London-based index creator FTSE recently tied up with the MCX Stock Exchange (MCX-SX) to offer a slew of new domestic indices and launch a range of international FTSE indices that will be listed and traded on the MCX-SX when it gets regulatory approval. Paul Hoff, managing director, Asia-Pacific, FTSE, spoke to Chandan Kishore Kant on plans for the venture. Excerpts:
What are the products you are planning to launch through MCX-SX?
There will be a need to have a flagship index, like the Sensex or the Nifty, that an international as well as a domestic investor can use. Hopefully, we will create a series of other indices as well. We are also excited about launching structured products. India was quite concerned about structured products a few years ago.
In fact, Citibank was unwilling to launch any such product because of issues with the regulatory authorities — the Securities and Exchange Board of India and the National Stock Exchange. However, a good structured product protects investors more because of sheer transparency. In the US, in case of credit derivatives, one did not even know the defaulter because of the layers. Using a structured product makes things much simpler due to the underlying index.
The Sensex has 30 stocks whereas the Nifty takes it forward to 50. What will be your composition?
We will look at 10 major industries. Let’s say, a 30-40 stock index.
How will you keep a balance so that some stocks are not over-represented in terms of weights?
When one compares the sectors with the overall universe, in some cases they will be overweight while in others they will be underweight. In case of underweight indices, we will put in other stocks. We may start with 30 stocks, but the number could increase.
Another way is to cap the weights. You cap the percentage of a stock so that there is a better distribution curve. The index where capping has worked the best has been the FTSE (China-25). The first stop is at 10 per cent, the next at 9 per cent, the third at 8 per cent, and so on. So, you have a very smooth curve on the distribution side.
What will be the ideal liquidity?
Liquidity is always the first area. The fund manager should be able to deploy the money and buy into the market. That means he needs to have liquidity of stocks. We will be using international free float numbers. It’s quite important to use international numbers because if there are ownership restrictions or if stocks are heavily restricted due to domestic rules and regulations, we need to reflect that in our indices. FTSE indices are always designed for international investors.
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Is FTSE planning to launch some of its indices on MCX-SX?
Yes. There are a number of our indices in America and Europe which we can introduce here. For instance, FTSE-100 could be listed in the Indian market.
The European market will open while Indian markets are trading. How will this impact trading?
India is in an interesting position because it will be possible to have a product here that can trade during opening hours in Europe. It will be possible for Indian investors to trade before the European market opens. There will also be arbitrage opportunities between the two markets.
How do you plan to attract investors across the country?
MCX-SX has a number of ideas. We will try to incorporate our methodology and make them happen. There could be provincial indices, which have been quite successful in China. So, that is one of our courses of action. I think it is exciting and we have already some such examples. For instance, we can have a FTSE Gujarat index.
