To enable Indian investors take positions in every top world market at a low cost.
The National Stock Exchange’s (NSE’s) deal with the London Stock Exchange (LSE) for working out a joint business strategy is significant in many ways.
If the deal happens, NSE’s equity benchmark index, S&P CNX Nifty, will become a globally traded contract. Also, NSE will be able to offer a basket of top traded global indices once the FTSE 100 index is listed on its floor in India. The idea is to allow Indian investors take positions in every top world market at a low cost.
NSE already has a licence to list Dow Jones Industrial Average and S&P 500 through its alliance with the Chicago Mercantile Exchange (CME) and the process to list them in rupee-denominated contracts is on. FTSE, as a independent company, manages over 1,20,000 equity, bond and alternative asset class indices and its owned by LSE and Financial Times. FTSE 100 is among the top ten popular stock indices along with S&P and Dow Jones globally.
Other stock exchanges have taken the cue. The Bombay Stock Exchange (BSE) has tied up with the Deutsche Boerse Group, a strategic investor in it, to explore cross-listing of indices and other products.
“While NSE will have an edge due to its dominant position in derivatives at home, the cross-listing of indices in the US and Europe, the world's largest derivatives hubs, will change the market dynamics,” said an analyst.
The details of these alliances gives an understanding of how cross-listing of Indian indices in Europe and the US will help both NSE and BSE increase their reach and market share.
In the US, the Nifty is traded on CME Globex, the most widely-distributed electronic trading platform in the world. It is the largest hub for derivatives in the US and the second largest globally. This will help NSE increase its reach as the CME Group has ties with Brazil’s Bolsa de Mercadorias & Futuros, Bovespa, Bursa Malaysia, Dubai Mercantile Exchange, KRX Exchange of Korea, Paris Bourse SBF SA, Montreal Exchange, Spain’s MEFF and SGX (Singapore Stock Exchange).
The members of all these exchange get several trading privileges in terms of direct access and cross-margining. For instance, CME positions in Nifty futures can be offset on SGX and vice versa. Also, OneChicago, the electronic platform which is a joint venture of IB Exchange Corporation, the Chicago Board Options Exchange and CME, is a unique example, as members of three owner exchanges are automatically members of OneChicago and there are no separate membership fees for trading.
Interestingly, the BSE's benchmark index, Sensex, would have a greater reach in Europe. The derivatives exchange market there is dominated by Eurex, controlled by German operator Deutsche Boerse and SIX Swiss Exchange. Eurex dominates trading in derivatives on indices such as Eurostoxx 50, Dax and SMI Swiss index, as well as German and euro zone equity options on single stocks. Its global liquidity network comprises around 410 direct exchange members in 25 countries.
The second-largest player in derivatives market in Europe is Liffe, owned by the NYSE Euronext. NYSE Liffe dominates the market for UK equity options and options on stocks offered on the Euronext markets.
LSE, with which NSE is seeking an alliance, is ranked a distant third behind Eurex and Liffe. At present, LSE's derivatives operations are centred around Italian exchange IDEM and its London-based Russian derivatives exchange, EDX.
LSE chief Xavier Rolet is banking on regulatory changes that will put the $615-trillion over-the-counter derivatives onto exchanges. LSE will launch equity derivatives on a new trading system provided by TMX Group, the Canadian exchange operator, where it is believed Nifty options too will be traded.
On BSE, if top management officials are to be believed, the basket of indices will include top German index DAX, Europe’s leading blue-chip index, Eurostoxx 50, and SMI Swiss Index, which comprises 50 largest stocks of the Swiss equity market. BSE sources also confirm the exchange is in talks with other major index family owners in Europe to list them in India.
While both NSE and BSE have an edge over the upcoming MCX-SX as some of their tie-ups are exclusive, it remains to be seen who will patronise NYSE, one of the oldest and largest US exchanges. NYSE is closely watching the developments in the Indian exchange space after recently selling its five per cent stake in NSE, as the latter joined hands with its rival in the US. However, the scope for NYSE to form an alliance with an Indian exchange is quite narrow It has already sold its stake in NSE and can only join hands only with BSE.
Meanwhile, the deal between MCX SX and FTSE to jointly develop products is in limbo, as the former battles it out in court with the Securities and Exchange Board of India for permission to operate as a full-fledged stock exchange.
