After analysing the participation in equity-linked Indian products trading on offshore exchanges, Kotak Institutional Equities (KIE) has concluded that Nifty futures offered by Singapore Exchange (SGX) enjoy advantages of time, cost and mitigating currency risks over the National Stock Exchange (NSE) .
The increasing popularity of the offshore product may threaten the price-setting status of NSE and lead to loss of regulatory oversight and foreign exchange, concluded KIE. It noted that while the open interest of SGX Nifty futures were already capturing nearly half of the cumulative open interest since CY12, a jump in the turnover in the offshore instrument in the recent past indicates that these positions are not passive in nature anymore.
"The significant jump in SGX Nifty turnover from $0.5 billion to $1.3 billion indicates a substantial loss of market share for the NSE, given that NSE Nifty futures volumes dropped from $2.2 billion to $1.8 billion during the period,” added KIE.
KIE further observed that SGX Nifty futures are overshadowing Nifty futures on NSE in terms of open interest, with the offshore instrument accounting for more than 70% of cumulative open interest . Given that SGX Nifty futures trade from 0600 hrs to 2330 hrs IST, they provide hedging opportunities for market makers on Indian equity-linked products even after the NSE has closed. Secondly, transaction costs for futures on the NSE are five times higher than those on the SGX.
The SGX Nifty instrument is US dollar-denominated and mitigates currency risk and hedging costs.