NSE to NYSE !!

In a surprise response to my previous post, a lot of my peers have asked me how our exchanges can dream of going global, when after all they are 'desi'. One even quipped that beggars can't be choosers! But I stand firm with my belief and to prove my point, enlist the following things below, which could see NSE becoming another NYSE, along with the significant premise of India becoming a superpower.

Firstly, let me make it clear why I chose NSE over its bitter rival BSE. Ever since the launch of NSE and its electronic trading platforms, the BSE has been playing catch up all the while. So for me, amongst Indian stock exchange contenders, NSE comes above all. BSE has a lot to do to set its house in order.

Second, although NSE should dream global, it should currently set its target on regional dominance. In my opinion, the ideal strategy would be for NSE to try and spread its reach in the next 5 years or so by becoming the dominant stock exchange of the Indian subcontinent. The secondary capital markets of India’s neighbors are not known for their price discovery and liquidity. Thus, for the large firms in the subcontinent, which are looking for raising large capital NSE can be a more viable option instead of looking westwards.

The process of transforming the NSE to South East Asia’s major bourse will be a learning experience for the exchange and regulatory authorities. Many structural changes would be required, but these will only lead to the ultimate goal of being the world’s dominant stock exchange.

On the regulatory side it will require a lot of push and pull as well. This leads to my third point, about capital account convertibility. The foreign investment environment should be completely freed from any capital convertibility controls, which if present will be a big problem for expanding the NSE’s reach globally.

Fourth, its listing requirements will have to be adjusted from time to time, although I am bullish on the INR, it will be safe to assume that dollar could still be the unit of account. Looking at the short term i.e. in the next 7-8 years INR could continue to be in the listing norms and even the currency for transaction. Various macroeconomic variables in the future will decide whether INR will continue to be the global NSE’s transaction currency.

NSE should currently set its target on regional dominance... the dominant stock exchange of the Indian subcontinent... for the large firms in the subcontinent, which are looking for raising large capital NSE can be a more viable option instead of looking westwards.

Second on the regulatory radar and fifth overall, is the change in the accounting standards subjected to the firms listed on the exchange. Investor confidence is one of the fundamental requirements for building this global exchange. Therefore, a common measure to assess companies listed and the overall index products of the exchange would be facilitated by a recognized accounting standard. Maybe the IFRS or an evolved version the IAS; this only time will tell.

Sixth, we need to see rapid expansion on the products being offered by the NSE. Although it lost out to the Bombay stock Exchange for the country’s first IDR, this will serve as a rude wakeup call and set the ball rolling.  Foreign companies are looking for bullish and deep capital markets like India to raise money in the form of IDRs and foreign bond issues. NSE has to be ready to be able to provide that kind of platform and logistics to gain from the coming opportunity in times ahead.

Seventh, would be to build partnerships with other foreign bourses. NSE already has Nifty futures trading on the Singapore Stock Exchange, and just recently has tied up with the Chicago Mercantile Exchange for cross listing of index futures. Nifty futures will be traded on the CME, while the Dow Jones and S&P 500 futures will be traded on the NSE. The move is a step towards alignment to global markets.

This is a great opportunity for the clients in India who are looking for portfolio diversification. We have largely seen a homeward bias from clients so far, maybe because of a lack of opportunity from diversify, but I believe this will be beneficial for them in terms of their portfolios as well as having a global perspective.

The Hindu Business Line reported:

“According to market participants, trading in SGX Nifty futures has been happening almost a decade but volumes picked up only in the last couple of years. At the end of April 2010, open interest stood at 1, 91,741 contracts, which are 65 per cent more than a year-ago period, according to SGX. Trading volumes surged to 7, 79,641 contracts, which are 52 per cent higher over a year.

As part of the agreement, Indian rupee-denominated S&P 500 futures contracts will be listed for trading on the NSE and in return CME will list U.S. dollar-denominated contracts on India's benchmark stock index futures contract, the S&P Nifty.”

NSE faces many short term challenges and within them growth possibilities, which could very well decide its future. With an eye on global partnerships it needs to fend of a coming rival...

The National Stock Exchange (NSE) has signed a letter of intent along with London Stock Exchange (LSE) to evaluate cross listing of index products as well as explore joint strategic opportunities. Both the bourses have explored the possibility of a cross-listing agreement of their flagship indices.

While FTSE Group may license the FTSE 100 index to the NSE, the bourse would license the Nifty to LSE for trading option contracts. Initially, only Nifty options will be considered for listing at LSE as NSE already has licensed Chicago Mercantile Exchange (CME) for trading Nifty futures contracts.

Also recently, there were reports of NSE being in talks with Japan’s Tokyo Stock Exchange, exploring probably what reports suggested was cross listing of the two exchanges’ flagship index futures.

Eighth, NSE faces many short term challenges and within them growth possibilities, which could very well decide its future. With an eye on global partnerships it needs to fend of a coming rival, the Multi Commodity Exchange of India Ltd. It needs to fully exploit the growth potential in India before looking beyond its shores.

While researching online I found an interview of the CEO, NSE who was talking about his firm’s plans future plans in India:

“One is to go out increasingly to underserved market those that are smaller in terms of not being economically viable for intermediaries. To improve the economics of serving in those areas, they may try helping brokers by picking up the tab on public infrastructure. Increasingly, that will try to reduce the cost of commercial public infrastructure, so the brokers do not feel the disincentive to service them. That may bring in the so-called marginal investors.

Second, the derivatives arena will continue to evolve, unlike cash equity which typically moves at gross domestic product (GDP) plus (rates). The plus comes from some chunks of the unlisted economy becoming listed. Derivatives will continue to bring out newer products and services.

Third, the domestic institutional sector still doesn’t use derivatives. Domestic institutions are beginning to get used to these products. Mutual funds are beginning to use a bit but still a small proportion; that would increase.

Fourth, newer asset classes—currency, interest rates are classic products which really need hedging. Arguably, the two most important prices are currency and interest rates, but they are hard to hedge. That will build over a period of time.”