Sebi curbs on derivatives send FPIs overseas; SGX trades jump 150%

Mumbai: The recent curbs on derivative trading imposed by the Securities and Exchange Board of India to ease wild swings in the market has prompted foreign funds to move their equity derivatives bets from Mumbai to Singapore. Total number of Nifty futures contracts traded on the Singapore Exchange have jumped over 250% in March, while derivatives turnover dropped by over a quarter on the NSE during the month after the capital market regulator on March 20 brought in curbs such as restrictions on big trades including short-selling and enhanced margins. Brokers said lower costs and controls have pushed several Foreign Portfolio Investors to Singapore Exchange (SGX) where Indian derivatives are traded.

While the trading volumes in SGX Nifty, the most popular offshore product, have surged during March, data compiled by ET showed volumes in SGX Bank Nifty and SGX single stock futures too have doubled.

In March, over 30 lakh Nifty contracts traded on SGX compared to an average of 12 lakh contracts a month for the last one year. Also, the trading volume in March is 50% higher than February when 20 lakh contracts of Nifty traded. At NSE, the average daily turnover in derivatives market during April fell 34% compared to one-year averages while during March the fall was 24%.

Brokers said there is little incentive for foreign funds to do their F&O trades in India. The country already imposes 30-40% capital gains tax on derivatives along with other taxes including STT and stamp duty. Trades done on SGX aren’t subject to these taxes. FPIs are a key part of Indian F&O market since they contribute to about 20% of the total trading volumes.

“Whenever there is a big market event, the market volumes surge. However, in the current scenario volumes are declining in Indian F&O markets even as we are in middle of a Black Swan event,” said the head of a custodian business of a leading European bank. “Maybe it is a conscious effort by Indian regulators to lower volumes. However, the problem is when you lower the volumes by imposing curbs, it impacts liquidity and price discovery of a market,”

The shift in trading activity by FPIs from NSE to Singapore had led to Indian exchanges announcing in February 2018 that they would stop providing market data to foreign bourses by August 2018 as part of an attempt to prevent more of the domestic equity derivatives market from going offshore. After a legal battle for over a year, both exchanges reached an agreement that will result in NSE’s India-related products offered on SGX to be executed in the Gujarat International Financial Services Centre, or GIFT City.

Some brokers expect the restrictions to be extended beyond April 22—which is scheduled to be the last day of the curbs.

”Sebi has put in place certain additional risk management measures to counter any increase in market volatility,” said Sriram Krishnan, managing director, Deutsche Bank. “As and when stability returns, we can expect Sebi to go back to the normal framework and trading volumes onshore to recover,”

The actual trading volumes of Indian derivatives offshore could be much higher than what the SGX data shows, say market experts. There are several over the counter (OTC) contracts available with Indian securities as underlying. These contracts are not traded over any exchange and are managed by the large foreign institutional brokerages.