the Exchanges are actually justified on the data feed ban
A couple of weeks ago when the NSE and BSE terminated data feed supply to global exchanges, there was a big noise created by MSCI. In fact, MSCI had even warned India of a possible weight downgrade if data feeds were not given. To the credit of the government, it stood its ground and it was actually justified in doing so. Here is why!
What’s the color of the money?
When the government complains that it does not exactly know the color of money trading its indices, it is actually referring to these offshore products that trade as a derivative on the Indian market indices like the Nifty. There are two problems here. Firstly, these trades are executed through the participatory note (P-Note) route to the eventual beneficiary is not known despite the best efforts of the regulatory compliance teams. Secondly, P-Notes have long been an instrument for taking big macro calls on any market. We saw that in the aftermath of 9/11 on global airline stocks and that is the kind of risk that India does not want to really run. With offshore products trading in other global exchanges, it becomes much easier for someone to play a macro-short. The curb on data feeds is to ensure that such strategies are largely incapacitated due to the absence of live feeds. To that extent, the government is perfectly justified. Off-shoring is more of business risk but the real risk is that it opens the doors to trade without accountability.
SGX Nifty and INR Futures…
Over the last few years, India has seen 2 major trading products being off-shored in a big way. First, we saw the Nifty trading largely shifting to the SGX. Of course, there were reasons like the dollar denomination of the SGX Nifty and absence of STT on the SGX. But the fact was that volumes were being off-shored and India had little control. Secondly, we saw a major off-shoring of the INR/Dollar market to DGCX and SGX as longer timings and lesser regulation made them attractive markets. Both were huge macro risks for India.
There is a middle path…
To be fair to the Indian government, it has a solution too. Firstly, in the case of MSCI Vikram Limaye has clarified that data feeds will still be available for ETFs. But feeds will not be available for the off-shore trading of Indian indices through informal contracts. Secondly, in case of SGX Nifty, the Singapore Exchange has an alternative to launch through the INX at GIFT City and that is what Singapore is doing. One can replicate the benefits of the SGX Nifty right here at the GIFT. So the ban on data feeds has not created any insoluble problem as the MSCI is making it out. India is justified in barring off-shoring of trading, especially when it is a systemic macroeconomic risk. The government has realized this will be a better way to curb round-tripping of funds. Actually, they are bang on.
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