The National Stock Exchange of India sued Singapore Exchange in a Mumbai court, escalating a dispute that threatens to leave international investors without one of the world's most widely used offshore futures contracts.
NSE is trying to stop its Singapore counterpart from launching derivatives that could replace the Nifty 50 contracts that have traded in the city-state for 18 years. Global funds use these instruments to hedge their positions in one of Asia's biggest equity markets. Indian exchanges ended agreements that allowed offshore derivatives in February, leaving SGX and others scrambling.
"This is a big mess," said David Shin, Asia head of global equity derivative sales at TD Securities in Singapore. "I can't see how SGX would go through with the launch when this is in the air. There's a lot of gray here because if investors do trade the new contract knowing this legal case is out there, is there legal liability that cuts through to the investors of the new contracts?"
SGX, which announced the NSE's legal action in a statement on Tuesday, said it has "full confidence" in its legal position and would "vigorously" defend itself.
The Singapore bourse's stock tumbled on news of the lawsuit, falling the most since April 4. The Mumbai court is expected to hear the case on Wednesday, according to people with knowledge of the matter who asked not to be named because the details aren't public.
Officials at the Registrar General Of Bombay High Court were not immediately available for comment when reached on the office line.
"Investors having existing positions in SGX will be affected if the Mumbai court stays the start of the contract," said Devansh Lakhani, director at Lakhani Financial Services in Mumbai. "Investors with outstanding positions may have to book losses if they aren't able to rollover to the new contract."
NSE spokesman Debojyoti Chatterjee declined to comment. The exchange's move is another ratcheting up of tensions between bourses in India and Singapore amid efforts by the former to keep trading onshore.
China and Malaysia are among other emerging economies in the region that have taken steps to keep control of capital flows even as they push to further integrate into global markets. In India's case, it's been promoting a tax-free trading zone in Prime Minister Narendra Modi's home state, known as Gift City, as an alternative to offshore centers.
"The principal objective is to prevent India's turnover from being affected by overseas venues," said Gopalan Sridhar, a Singapore-based fund manager at Aquarius Investment Advisors. At the same time, "NSE is trying to increase access to international investors by increasing trading hours and allowing U.S. clients to trade."
U.S. regulators last week approved allowing NSE members to accept American customer funds for trading in futures and options contracts on the Mumbai bourse.
In a surprise announcement in February, India's national exchanges said they would end all licensing agreements with overseas bourses and also stop providing live prices. The international community responded with alarm and there was a rebuke from MSCI, with the index compiler calling the move anti-competitive.
Singapore has become a hub of offshore trading for many markets, including China, Japan and Indonesia. In response to the February action, many analysts cut their ratings on SGX's stock. The company's shares fell as much as 2.4% in Tuesday trading.
There were 1.65 million Nifty 50 index futures contracts traded on SGX in April, according to the exchange's data. While that was down 14% from a month earlier, it was still the third-most traded contract on Singapore's bourse, behind the FTSE China A50 and MSCI Taiwan offerings.
SGX said last month it would launch its own India derivatives in June even as it continues to evaluate a venture with NSE in Gift City. In its Tuesday statement, SGX said it's essential to maintain liquidity in overseas markets to connect international participants to Gift City.
"The case may drag on for years but it is the short-term decision which matters most," Sandeep Parekh, founder at Finsec Law Advisors, said by phone. "SGX will be in a problem if court grants a stay; if they don't grant it, then NSE will be in a bind — it is highly likely that NSE will terminate all its partnerships with SGX, including the proposed Gift City venture."