MUMBAI: India's strict rules to prevent money-laundering could impede its ambitious plan to bring Nifty derivatives volumes from the Singapore Stock Exchange (SGX) to the Gujarat International Finance Tec-City (GIFT) in Gandhinagar, two people aware of the challenges said. The success of GIFT is critical for the fledgling International Financial Services Centre (IFSC) in Gujarat.
While Indian exchanges follow a ‘segregated nominee account structure’ for client accounts, which helps depositories and exchanges identify the ultimate beneficiary of these accounts, SGX allows an ‘omnibus account structure’, where regulators get no such information.
Under the segregated nominee structure, orders of foreign investors will be routed through eligible entities for trading on stock exchanges in IFSC, while adhering to regulatory requirements relating to identification of end-client, unique client code, order placement at client level, client level margining and position limits.
Almost a year ago, the Singapore Stock Exchange (SGX) and NSE reached a truce over trading of Nifty derivatives in Singapore, with the two agreeing to create a new platform for trading them at GIFT in Gandhinagar.
The SGX-Nifty contracts are expected to move to IFSC after operationalising the SGX-NSE IFSC Connect, which will help build liquidity at GIFT City. GIFT has been designed as a global financial and IT hub, offering, among other things, offshore banking, capital markets, offshore insurance and offshore asset management.
“However, this crucial connect is facing hurdles on the recognising of end beneficiary, which is delaying the transition of these contracts from the Singapore exchange to IFSC. As per the connect proposal, SGX will act as a clearing member. However, SGX does not insist on knowing the end beneficiary, whereas the structure in India requires the fund to disclose end beneficiary whenever such information is sought," said the first of the two people quoted above, both of whom spoke under condition of anonymity.
In an emailed response, a spokesperson for SGX said, “SGX and NSE continue to work closely together to operationalise the NSE IFSC-SGX Connect. SGX and NSE remain strongly committed to working with key stakeholders, including the relevant authorities, to incorporate international best practices to the NSE IFSC-SGX Connect, and to make it successful from both an operational and commercial perspective".
A spokesperson for NSE did not offer any comments to an emailed query.
The SGX-GIFT connect is aimed to help members of SGX and NSE IFSC trade in Nifty products at GIFT, while managing their exposures through their respective clearing corporations. It was set to be operational before the end of 2020. Currently, SGX has a 52% market share in Nifty futures.
The new platform at GIFT would have ensured that liquidity is quickly built up at GIFT. So far, at IFSC, the two exchanges -- BSE’s India International Exchange (INX) and NSE IFSC -- clock an average daily traded value in excess of $3 billion, but most of it is proprietary trade.
“SGX for years has allowed omnibus account structures. It is a tad difficult to convince clients that for trading in Nifty contracts, the structure would need to change. Also, ((it is difficult)) at a time when the changing geo-political scenario has sent investors hunting for lucrative jurisdictions," said the second of the two people quoted above.
Omnibus account structures have recently come under increased scrutiny from global regulators due to apparent lack of investor protection and tax transparency. The Union finance ministry, which is working to make IFSC a global jurisdiction to cash in on the changing geopolitical scenario, does not want it to become a tax haven.
“Efforts are on to ensure that within six months, foreign investors could trade at IFSC from any location in the world without being physically present at GIFT. But we do not want this to become a tax haven; so, the requirement of end-user information can’t be done away with," a regulatory official said on condition of anonymity.