The current skirmish between the Singaporean and Indian stock exchanges could turn out to be a drawn-out war if an upcoming court battle fails to resolve the dispute.

The two firms have been locked in a legal dispute for months. In February, the three Indian stock exchanges—the National Stock Exchange of Indian (NSE), the Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange of India (MSE)—were asked by the Securities and Exchange Board of India (Sebi) to terminate their existing market data licensing agreements with foreign exchanges. In response, the Singapore Exchange (SGX) announced that it was set to launch derivatives contracts based on the NSE’s popular Nifty-50 index. 

The contracts were slated to be listed on June 4, but the Bombay High Court ordered an injunction on SGX’s new products being listed after they were challenged by the NSE. Indian authorities are concerned that foreign exchanges, such as the SGX, are benefiting from liquidity in Indian names that should be concentrated on domestic bourses.

At the heart of the dispute is whether SGX is legally able to use the end-of-day settlement reference prices in its Nifty derivatives, information that it says is publicly available. The NSE claims the use of those prices violates licensing rights. The two parties are set to hear an arbitration outcome by June 16, delivered by the court. However, Nikhil Narendran, a partner at India law firm Trilegal, believes it is unlikely that there will be a decision by that point.

“It depends on when the arbitration panel was constituted, but usually the timeline is around 12 months. However, we’ve also seen arbitration cases close in a couple of months as well, depending on how the parties push for it,” he says.

Nikhil adds that there was some confusion as to how the arbitration should take place. “They could have had an arbitration agreement between them saying they will arbitrate if something goes wrong with respect to a contract. Probably the arbitration agreement will still be in force, which is probably the reason why they’ve been asked to arbitrate,” he says.

He adds that the courts do not usually insist that third parties should arbitrate unless there is some agreement between the parties that they will arbitrate in the event a dispute occurs.

A source close to the SGX tells Waters that the exchange is doing what it can to ensure stakeholders—which now includes a “complicated” set of people onshore in India—understand that the NSE’s actions will cause “irreparable” harm to India’s liquidity if clarity on the matter is not conveyed appropriately.

Yet the problems run deeper than just perception and reputation; even if this particular case is solved quickly, there could be lingering animosity. The source says there are two aspects to the whole debacle: one is in ensuring that market maintains its order, which the source believes the NSE is ignoring this responsibility by jumping on SGX’s case so late into the game.

The other is that the abrogation of the licensing agreements by the Indian exchanges has attracted heavy criticism from the investment community. Index provider MSCI, in particular, has come out hard against the exchanges, requesting them to reconsider what it calls their “unprecedented anti-competitive action.” MSCI recently said that it will potentially cap the weighting of countries such as India, as well as Brazil, Turkey and South Korea in its indices, as a direct result of them limiting investor access.

The index provider also cited that the mandatory registration process for international investors required by the Securities and Exchange Board of India (Sebi) is lengthy and burdensome. MSCI will consult its clients and announce its decision by December 31, 2018.

“The [decision] that the NSE took is upsetting because it is like it’s calculated to cause maximum uncertainty,” says the source. MSCI’s announcement, in particular, has caused consternation among market participants who were already increasingly concerned by the nature of the fracas between SGX and NSE, says Lyndon Chao, managing director for APAC equities post-trade at the Asia Securities Industry Financial Markets Association (Asifma).

“If India does succeed in blocking SGX, the level of inconvenience created for foreign institutional investors, not to mention the perception that India is not open to multiple channel access, will impact decisions of organizations like MSCI, which reviews index allocations on a periodic basis,” Chao says. “We don’t live in a static world. It’s very dynamic. MSCI has a duty to serve their institutional clients. This includes them reflecting client feedback on how easy or difficult it is to invest in India and that’s going to inform and influence investors’ decisions.”

Data Copyrights

The initial court action was objecting to the new products the SGX was meant to launch on June 4. Instead, the Indian exchange filed for a pre-emptive injunction on the basis that the new products should also be licensed.

“They think the new products should also be licensed, so they have asked to hold back on listing the new products until they sort the licensing issue out on their end,” the source adds.

The SGX source says the NSE claimed the new products were passing themselves off as Nifty-50 products.

“Nobody believes that because the SGX was very clear in saying that the Nifty products would be delisted. NSE maintains that since the SGX requires a license for its new products, it should go through arbitration. The SGX is fighting whether there’s even a right to have arbitration or jurisdiction. There is no jurisdiction because there is no possibility of the new products relying on any license,” the source says.

However, a source close to the NSE argues the contract specifications of the new SGX India contracts are similar to the contract specifications of the existing Nifty and Nifty Bank futures contracts traded on SGX, with the only difference being in the description of final settlement price.

“The description of the final settlement price/reference value specified in the contract specifications clearly indicates to the closing value of Nifty 50 and Nifty Bank index respectively without referencing the index names,” says the source.

The source adds that SGX’s approach is “detrimental” to Indian markets as both the Indian government and regulators will not have any information access or regulatory oversight on these products.

Shifting price discovery of Indian assets to “unlicensed products” in an offshore jurisdiction may also lead to illiquid domestic markets. This could result in lower foreign portfolio investment in Indian capital markets, which will adversely impact macroeconomic factors, such as the current account deficits of India, the source adds.

“A diverse category of participants is a must for maintaining good liquidity in the markets. Currently, Indian markets have well-diversified participation from retail investors, domestic institutional investors, foreign investors and prop desks. With the alternate liquid venue, the foreign investors may prefer to transact in offshore markets. This will lead to illiquidity in the onshore markets, thereby further impacting the efficient price discovery for Indian investors,” the source says.

As to whether SGX’s new products violate data copyrights, Nikhil says it depends on where the stock exchange is gathering settlement data from. “Let’s say it gathers data from existing sources out there in the public, one cannot say it’s copyrightable. But if it’s obtaining data from a source which is unique to the source where it’s coming from, then that’ll be a copyright infringement. To my mind and my expertise in dealing with IP [intellectual property] matters, if it’s gathered from public sources it’s unlikely that it’ll be protected under copyright.”

Nikhil continues: “Now, let’s say NSE is giving out this information to another party on the condition that they’ll keep [it] confidential or they won’t let it out and that data gets leaked, then that’ll become a copyright infringement… or more of a breach of confidence. Also, a copyright will exist in the form of how it’s presented.”

The source close to the SGX adds that the new products are based on other futures, and not on an index. “It’s a well-understood method. According to US and European case law, the legal standing in what SGX is doing is impeccable. The NSE’s claim that the new products should be licensed is a legal trick to cause uncertainty. Facts are not copyrightable, and it’s not protectable under license. The final settlement price of a future that’s publically available is a fact,” the source adds.

The point about SGX’s plans being legally “impeccable” is debatable, although it is true that a similar case has been brought before US courts in the past.

In a 2002 court case between the New York Mercantile Exchange (Nymex) and the Intercontinental Exchange (ICE), where the former sued the latter for usage of its settlement prices in over-the-counter (OTC) derivatives contracts, Nymex claimed it held copyrights on individual settlement prices, and that ICE had misused its property for its swap contracts.

The judge in the US district court terminated the lawsuit in 2005 on the basis that Nymex’s settlement prices were not protected by copyright law, and that ICE had not infringed on any copyright or trademark in referencing Nymex’s publicly available settlement prices in its OTC derivative contracts. The US Supreme Court, in 2008, declined to hear further appeals.

A managing director of Asia-Pacific equities at a bank says this ruling could support SGX’s case. “It seems there is a precedent with the Nymex-versus-ICE ruling to support SGX that there is no intellectual property rights angle for settlement prices,” the managing director says.

Given that the case was heard in the US, however, a New York-based attorney tells Waters that the judgment would in no way be binding on Indian courts. “It could certainly be persuasive, particularly if those exchanges want to do business in the US, but ultimately variances in Indian law will be what informs the judgment there,” the attorney says.

Regardless of precedent and persuasive past cases, one inalienable fact remains: as the SGX is not under India’s jurisdiction, the injunction technically is not enforceable in Singapore. While it could have decided to act in its own interest and gone ahead with the launch, it decided to go through arbitration with the NSE to iron things out and ensure “maximum” clarity for its clients, the source says.

They add there has been a direct line of communication with the NSE, and the Indian exchange knew about SGX’s intention to find a replacement product for its clients to transition as the SGX Nifty 50 family of products is retired.

Prior to this whole debacle, both parties were in talks to build a trading link via Gujarat International Finance Tech City (Gift City) similar to the stock connects between Hong Kong, Shanghai, and Shenzhen. “They wanted to build a connect in three-to-six months, and obviously this is not possible. These things take years to build. It involves different regulators, brokers, and the whole investment community. It just isn’t possible. The process takes a long time,” says the source.

Immediately after NSE decided to pull back on its data license, the SGX knew it had to find a continuity solution so its investors could continue managing their risk, so it came up with the new products—SGX India Futures, SGX Options on SGX India Futures and SGX India Bank Futures.

“Without this, what is the point of building a bridge to Gift City? There is no point if there isn’t going to be any liquidity offshore to migrate onshore,” the source adds. Others agree. Asifma’s Chao says that India is sending mixed signals by shuttering its foreign licensing agreements while simultaneously trying to partner with foreign entities to attract investment.

“The more channels you build up, the easier it is for investors to gain access to your market. So, what India is doing is really counterproductive. It’s trying to establish Gift City but at the same time the message it is sending to investors is that it’s closing more channels than it is opening up,” he says.

Saving Grace

Perhaps one thing India has going for itself is the US Commodity Futures Trading Commission’s (CFTC) decision to—through its Foreign Part 30 exemptions program—provide US customers with increased access to the futures traded on the NSE.

In addition, Sebi has extended trading hours till 11:55 PM in equity derivatives, thus making Indian markets accessible across all time zones.

Asifma’s Chao says it is fortunate for India that US funds are no longer prohibited to invest in India single-name-stock futures, due to a recent no-action letter issued by the CFTC.

“Typically, US funds have restrictions with which to where they can or cannot invest and with this CFTC letter, they are no longer restricted against investing in India single name stock futures. This helps remove a longstanding impediment for direct investment onshore,” he adds.

Chao says the big picture in all of this is really what the clients want.

“In the end, it’s all about them, the customers are always right. As much as the NSE is trying to push foreign institutional investors to come onshore—and they’re trying to do this through Gift City—the fact is they simply haven’t built a robust and an efficient enough market infrastructure for that to happen just yet. But the offshore channels are providing that access to foreign institutional investors,” he says. “India is risking the allure of its own market by taking away that offshore access. Liquidity is just like water. The more you try to grab it, the more it will flee from you.”

If NSE wins its case and the SGX does not get to launch its successor products to the SGX Nifty 50 family of derivative products, there may be some impact on foreign investment into India. Investors need convenient hedging tools to get comfortable investing in markets, he says.

As for the SGX, Chao says what it could do in response to a negative outcome is to continue to find opportunities to arbitrage the inefficiencies of other markets and provide an alternative platform with alternative products that would provide easier access to investors to that specific market, with low trading frictions—even if that involves resurrecting failed initiatives. “If their newly-launched India products get cut off, for example, maybe they can re-explore the Asean trading link,” he adds.