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SGX-NSE GIFT connect is nearly here, but there's a hurdle

A file photo of Gujarat International Finance Tech (GIFT) City. If the hurdle is not addressed by March, the GIFT trading link will start operations without participation from Hong Kong-based investors. (Photo: Bloomberg)Premium
A file photo of Gujarat International Finance Tech (GIFT) City. If the hurdle is not addressed by March, the GIFT trading link will start operations without participation from Hong Kong-based investors. (Photo: Bloomberg)

  • But  regulatory  curbs  may  pose  hurdle  for  SGX’s  Hong  Kong clients
  • According to the latest data, the open interest on SGX-Nifty is nearly four times the open interest on the Nifty50 index

MUMBAI : The trading link to be established between National Stock Exchange Ltd and Singapore Exchange Ltd (SGX) at Gujarat International Finance Tech (GIFT) City to divert the flows into Indian securities away from Singapore and to India’s so-called foreign jurisdiction is expected to go live on 1 April, said Injeti Srinivas, chairman, International Financial Services Centre (IFSC) Authority.

“The operations will start in a phased manner, with the first phase beginning from 1 April," Srinivas said in an interview. “The SGX special purpose vehicle has already been incorporated, its office has been set up, and the market data connect effected. The technology validation is going on and is likely to be ready in a month or so."

However, an official at an Indian regulator said that SGX has written to both NSE and the International Financial Services Centre (IFSC) Authority, stating that their clients based in Hong Kong may not be able to invest through the NSE IFSC-SGX link because of regulatory curbs.

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Connecting markets

“The letter states that almost 40% of their clients or funds taking exposure to India through SGX comes from Hong Kong, and this Chinese financial services jurisdiction does not allow investments in any jurisdiction, which is not a signatory to a bilateral agreement or International Organization of Securities Commissions (IOSCO)," the official said, declining to be named. IOSCO is an association of organizations that regulate the world’s securities and futures markets.

The five-year-old IFSC and IFSC Authority, set up in 2020, are not part of IOSCO yet.

“IFSC Authority is in the process of obtaining membership in premier international forums of financial regulators. We are equally keen to enter into bilateral understandings with our counterparts across the world," said Srinivas. His comment was not in the context of the NSE IFSC-SGX connect.

Emails sent to spokespeople for NSE and SGX were not answered immediately.

If the regulatory hurdle is not addressed by the end of March, the GIFT trading link will start operations without participation from Hong Kong-based investors.

“We are not expecting all the clients to come on board on Day 1. It will be done over the next four months, starting in April. By August, we expect all funds and brokers to migrate to IFSC. The volumes on Nifty futures at IFSC will become three times in the first month itself," said a third official, who also declined to be named. This person added that the current SGX-Nifty index and related contracts will be shut down by August.

Initially, the NSE-SGX Connect will lead to more revenues for SGX than NSE IFSC. According to the revenue-sharing agreement, trades will be settled on the exchange from where it originates.

“As the bulk of clients will be from Singapore, the trades are likely to be settled on SGX, and thus, they will command the bulk of the revenue share," the person said.

In February 2018, NSE stopped providing data feed to foreign exchanges, including SGX, reasoning that it was losing a major source of revenue, liquidity and relevance to foreign bourses.This prevented investors trading in Singapore from accessing NSE’s real-time data, crimping their ability to invest in Indian securities through SGX. This marked a break in the nearly two-decade-old relationship between them. The dispute went to the courts, but the estranged partners smoked the peace pipe in 2019, deciding to jointly launch the Nifty index-based derivatives products in GIFT IFSC. GIFT City is on par with Singapore, Dubai and Hong Kong regarding taxation.

According to the latest data, the open interest on SGX-Nifty is nearly four times the open interest on the Nifty50 index. On average, SGX generated nearly double the Nifty futures volume daily than NSE. SGX has more than a 52% market share in Nifty futures. This is because the lot size of a contract on SGX is much larger at 27.36 lakh.

The data connectivity between the two exchanges at GIFT will be set up by the end of the month by vendor Tata Consultancy Services Ltd, the third official said.

The other issue that may pose problems for the GIFT City launch is geopolitical concerns around China and Hong Kong. India has been keenly monitoring foreign flows, both direct and portfolio investments from the two jurisdictions.

“That is something for the regulators and government to decide on. Even today, funds from Hong Kong are investing via SGX-Nifty. They hold Indian FPI registration," the second official said.

Indian laws require the identification of the end client, whereas Singapore depositories and exchanges do not have direct access to the identity of individual clients. To bridge the differences, rules were changed for IFSC situated exchanges and entities to make the end-beneficiary disclosure lenient with the caveat that Singapore will be able to provide such information whenever sought by IFSC Authority.

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