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No More Offshore Derivatives Of Indian Equity Indices, Stocks

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India’s three stock exchanges will stop sharing data with foreign peers to prevent volumes from moving overseas, they said in a joint statement. The decision will halt derivatives tied to Nifty 50 Index and S&P BSE Sensex and stocks on Singapore and Dubai stock exchanges.

The licence with SGX to trade Nifty futures will get terminated, National Stock Exchange’s Managing Director and Chief Executive Officer Vikram Limaye told BloombergQuint in a phone interview. India’s largest exchange will issue the termination notice to end the contract in six months, he said. “We cannot disclose the details of the financial arrangement, but we have taken a broader call in the interest of consolidating the Indian markets.”

The decision comes after SGX started offering single-stock Nifty futures, that account for more than a third of the futures volumes on the NSE. Foreign portfolio investors use such contracts to hedge their exposure in the cash segment, and moving to Singapore reduces costs as contracts are dollar-denominated and offer tax advantage. That was the immediate concern of Indian bourses, including the Bombay Stock Exchange and the Metropolitan Stock Exchange.

"It is observed that for various reasons the volumes in derivative trading based on Indian securities including indices have 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." - Joint Statement By NSE, BSE and MSEI

Also Read: What NSE Stands To Lose From Nifty Single-Stock Futures In Singapore

Market participants, index providers, data vendors, their subsidiaries and group companies will have a month to stop all arrangement with offshore exchanges. “The other arrangements, if any, shall be grandfathered for a period of one month,” the joint statement said.

NSE has a licensing arrangement with SGX for dollar-denominated index futures linked to Nifty 50, Nifty Bank, I.T., CPSE and Midcap 50 indices and Nifty 50 options, according to its draft prospectus filed in September 2016. Singapore was its largest index licensing customer in the financial years ended March 2014, 2015, 2016 and 2017. NSE earned 98.7 percent of the overseas index licensing fee from SGX in the year to March 2016.

“We have been in touch with SGX on this issue prior to launch of stock futures and recently. We have also indicated to them that there will be some measures to consolidate trading in India,” Limaye said. “We have discussed the issue with SGX after today’s media release as well.”

NSE also has derivatives benchmarked to Nifty indices with three other stock exchanges—the Chicago Mercantile Exchange, the Osaka Exchange and the Taiwan Futures Exchange. The termination period of these exchanges other than SGX won’t be as much as six months, said Limaye.

India’s largest exchange has already lost volumes in index futures to SGX after the government cracked down on investments through offshore derivative instruments used by foreign investors not registered in India. The hope is that volumes will return to India after these measures, said Limaye.

Also Read: NSE’s Limaye Says Options Open To Stop Futures Trade From Moving To Singapore

BSE To Terminate Its Pacts

BSE will also have to terminate its arrangements with BRICS Exchanges Alliance. It also has tie-ups to offer derivatives on stock and futures exchanges in Brazil, Russia, Hong Kong and South Africa. In addition, options and futures based on the S&P BSE SENSEX are also listed and traded on Eurex and the Dubai Gold and Commodities Exchange.

Push For GiFT City

The regulator and exchanges have taken a call to create an offshore jurisdiction in the International Financial Services Centre, Ahmedabad. The volumes at GiFT City are not high but it’s expected to benefit as it’s an alternative for investors who trade in offshore jurisdictions for tax benefits.

While the budget removed short-term capital gains tax in the IFSC, the Minimum Alternate Tax is applicable, making the transaction costs slightly higher, said Limaye. Investors will see the benefit of coming directly to India, he said. GIFT City is an alternative for investors who trade in offshore jurisdictions for tax benefits, Limaye added.

Exemption For ETFs

The regulator exempted use of licensing arrangement for sharing data to be used for raising ETF money. There will be licensing arrangements with ETFs as the money directly comes into India, said Limaye.

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