It is said well begun is half done. If so, there is hope for a resolution between the National Stock Exchange (NSE) and Singapore Exchange (SGX). That’s because Justice S.J. Vazifdar, the arbitrator between the two exchanges, has begun well. For background on the case, and a sceptical view of the prospects of a resolution, read this previous column. Things have changed since.

The directions issued by the arbitrator in the past week have calmed nerves at both exchanges and have given each side bragging rights. SGX’s press release harped about the fact that trading on Nifty futures will continue for at least six months beyond the earlier mentioned date of August 2018. NSE’s release went on about the injunction on SGX from launching contracts linked to any of its indices till February 2019. SGX got the ‘continuity’ it was seeking for its customers, and NSE got its injunction. Both sides seem happy. Justice Vazifdar seems to have pulled off the impossible.

Of course, all of this won’t amount to much if the two exchanges refuse to see eye to eye by the end of the arbitration process. But the interim order at least positions the two exchanges well for a possible solution. First, with a longer deadline, the arbitrator has bought precious time. This will not only allow him to study and understand the arguments on both sides better, but will also give NSE and SGX time and space to work towards a resolution.

The earlier August 2018 deadline, by which time SGX was supposed to stop trading Nifty futures, led to knee-jerk reactions. Hopefully, responses from both sides will be more measured now.

Rather than react to all the hurly-burly, NSE and SGX can take time to reflect on the damage their decisions have wrought. Nifty futures were a fairly popular hedging instrument for international investors, but that’s taken a severe hit, going by the sharp drop in open interest on SGX. That’s not all. Since we live in the age of connected markets, open interest on NSE’s Nifty futures contracts have fallen as well, albeit to a lesser degree.

If there was any misguided perception that clamping down on SGX will result in higher volumes onshore, there is no evidence of it. “Institutional investors typically prefer offshore products first before eventually accessing the onshore markets directly. But recent steps give the impression that Indian authorities want to restrict access to offshore products and want to force everyone onshore. This can affect flow from investors who don’t yet want to trade directly onshore," Mark Austen, chief executive officer at Asia Securities Industry & Financial Markets Association (Asifma), says.

The loud protest by MSCI Inc, asking Indian exchanges to reconsider their move to put restrictions on use of their trade data, also suggests the international investing community is antagonised. NSE’s answer to all of this is the international financial services centre at Gift City, although there is no sign of interest from international investors yet.

From SGX’s perspective, the drop in open interest shows it stands on precarious ground. If the uncertainty prolongs, investors may continue to reduce their exposure. It may well choose to attempt another launch of so-called surrogate products, after the final arbitration order. But if the judge disallows a roll-over of its existing Nifty futures positions to the new products, it would need to start from scratch.

This would mean it takes a significant hit, vis-a-vis its position just a few months ago.

When both sides assess the damage to themselves and to the markets, they will hopefully budge and try and find some middle ground. Perhaps they will try and revive talks of a connect between the two exchanges.

For now, this may seem like an impossible task. After all, NSE has stated it wants to consolidate liquidity for its indices onshore, while SGX is equally bent on providing India hedging products to its customers.

But as they say, you should never say never. While NSE and SGX officials and their lawyers were locked up in a room presenting their arguments before Justice Vazifdar, back in Singapore, US President Donald Trump and North Korean leader Kim Jong-un shook hands in the first ever summit between the heads of the two countries. Who knows, the judge may well get the two exchanges to shake hands when they return for hearings next year.

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