needless to say, NSE supporters say that is hogwash, since trading in futures is always with reference to an underlying, which essentially belongs to NSE. “Applying SGX’s logic will result in a free-for-all scenario where there is no value for trademarks and contracts,” they say. A moot question is if SGX will try a similar stunt with an S&P 500 futures contract, for which the index provider has an exclusive tie-up with the Chicago Mercantile Exchange.

While it is evident that this is a complicated issue, previous court rulings don’t seem to provide NSE much cheer. As such, things may well end up in a scenario where SGX has the cake and eats it, too. As pointed out in this paper on Wednesday, it can not only continue to trade Nifty futures, but it now needn’t even spend on any licensing fees to NSE.