Financial Times

India shocks global investors by clamping down on offshore derivatives

by Philip Stafford in London, Emma Dunkley in Hong Kong, Simon Mundy in Mumbai, FT

February 13, 2018 | 2:03 pm
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Indian exchanges have shocked global investors by clamping down on offshore derivatives tied to Indian equity markets, in a move that is set to disrupt trading on numerous exchanges around the world.

Three of India’s largest trading venues announced late on Friday night that they would stop feeding data to overseas exchanges, due to concern that trading is shifting away from the country and draining liquidity.

The unexpected move sent shares in Singapore Stock Exchange, the main international venue for trading Indian equity futures, tumbling by as much as 9 per cent on Monday morning.

Medha Samant, an investment director at Fidelity International, said the measure will probably “have an impact on some of the new money coming into India”, making it harder for new investors seeking to add Indian stocks to their portfolio.

However she said it is likely to be a short-term issue, impacting derivatives tied to India’s key indices such as the Nifty 50.

FIA, the futures industry’s main trade association, said the decision “raises serious concerns”. The body added: “It appears likely to disrupt trading on numerous exchanges around the world and alarm international investors.”

One person in the industry, who wished to remain unnamed, said there are about 10 exchanges affected, including Chicago’s CME, as well as a string of index providers.

The three Indian exchanges — the National Stock Exchange of India, the Bombay Stock Exchange and the Metropolitan Stock Exchange of India — said that derivatives trading using Indian stock market data had “reached large proportions in some of the foreign jurisdictions, resulting in migration of liquidity from India, which is not in the best interest of Indian markets”.

The move came days after SGX launched single stock futures that track the performance of India’s largest companies. SGX has also offered Nifty 50 index futures since 2000, which are used globally to gain offshore exposure to the Indian equity market by tracking the National Stock Exchange’s main index. Most of the Indian single stock futures business trades at the NSE.

The action followed India’s annual budget earlier this month, which unveiled plans to reintroduce long-term capital gains tax on equity investments — a move that some analysts predicted would hasten the migration of trading to foreign markets.

Ravi Varanasi, chief business development officer at the NSE, India’s biggest exchange by trading volumes, said that the co-ordinated action followed the launch last year of dollar-denominated index products at a new international financial services centre in India, where foreigners are permitted to invest with simple registration processes and without facing most local taxes.

“Everyone has been worried about some amount of trading volumes shipping abroad. So when the government made available the platform of the international financial services centre, we wanted to use it,” he said.

The Singapore exchange said it would “take all measures to maintain orderly trading and clearing of SGX India equity derivatives for our international clients”, and would over the next several months “develop viable solutions”.

SGX added that its licence agreement with NSE “will ensure the continuity of listing and trading” of its Nifty derivatives until at least August this year.

The measures particularly hit SGX, where futures have become a popular way for overseas investors to trade the market because they are dollar-denominated and subject to lower taxes.

In the last financial year to June 30 the exchange traded more than 20m Nifty 50 contracts, down 3 per cent on the previous year.


by Philip Stafford in London, Emma Dunkley in Hong Kong, Simon Mundy in Mumbai, FT

February 13, 2018 | 2:03 pm
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