The Morgan Stanley Capital International (MSCI) has jumped into a fight it should have kept out of. The company, which is one of the biggest index compilers with nearly $9 trillion riding on the indices it generates, is now trying to lean on emerging countries like India for market access.
On Wednesday MSCI said it was placing Indian and Brazilian markets on notice for limiting investor access. The weights of India and Brazil markets could be capped on MSCI Indexes. The company also said countries like Turkey, South Korea, India, and Brazil restrict the use of local data in derivatives created by offshore exchanges. India, additionally, was faulted for a lengthy and burdensome mandatory registration process for foreign investors.
There is no doubt that the second part of the argument is true, as the registration process is never-ending.
However, as for market access, there are a number of issues involved here. Foreigners prefer to trade in rival exchanges mainly because of the cost of doing business. Take Singapore’s SGX for instance. First, investors get to trade in dollars, second, they pay lower taxes, and finally, the cost of transacting in India is much higher than in Singapore. Multiple layers of taxes by the central and state government plus the high cost of trading imposed by the exchanges themselves are prohibitive for high volume trades. SGX clearly scores over Indian exchanges when it comes to the cost of doing business.
But when it comes to limiting investor access, MSCI is way off target. The issue that MSCI has raised is the ongoing tussle between National Stock Exchange (NSE) and SGX where the latter uses NSE’s Nifty index to trade for 16 hours in a day, well after Indian markets have closed.
SGX Nifty is amongst the most traded futures contract on the SGX. However, many a time there is little or no synchrony between the two markets. Take for example on the day when Indian exchanges decided to cut all ties with the Singapore Exchange, the SGX Nifty fell by nearly 8.8 percent at the start of the day, the most it did since November 2008; however, the Nifty did not move in lock-step, suggesting that no arbitrage was happening.
As there is no underlying instrument in SGX it’s only traders who are attracted to the exchange. Investors, who deal in buying and holding stocks will not be keen in trading in SGX. Arbitrage opportunity, if at all will be possible only when both the exchanges are open simultaneously.
SGX is fine with this arrangement and is keen on only attracting speculative volume, or what is normally known as hot money. The exchange now wants to introduce stock futures on its own. As most of the volume in NSE is also in derivatives it is naturally disturbed by SGX entering in its territory. SGX wants to introduce the derivative contracts of stocks without paying NSE any fee.
To rub it in, the new index that SGX is planning to launch is a clone of Nifty. Reports say that SGX is considering allowing its SGX Nifty traders to roll over their position to the new index seamlessly after its contract with NSE expires in August. Normally there cannot be shifting of position from one instrument to another.
Perhaps MSCI sees an opportunity here to work with SGX and promote its own index. But MSCI is clearly coming on too strongly in the name of ‘limiting market access’. Indian exchanges allow shares of Indian companies listed abroad to be converted into Indian ones and traded domestically, after all.
MSCI’s Emerging Market Index has nearly $88 billion tracking it. India with its 8.3 percent weight has nearly $7.3 billion at stake. Many passive funds invest by using the 79 stocks MSCI India Index.
MSCI never complained of limited access all these years. But now it sees an opportunity is getting a derivative index traded without allowing its investors to take the currency risk. But in doing so it is setting a wrong precedent.
MSCI Chief Executive Officer Henry Fernandez is quoted as saying “It is expected that stock exchanges, which often have legal or natural monopolies, should not impose clauses in their provision of stock market data. The existence of these types of practices will lead to a negative assessment.”
In essence what the MSCI is trying to say is that it should be allowed to use the derivative data of any company and use it to be traded in any exchange. If it is not allowed to do so it will arm-twist the countries to fall in line with a threat of reducing their weight.
Access to economies should be seamless but cherry-picking financial instruments, that too derivative instruments is not helping the economies where the shares are listed. The companies whose derivatives are listed abroad do not benefit, either. The entire exercise just expands the casino.
India’s response should be to ignore the MSCI threat and focus on promoting the Gujarat International Finance Tec City (GIFT) where the NSE should relax its position and enter into a partnership with SGX. It would provide SGX its data, allow trade in dollars and make more money than it would by doing it on its own, thanks to the clients that SGX brings in.