Shut down of trading in SGX Nifty?

The recent decision by the NSE to stop licensing live feeds to other exchanges did come as a major surprise. While live feeds to SGX will stop immediately, the traders will have time till August 2018 to wind down their positions completely as that is when the trading will have to stop. What does it mean and what are the implications for Indian markets?

Why the SGX Nifty developed?

Before getting into the SGX Nifty futures debate, it is interesting to understand why this product took off in the first place. Under an agreement between SGX and the NSE, the SGX was offering trading in Nifty Futures on the SGX platform. There were 3 reasons why the SGX became immensely popular. Firstly, the SGX does not charge STT which is applicable when you trade on the NSE. That made SGX Nifty more attractive for global players like FPIs. Secondly, the SGX is dollar denominated unlike the Nifty futures which is INR denominated. This gives the FPIs a natural hedge and they are saved the cost and hassle of hedging their open currency positions. Thirdly, the SGX Nifty had much longer market timings compared to the Nifty Futures and that made it a more attractive market for global investors. While the SGX share has come down in the recent past, it used to be much higher in 2012-13 when the prospect of retrospective taxation under GAAR was on the verge of being implemented. But what could be the implications now?

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Not a great idea, though!

The purpose of licensing indices to other exchanges is to earn license fees from then. Most of the world indices which attract substantial trading interest tend to get traded in multiple exchanges so that the reach of the index can be enhanced. This is a joint decision by the two principal exchanges but NSE could be the worst hit.The Nifty futures actually became the gold standard for hedging the index risk not only because it was the first off the block but also because the existence of the liquid SGX Nifty added to its allure. While the SGX’s proposal to introduce stock futures may have been the trigger, the India-first policy is unlikely to help the interests of the exchange or of the investors.

You cannot stem the tide…

This trend is not just visible in index futures but also in currency futures where DGCX has become a big center for INR-$ pair trading. Ultimately, money is going to flow to the avenue of highest risk-adjusted returns. The moral of the story for Indian markets is to tweak the Nifty futures to make them more attractive for global investors. Even if the NSE stops giving live feeds, there is nothing stopping global exchanges from offering trading in India futures. That will be bad for exchanges. Alternatively, this could lead to the loss of interest in trading Indian markets. In fact, that could be much worse!

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