An FII will have much to celebrate from the recent plans to introduce Nifty futures on the Chicago Mercantile exchange (CME). Any bad news on the US jobs data or GDP growth rates, and it could sell Nifty futures on the CME, during their waking time. Later, when the Indian market opens, it will reverse the positions and start selling its portfolio of stocks in the Indian market. It?s not that they couldn?t have done that before. In fact, Singapore stock exchange (SGX) has traded Nifty futures for ages, but it suffers from two things. One, its regional timing doesn?t give much leeway. It opens at 6:30 am Indian standard time and closes at 3: 45 pm. Indian stock markets close by 3:30 pm effectively giving a 15 minute extra leeway. In the morning though, they get two and half hours more.

Also, it suffers from poor volumes, leading to inefficient price discovery. So, for instance, if an FII had to offload $100 million worth of shares in the Indian market, it is unlikely it will find enough volumes in Nifty futures to do so at SGX. In the year 2009, volumes of SGX Nifty futures were just 4% of that of NSE. The daily average contracts were a minuscule 29,524 contracts as compared to 6,87,000 for NSE in 2009.

One Indian fund manager mentions that initially he used to get up early to catch the global bearish or bullish trend and bought and sold SGX Nifty futures. With three and a half hours difference between opening of SGX and that of Indian exchanges, it allowed some leg room. But not any more, as the gap has narrowed (NSE and BSE open an hour earlier), while volumes have also dwindled.

The advantage of having Nifty futures on CME would be that it would open shortly after Indian market closes, effectively allowing FIIs to take quick positions in Nifty futures based on developments in the US as well as Europe. While full details are not known about the exact timings of trading of Nifty index futures at CME, most of them trade for 23 hours, as per CME website. This effectively will allow them to price Nifty better as and when global news flows in. The catch though is that volumes should pick up to make it an effective hedging tool. Not to mention passing regulatory hurdles.

muthukumar.k@expressindia.com