February 13, 2018

On 9 Feb 2018, the National Stock Exchange of India (NSE), Bombay Exchange (BSE), and Metropolitan Stock Exchange of India (MSEI) announced the end of licensing of their indices and securities, or providing data to foreign exchanges. This came after SGX said in Jan that it would start offering single-stock futures (SSFs) benchmarked to Nifty 50 companies, and is part of India’s move to bring trading liquidity back to its home bourses.

Singapore is a popular offshore market for Indian derivatives, namely through its SGX Nifty 50 index futures, which currently account for 40% of overall Nifty futures turnover (remaining share with NSE) and c.70% of open interest. While there would not be any material impact on SGX’s FY6/18F earnings (under the agreement with NSE, there will be a notice period of 6 months till Aug 2018 at least), we project potential earnings gap from FY19F onwards as its other new initiatives take time to ramp up.

The Nifty contracts made up 12% of total derivatives volume in FY17, and contributed an estimated 10% of derivatives’ revenue (4% of total topline). In our scenario analysis, we assume the loss of entire Nifty contribution at various average clearing fees, which could lead to a potential 2-11% decline in FY19-20F earnings. We note that there are possible areas for cost savings from the decrease in trading volumes, while the absence of royalty fees from Nifty products will result in lower royalty costs to NSE.  on We adopt the base case scenario, and cut our FY19-20F EPS by 7.7%. Hence, our target price falls to S$7.85 (still pegged to 24x FY19F P/E, its historical mean). We downgrade from Add to Hold as we expect near-term share price to be weighed down by the uncertainty from this licensing change. Stronger pick-up in other trading products and market sentiment could pose upside/downside risks to our call.

To mitigate the potential earnings loss from this new restriction and protect its Nifty franchise, management is looking to develop more sustainable solutions with NSE’s International Exchange in Gujarat International Finance Tech City (GIFT), and launch new products, which would be announced in due course. SGX also believes that its SSFs on Indian equities could be exempted as they are neither subject to the same licensing requirements, nor part of any index.

This licensing restriction will not only affect SGX, but also other exchanges in Chicago and Dubai where Indian derivatives are traded, as well as index providers like MSCI. Given India’s 8.4% weighting in MSCI Emerging Markets Index, we suspect there could be greater ramifications, including demand disruption from international funds. Downgrade to Hold with a lower TP of S$7.85 by CIMB. Share price closed at S$7.300