NSE-SGX Connect: A Showcase Of India’s Technology And Rising Influence Of Its Stock Market
NSE-IFSC-SGX Connect is a one-of-its-kind link that will connect different markets as one trading platform.
While there is an existing Hong Kong-Shanghai connect, this is for the first time that two countries, India and Singapore, have come together to launch such a link. It will allow investors and trading members who traded in NSE-listed Indian securities through SGX to trade in these securities via NSE IFSC.
The NSE had struck a licensing agreement for Nifty products with the Singapore Stock Exchange. This caused the migration of foreign investors to SGX, increasing offshore trading of Nifty futures followed by Nifty options and stock futures and options. For more than a decade now, the NSE has tried to bring the offshore trading volumes for its products back to India. The Indian bourse then decided to stop sharing pricing data with SGX, prompting arbitration proceedings.
Bringing the two exchanges to the negotiation table, regulators including the Securities and Exchange Board of India, the Reserve Bank of India and Monetary Authority of Singapore charted a win-win situation in the form of NSE IFSC-SGX Connect.
The link will help in transitioning the liquidity pool away from Singapore to India's NSE IFSC in Gujarat's GIFT City.
However, this is not as easy as it seems, given the complexity of trading derivatives coupled with real-time settlement. India’s largest technology company, Tata Consultancy Services Ltd., was selected to enable this transition at the Singapore Stock Exchange. Following the launch of the connect on July 15 by Prime Minister Narendra Modi, nearly 40% of trades in India will run on TCS’s BaNCS technology platform.
“SGX is pioneering the creation of a new trading infrastructure in Gift City, that paves the way for trading of globally popular products such as the Nifty futures through the NSE IFSC platform,” said Tinku Gupta, senior managing director and chief technology officer at SGX.
It has to be seamless for participants, R Vivekanand, global head, BFSI platforms and products at TCS, said. “For the market participants in Singapore, they need to be able to work in a better way more seamlessly. They are going to pretty much trade on the same product," he said. "So, in a sense, it should be as seamless as trading at SGX. So, that is the kind of the system we are putting in place for them.”
“We have the TCS’s BaNCS trading solution that is getting deployed on the market participation side, so that the order management and risk management happens through our solution. And when the trades from SGX comes through, it will hit the NSE IFSC system here,” Vivekanand said.
However, one the biggest challenges for the connect is clearing of trades, which will take place at IFSC.
It has to ensure that there is a level of cross-margining (excess margin is transferred from account to another) and there is no loss of liquidity because of trading in two markets, said Vivekanand. Thus, they get to trade in two markets and more Nifty future products without the disadvantages of illiquidity, he said.
“The connect started testing negotiated bulk trades in May and has seen nearly 20-25% of the liquidity shift to India,” he said. “Volumes and value began inching up since mid-May, with June posting total value of trades at $25 billion.”
The connect will have eight futures and options products at launch.
While the technology is complex, trades will be cleared in NSE IFSC, Vivekanand said. “For Singapore, we have to bring the obligations together on the other side (SGX),” he said.
The netting will take place in Singapore as the money and cross-margining is in place at SGX, while the clearing will take place at the NSE IFSC, he said.
The two exchanges have to ensure that the obligation is complete and seamless to address and fork it over the two exchanges. This process will have real-time risk management including alerts and margining.
Investors on the Singapore Stock Exchange are allowed cross-margining across assets. This will be the first issue the new system will tackle since there is a change in the way investors will have to trade once the connect comes into force.
In clearing, too, there would be the need for some changes to the system as IFSC does not handle clearing of multiple buckets. So, obligations at IFSC and at Singapore need to be bought and settled together, seamlessly.
“The multi-broker model that we have will help segregate positions and has capabilities to handle solutions across asset classes,” Vivekanand said. Thus, "our solution also has other products that need not be changed much", he said, adding that the market just needs to get familiar with the products.
The two-country connect will also have a robust redundancy and disaster recovery sites across multiple levels. There is redundancy at the participant’s level, SGX level and NSE IFSC, with near and far location disaster recovery, Vivekanand said.
These systems come with the robust potential disaster recovery that is tested continuously. Both volatility and performance is tested, he said.
Currently, the connect looks only at transition liquidity of Nifty products traded in SGX to India’s IFSC. Nevertheless, the technology is available going forward for Indian investors and traders based in IFSC to trade on SGX products. Not now, maybe sometime in the future.