Indian bourses to stop licensing indices and stock prices to foreign exchanges

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In a joint press release issued on Friday, 9 February 2018, India’s top bourses, the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange of India (MSEI) announced that they will stop the licensing their indices and securities data to foreign exchanges.

Background • Chicago Mercantile Exchange: U.S. dollar denominated

futures linked to NIFTY 50 futures • Osaka Exchange: Yen-denominated NIFTY 50 futures • TAIFEX: New Taiwan Dollar denominated NIFTY

50 futures

Also, in 2016, six exchange-traded funds (ETFs) linked to NIFTY indices were launched in international markets, including Hong Kong, Taiwan and South Korea. As of 30 September 2016, ETFs linked to NIFTY indices were listed on 17 exchanges in 15 countries.1

b) BSE has licensed: • Leading exchanges in Brazil, Russia, China and South Africa

to list futures products based on the S&P BSE SENSEX • Eurex and the Dubai Gold and Commodities

Exchange (DGCX): Options and futures based on the S&P BSE SENSEX2

As these exchanges started offering foreign currency derivative contracts on Indian indices and stocks with low transactional costs, advantage tax structures, and predictable regulatory requirements, they gained a lot of traction among foreign investors who wished to participate in the Indian economy without the hindrance of stringent compliance requirements.

A snapshot of NIFTY’s derivative contracts volume (no. of contracts) traded on NSE and SGX from July 2015 to October 2017 is provided below:

Indian exchanges (hereafter, Exchanges), through a licensing arrangement, provide their market data at various levels (real-time feed, delayed feed and end of the day feed) to index providers, either directly or through their subsidiaries/group entities or through third-party data vendors for creating indices. Such indices are licensed by the index providers to prospective licensees, including foreign stock and derivatives exchanges and other foreign trading platforms (foreign exchanges and/ or trading platforms), to enable them to provide products for trading and settlement on such foreign exchanges and/or foreign trading platforms.

Additionally, it is possible for Exchanges to create indices based on their market data which could then be licensed to such foreign exchanges and/or trading platforms for the purpose of trading and settlement of products based on such indices outside India.

To strengthen the Indian brand and consolidate the market leadership position by reaching investors in more geographic locations and from different backgrounds across the globe, the following arrangements were made with international exchanges.

a) NSE has licensed four international stock exchanges to trade and settle products linked to Indian indices or stocks.

• Singapore Stock Exchange (SGX) : U.S. dollar denominated futures linked to NIFTY 50, NIFTY Bank, NIFTY IT, NIFTY CPSE and NIFTY Midcap 50

Jul - Sep 2015

Oct - Dec 2015

Jan - Mar 2016

Apr - June 2016

Jul - Sep 2016

Oct - Dec 2016

Jan - Mar 2017

Apr - June 2017

Jul - Sep 2017

Oct - Dec 2017

FY2016 Q1 FY2016 Q2 FY2016 Q3 FY2016 Q4 FY2017 Q1 FY2017 Q2 FY2017 Q3 FY2017 Q4 FY2018 Q1 FY2018 Q2

SGX NIFTY* 55,61,702 47,25,549 52,93,741 54,53,963 52,71,904 52,54,302 48,33,250 51,39,641 56,01,591 56,12,109

NIFTY** 3,98,57,111 1,52,40,806 1,44,61,230 1,27,33,661 1,06,27,390 1,07,30,519 91,63,964 84,28,957 84,57,999 87,28,644

Total 4,54,18,813 1,99,66,355 1,97,54,971 1,81,87,624 1,58,99,294 1,59,84,821 1,39,97,214 1,35,68,598 1,40,59,590 1,43,40,753

% of SGX to total volume

12.25 23.67 26.80 29.99 33.16 32.87 34.53 37.88 39.84 39.13

* As published by SGX ** As published by NSE

The volume of SGX NIFTY contracts to total volume (cumulative of NIFTY-based derivate contracts traded on NSE and SGX) has increased from 12.3% to 39.13% over the last two years.

Summary of order

Impact of the order

Conclusion

1. Exchanges or their subsidiaries/group entities or any other entity having a licensing arrangement with Exchanges shall not license/provide Indian indices and/or data, including the price of Indian securities, to any foreign exchange and/or trading platforms for trading or settling derivatives in any form in a foreign jurisdiction.

2. Exchanges, either directly or through their subsidiaries/group entities or through third party data vendors, shall not license/provide market data, including prices of securities traded on the Exchange’s platform to –

• any exchange or a trading or settling venue outside India, for trading or settling any products including derivatives;

• any index provider and/or its licensee, for creation of indices or products based on such indices, which in part (weightage of 25% or more on Indian

• Foreign exchanges are prevented from offering contracts based on Indian indices and single stocks futures to be traded and settled on their trading platforms.

• Foreign portfolio investors who use such contracts to hedge their exposure in the domestic cash segment and to reduce costs and benefit from a tax advantage would be forced to unwind contracts and buy into domestic derivatives to gain exposure to India.

• Foreign investors who wish to trade on India’s main stock index with no presence in India will now be forced to register with the Securities and Exchange Board of India (SEBI) to participate in the Indian growth story.

• Indian capital markets will become less volatile and insulated from foreign market sentiments.

The move is expected to bring more liquidity into the nation with a shift in volumes to Indian exchanges. In addition, it will reduce the impact of foreign markets and stabilise Indian markets.

Though the International Finance Center (IFSC) has been set up to cope with the foreign market, unless necessary additional steps are taken to enhance infrastructure, reduce transaction costs, ease compliance requirements, and make taxation far more favourable, foreign investments into the market may be deterred, thereby dampening volumes.

securities) or in full are based on prices of securities/indices listed in India or are benchmarked to Indian indices, which may be made available for trading or settling derivatives on any foreign exchanges and/or trading platforms; and

• any licensee, either directly or through its subsidiaries/group entities or through a third party data vendor in any form or manner for the purpose of trading or settling derivative products on any foreign exchange and/or foreign trading platform. Further, such licensee is also not permitted to use market data for issuance of overseas derivatives instruments and/or structured products on exchange-traded derivative contracts on Indian securities traded on foreign exchanges and/or trading platforms.3

• Revenue to the government is expected to rise in terms of capital gains taxes, Securities Transaction Tax (STT) and other trade-related taxes.

• The foreign currency trade volumes are also expected to rise with more investors pumping in foreign currency to trade in rupee denominated derivative contracts.

• Although Indian exchanges will lose marginal revenue from data licensing, they are expected to gain substantially from the increase in trading volumes of derivate contracts.

• Indian regulators can more effectively and efficiently manage onshore trades on Indian securities.

1 As per Draft Red Herring Prospectus, dated 28 December 2016 filed by NSE with SEBI

2 As per Red Herring Prospectus, dated 11 January 2017 filed by BSE with SEBI

3 As per the press release issued by the stock exchanges dated 9 February 2018

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pwc.inData Classification: DC0This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.© 2018 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.SUB/February2018-11985

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