The regulator may mandate a minimum market capitalisation of $100 billion.
The Securities and Exchange Board of India (Sebi) will soon come out with a regulatory framework for allowing Indian stock exchanges to launch derivatives based on indices abroad. Sebi will lay down the finer contours related to market capitalisation, number of stocks in the indices and their weights.
According to people familiar with the matter, the regulator wants stock exchanges to introduce derivatives only in indices that have a minimum market capitalisation of $100 billion and are broad-based. In other words, Sebi plans to put in place comprehensive norms that will serve as the base for all future alliances between Indian and foreign exchanges.
“The complete framework has been decided and will be announced soon,” said a person privy to the development, on condition of anonymity. “While it (overseas index) should have a minimum m-cap (market capitalisation) of $100 bn, there should be at least 10 stocks in the index. Further, most of the stocks should have substantial weights in the index.”
This will be important step, as Indian stock exchanges are trying hard to bring home some of the leading overseas indices, to garner higher market share. Globally, some of the biggest bourses like the Chicago Mercantile Exchange (CME) and the Singapore Stock Exchange (SGX) offer trading in a number of foreign indices.
Flurry likely
Industry players believe exchanges will be quick in launching futures contracts based on foreign indices once the norms are notified. It is almost an year since the National Stock Exchange (NSE) entered into cross-listing arrangements with CME and the London Stock Exchange (LSE). The norms will provide investors an opportunity to place bets on markets like the US and the UK.
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Under the arrangement with CME, NSE has exclusive rights for trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India.
This is being made available to NSE via sub-licences from the CME Group, Standard & Poor’s and Dow Jones, respectively.
NSE has also signed a letter of intent with the LSE for getting the FTSE 100 in India. “As part of the letter (of intent), both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty to London Stock Exchange Group for the purpose of issuing and trading options and other index contracts,” says the NSE release dated July 28.
Incidentally, the market capitalisation of S&P 500 is a whopping 11.83 trillion, according to data available on Bloomberg. Similarly, DJIA commands a market capitalisation of $3.71 trillion. The London-based FTSE 100 also features among the world’s largest indices, with market capitalisation of $2.58 trillion.
MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products, including international FTSE indices, to be listed and traded on MCX-SX. It is, however, currently in a state of flux, as its equity segment is yet not operational.