NSE-IFSC-SGX Connect is a one-of-a-kind link that will connect different markets into one trading platform.
Although there is a Hong Kong-Shanghai connection, this is 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 have traded NSE-listed Indian securities through SGX to trade those securities through NSE IFSC.
The NSE had entered into a licensing agreement for Nifty products with the Singapore Stock Exchange. This caused foreign investors to migrate to SGX, increasing offshore trading in Nifty futures followed by Nifty options and equity futures and options. For more than a decade now, the NSE has been trying to bring offshore trading volumes of its products back to India. The Indian stock exchange then decided to stop sharing pricing data with SGX, prompting an arbitration proceeding.
By bringing the two exchanges to the negotiating table, regulators including the Securities and Exchange Board of India, the Reserve Bank of India and the Monetary Authority of Singapore have charted a win-win situation in the form of NSE IFSC- SGX Connect.
The link will help transfer the liquidity pool from Singapore to the Indian NSE IFSC in the GIFT city of Gujarat.
However, this is not as easy as it sounds, given the complexity of derivatives trading coupled with real-time settlement. India’s largest technology company, Tata Consultancy Services Ltd., has been selected to facilitate this transition to the Singapore Stock Exchange. Following the launch of the connection on July 15 by Prime Minister Narendra Modi, almost 40% of transactions in India will take place on TCS’ BaNCS technology platform.
“SGX is pioneering the creation of a new trading infrastructure in Gift City, which paves the way for trading globally popular products such as Nifty Futures through the NSE IFSC platform,” said Tinku Gupta, Senior Managing Director and Chief Technology Officer at SGX. .
It should be transparent to participants, said R Vivekanand, global head of BFSI platforms and products at TCS. “For market participants in Singapore, they need to be able to work better in a more transparent manner. They will pretty much trade on the same product,” he said. “So in a sense it should be as seamless as trading at SGX. So that’s the kind of system we put in place for them.
“We have TCS’s BaNCS trading solution being rolled out on the market participation side, so order management and risk management is done through our solution. And when transactions from SGX come in, they will reach the NSE IFSC system here,” Vivekanand said.
However, one of the biggest challenges for the connection is the clearing of transactions, which will take place at the IFSC.
He must ensure that there is a level of cross-margining (excess margin is transferred from one account to another) and that there is no loss of liquidity due to trading on two markets , said Vivekanand. So they can trade two markets and more shrewd future products without the drawbacks of illiquidity, he said.
“The connection started testing wholesale transactions traded in May and saw almost 20-25% of the liquidity shift to India,” he said. “Volumes and value have started to increase since mid-May, with June posting a total deal value of $25 billion.”
The connection will have eight term products and options at launch.
Although the technology is complex, transactions will be cleared in NSE IFSC, Vivekanand said. “For Singapore, we need to bring the bonds of the other side (SGX) together,” he said.
The clearing will take place in Singapore as the money and cross margins are in place at SGX, while the clearing will take place at the NSE IFSC, he said.
The two exchanges must ensure that the obligation is complete and transparent to address it and distribute it on the two exchanges. This process will have real-time risk management, including alerts and margins.
Investors on the Singapore Stock Exchange are allowed to cross-margin on all assets. This will be the first issue that the new system will tackle, as there is a change in how investors will have to trade once the connection goes live.
Also in the area of customs clearance, some modifications to the system would be required, as the IFSC does not handle the clearance of multiple buckets. Thus, bonds in the IFSC and in Singapore must be bought and settled together, in a transparent way.
“The multi-broker model we have will help separate positions and has the ability to manage solutions across all asset classes,” Vivekanand said. So, “our solution also has other products that don’t need much modification,” he said, adding that the market just needs to get familiar with the products.
The connection between two countries will also have robust redundancy and tiered disaster recovery sites. There is redundancy at the participant level, at the SGX and NSE IFSC level, with nearby and remote disaster recovery, Vivekanand said.
These systems come with robust disaster recovery potential that is continuously tested. Volatility and performance are tested, he said.
Currently, the connection is only for the transition liquidity of Nifty products traded in SGX to the Indian IFSC. Nonetheless, the technology is available in the future for IFSC-based Indian investors and traders to trade in SGX products. Not now, maybe in the future.