Traders are divided on the likely near-term popularity of the recently-launched CNX Nifty options on the Singapore Exchange (SGX) even as the Nifty futures on the SGX have seen a substantial increase in participation in the last three months.
?Due to lower transaction cost and an absence of the currency risk, there could be an eventual shift towards SGX options, especially that of the FII exposure entering the Indian market through the participatory note (p-note) route.? said Vijay Kanchan, head of institutional derivatives at J M Financial.
The SGX introduced the Nifty options since July 16 in its plan to ?enhance offshore investors’ access to the Indian economy?. The cumulative open interest in the active option contracts in the first week of its launch has increased to 10,321 contracts compared to 1,645 contracts on the first day of the trade.
The SGX has also signed up market-makers like BNP Paribas, Optiver Australia, Susquehanna International Group and Timber Hill to provide liquidity for the product.
According to a Vishal Jain, AVP, Equity Derivatives, the SGX options may gain popularity on account of cost advantage as well healthy activity in the underlying futures market. ?In absence of a tax liability like Securities Transaction Tax (STT), which is applicable to derivatives transactions in India, a pick-up in participation on the SGX platform is quite possible also as traders who have exposure in the Nifty futures get to hedge hedge their positions on the same exchange,? Jain added.
However, some traders opine that given the structural revival in the open interest of the Nifty futures on the domestic exchange (NSE) and eased uncertainty on General Anti-Avoidance Rules (GAAR), a meaningful increase in participation in the SGX Nifty options may not happen in the near future.
?Following some clarifications on the GAAR concerns, there has been a structural revival in the Nifty futures open interest on NSE, which hit a multi-year low of about 1.4 crore shares in June, to 2.8 crore shares. This shows that overseas investors still favour the domestic platform, which has ample liquidity,? said Savio Shetty, derivatives trader with Prabhudas Lilladher.
Since the start of April, amid uncertainty over the likely impact of GAAR on the participation of FIIs in Indian market, especially in the derivative segment, it was speculated that FIIs may choose Singapore as the preferred destination to execute their India-centric trade.
Accordingly, it was also contemplated whether the falling open interest in the Nifty futures on NSE indicates FIIs are relocating their derivatives exposure towards the Nifty futures traded on SGX Nifty.
Notably, for the first five months of 2012, the average open interest in the SGX Nifty futures was 5.27 lakh shares, 12% higher than that in the same period last year. At the end of June 2012, the open interest stood at 4.8 lakh shares.
