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

The National Stock Exchange fears losing volumes in stock futures trading that contributes over 85 percent of the futures turnover at India’s largest exchange.

That’s because the Singapore Stock Exchange plans to start single-stock futures tracking some of India’s largest companies that are part of the Nifty 50 index. The NSE is seeking to delay the launch, Bloomberg reported quoting unidentified people aware of the matter. The Singapore exchange said today it will launch the new product starting Feb. 5.

Foreign portfolio investors have a higher share in outstanding contracts than domestic peers in single-stock futures as they use them to hedge their positions in the cash market, a senior derivatives trader at a large domestic brokerage told BloombergQuint requesting anonymity. Most of the FPI exposure is concentrated in Nifty 50 stocks which contribute a third of the futures turnover on the NSE, he said. If SGX goes ahead with the launch, he said, nearly 50 percent of the FPI turnover is likely to move by the end of the first month.

India’s largest stock 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. Investments via ODIs, also called participatory notes, have dried up while corresponding volumes in Nifty Futures on the SGX have gone up. The two exchanges have a pact to offer such contracts. Now, the SGX single-stock futures threaten to take away volumes from the NSE.

NSE is yet to respond to BloombergQuint’s emailed queries.

Why It Matters

• Nifty 50 stocks account for nearly 36 percent of the total daily futures turnover worth Rs 93,095 crore as on Jan. 17 on the NSE, according to data compiled by BloombergQuint.
• FPIs account for more than 26 percent of the total futures turnover.
• FPIs contribute nearly 40 percent of the open interest in NSE futures market.

Why FPIs May Prefer SGX

The most active product on the SGX is Nifty Futures with a daily turnover of around $1 billion and $9 billion worth of outstanding contracts as of Jan. 18. That compares with nearly $3.4 billion of open interest of FPIs in Nifty and Nifty Bank Futures on the NSE.

Trading on SGX has its advantages. For one, contracts are dollar-denominated and reduce costs. The compliance and margin requirements are simpler and tax advantages give an edge to anyone taking up a hedging position in Singapore, said the trader cited above.

FPIs account for nearly 70 percent of the outstanding contracts in index futures in offshore markets like SGX, said a senior exchange official requesting anonymity. The government should step in to reduce transaction costs to prevent FPIs from migrating to SGX, he said.

SGX Gains From P-Note Crackdown

On the NSE, the notional value of ODIs in derivatives fell to Rs 5,072 crore at the end of Nov. from Rs 47,674 crore at May-end. The Securities and Exchange Board of India had in July asked FPIs to liquidate such offshore contracts either by the end of the contract or the end of 2020, whichever is earlier.

Going by volumes on SGX, foreign investors who traded in index futures through P-Notes migrated to Singapore in 2017 after the government’s crackdown.