NSE seeks to prevent offshore migration of derivatives business

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Mumbai: National Stock Exchange of India Ltd. (NSE) on Monday said it was in talks with the Indian market regulator and the government to find ways to prevent offshore migration of India’s equity derivatives business.

After the Singapore Stock Exchange (SGX) said on Friday it is planning to launch single-stock futures based on firms listed on NSE’s bellwether Nifty-50 from 5 February, the domestic exchange is concerned that such a move may lead to a shift in India’s already waning derivatives business to Singapore.

Reacting to SGX’s move, Vikram Limaye, managing director and chief executive of NSE, said, “There is a concern surrounding liquidity of Indian markets being fragmented and moving offshore.”

“We are in discussions with the Securities and Exchange Board of India (Sebi) and the government, and have also sounded SGX of the concerns,” said Limaye.

On Friday, equity derivatives worth Rs7.57 trillion were traded on NSE. Stock futures of Nifty contributed at least Rs75,308.24 crore or 75.31% to overall daily futures turnover of NSE. Total derivatives on stocks contributed Rs1.40 trillion or 18.6% of total equity derivatives turnover at NSE on Friday. Index options contributed 78% or Rs5.91 trillion to total equity derivatives turnover on NSE on Friday.

Foreign investors contributed Rs24,486.94 crore or 28.18% to the open interest on index futures and around Rs87,952.86 crore or 34% to open interest on index options traded on NSE on Friday.

NSE, which has announced plans to get listed, had mentioned in its draft red herring prospectus in December 2016 that it had an agreement with SGX, which authorizes the latter to allow trading in derivatives such as index options and index futures benchmarked to Nifty 50, Nifty Bank, Nifty IT, Nifty CPSE and Nifty Midcap 50 indices.

NSE has similar agreements with the Chicago Mercantile Exchange, the Osaka Exchange and the TAIFEX of Taiwan. Also in 2016, six exchange-traded funds (ETFs) linked to Nifty indices were launched in global markets, including Hong Kong, Taiwan and South Korea. As of 30 September 2016, ETFs linked to Nifty indices were listed on 17 exchanges in 15 countries.

According to the DRHP, for fiscal 2015-16, SGX contributed almost 99% of NSE’s overseas index licensing fees. In the document, NSE mentioned it expected revenue from index services to grow 15-20% over next five years through expansion of product offerings beyond pure equities.

Limaye said NSE is focused on what is in the best interest of Indian markets and in that context it will consider all possible options to “consolidate liquidity in India”.

A top NSE official said on condition of anonymity that the exchange had applied to Sebi for approval of more derivatives products based on equity and currency. Sebi is yet to approve the products.

“We will evaluate all options and take appropriate decisions,” said Limaye, without elaborating on the alternatives being contemplated by NSE or about the nature of its discussions with Sebi.

A glance at SGX shows rising interest in Nifty-50 futures among investors. These contracts recorded daily turnover of at least $1 billion on SGX and open interest worth $9 billion on SGX as on Thursday. Foreign portfolio investors (FPIs) contributed open interest of Rs1.12 trillion on NSE’s index futures and options combined on Friday.

Derivatives turnover on NSE has been dwindling over past few years. The total value of index futures traded on the NSE has come down from Rs45.57 trillion during 2015-16 to Rs43.36 trillion in 2016-17 and to Rs35.23 trillion in 2017-18 so far. The notional value of index options has come down from Rs3.51 trillion during 2015-16 to Rs3.27 trillion in 2017-18 so far.

NSE has lost more volumes in index futures after Sebi, in June last year, banned fresh investments by FPIs and their sub-accounts in participatory notes based on derivatives. The notional value of such contracts, according to data on the NSDL website, fell to Rs5,072 crore at the end of November from Rs47,674 crore at the end of May 2017.

Dollar denominated products on SGX and Chicago Mercantile Exchange benefit investors in terms of cost of trading. Also, unlike India, Singapore, Taiwan and other South-East Asian markets have a friendlier tax regime and easier margin requirements, which explains why foreign investors have been preferring to trade in Nifty-50 through offshore markets.

Limaye said NSE is also working with the regulators and the government to make Indian markets more attractive and competitive as compared to foreign jurisdictions.livemint