life in financial markets: it kicks off at last. a global equity product on nse

In my 19Aug09 blogpost I had broken the news of how NSE was very close to introducing a global equity product on its domestic trading platform.

Well, the news has broken now. Read below yesterday's (Wednesday, 10 March 2010) joint press press release of NSE and CME (Chicago Mercantile Exchange). It talks about NSE being licensed the use of S&P 500 index and Dow Jones Industrial Average index in futures contracts (only, options contracts not yet) on the two indices in its equity derivatives trading segment, and NSE's Nifty index being licensed to CME to use in futures (only, options contracts not yet) contracts in CME's equity derivatives trading segment.

So, Indian investors will be able trade in futures (but not options) on S&P 500 and DJIA and American investors will be able to traded in futures on Nifty index.

Although the new products are welcome I am disappointed that it is the only two. I would love to trade through a NSE broker on the NSE trading platform international ETFs (exchange traded funds), particularly the ones on green energy. NSE needs to tie up with other index providers and exchanges where those ETFs are listed and traded.

The CME-NSE press release:

Stock Exchange of India (NSE), the largest stock exchange in India, and CME Group, the world's leading and most diverse derivatives marketplace, today announced cross-listing arrangements, including license agreements covering benchmark indexes for U.S. and Indian equities. The parties have also entered into a Memorandum of Understanding with respect to other areas of potential cooperation, including related to development and distribution of financial products and services.
Under the cross-listing arrangements, the S&P CNX Nifty Index (the Nifty 50), the leading Indian benchmark index for large companies accounting for 22 sectors of the Indian economy, will be made available to Chicago Mercantile Exchange (CME), for the creation and listing of U.S. dollar denominated futures contracts for trading on CME, and the rights to the S&P 500® and Dow Jones Industrial Average™ (DJIA®) will also be made available to NSE for the creation and (subject to regulatory approval) listing of Rupee-denominated futures contracts for trading on NSE. The license to the Nifty 50 from NSE's affiliate India Index Services & Products Ltd. (IISL), which is exclusive to CME Group within the Americas and Europe, is in addition to the existing licensing arrangement between Singapore Exchange Ltd. (SGX) and IISL. The sublicenses to the S&P 500 and DJIA indexes, which are exclusive to NSE for Rupee-denominated futures contracts traded within India, are being made available via sublicenses from CME Group and each of Standard & Poor's and Dow Jones, respectively.
"Indian financial markets have gone through a phase of rapid growth in the past few years," said Ravi Narain, MD & CEO, NSE. "Our products are traded by institutional investors worldwide, making the Nifty 50 one of the more widely traded global products. This association with CME Group will make the Nifty 50, and, over time, potentially other products across various India-related asset classes, available to a much larger community of traders and investors. At the same time, investors in India will have access to new exchange traded products that reflect some of the world's most widely traded equity indexes. This will improve portfolio choice for Indian investors by widening the array of assets that they can hold in their portfolios."
"These agreements with NSE, India's largest stock exchange, represent another example of CME Group's commitment to expand our global offerings and services to our customers," said Terry Duffy, Executive Chairman, CME Group. "These arrangements will allow us to expand on our benchmark equity index product suite and provide our customers with access to a futures contract that is based upon the leading benchmark index reflecting the Indian equity markets."
"Our new partnership with NSE is an integral part of our global growth strategy," said Craig Donohue, Chief Executive Officer, CME Group. "In addition to our existing partnerships or investments in Brazil, Dubai, Korea, Malaysia, Mexico and Singapore, our NSE partnership will further expand our customers' access to the most actively-traded foreign markets, while also increasing access for global investors from within these regions to CME Group products and services. As the world's 12th largest and one of the most rapidly growing economies, India is an important part of our efforts to develop strategic partners in key growth markets."
"We see this as a very exciting development that marks the coming of age of Indian financial markets," added Mr. Narain. "This will go a long way in achieving our vision of supporting economic growth in the country by making Indian financial products available globally and meeting the needs of our investor community for global products."
"S&P Indices has a successful, twenty-seven year relationship with the CME Group in the U.S. futures market, and a strong ten year association with the NSE in developing stock market indices in India," says Alexander Matturri, Executive Managing Director at S&P Indices. "We are certainly pleased to be working with both of our longtime exchange partners to help Indian investors gain greater access to the U.S. equity markets as determined by the S&P 500, an index with nearly $1 trillion directly indexed to it."

life in financial markets: unviable Sebi's new small companies' listing rules

It looks like it is doomed to fail.

The latest Securities and Exchange Board of India (Sebi) move to allow listing of small IPOs of paid-up equity capital of Rs 10 crore and less on existing stock exchanges had been in the offing for about two years.

Such small IPOs were already possible under BSE's listing norms but had to comply with difficult requirements such as minimum revenue of Rs 3 crore in each of preceding three years and a 1,000 minimum public shareholder requirement.

These restrictions won’t apply under the new relaxations for the BSE. Even the NSE, that presently has a minimum paid-up capital requirement of Rs 10 crore for IPOs, will be able to list small companies.

But two new conditions that Sebi has introduced are expected to discourage small-size IPOs. These are the minimum IPO application size amount of Rs 1 lakh and a post-listing minimum trading lot size of Rs 1 lakh. These are expected to take away liquidity in trading and scare away even the big investors and institutional investors.

life in financial markets: trading hours on india's stock exchanges

There are no clear answers to the question on whether trading hours on stock exchanges should be long or short, but, I, for one, would like it to be as long as the stock exchange is able to offer it after ensuring that its risk-management system is be able to handle it. In India, for instance, the NSE or BSE can keep its trading system on for few hours in the morning-afternoon and a few hours in the late evening. For settlement purposes, each batch's trades should be cleared and settled separately on T+2.

Anyway, here is something I wrote in the magazine I presently work on the subject:

Missing the woods for the trees
If you open the door, open it fully. That is the message from some market observers on Sebi’s green signal to the stock exchanges to keep their trading system open any time between 9 am to 5 pm and extend their timings before and after the current 9.55 am – 3.30 pm regime.
The NSE had been lobbying hard to start their trading earlier in the morning due to gradual loss of global investors’ trading volume in its Nifty futures contract to Singapore Exchange’s Nifty futures contract that had a 2-hour head start due to the time difference between the two countries.
But domestic brokers and investors, wanting to use European and US markets developments in their trades in India, would be better off if NSE or BSE offers them a late evening trading hours slot.
“Exchanges ought to be free to decide their trading hours,” says Ajay Shah, associate fellow at the National Institute of Public Finance and Policy. “It is wrong for the regulator to control this.” We second that.

life in financial markets: wild west among india's equity brokers!

In the last one month or so, the National Stock Exchange has been publishing ads in newspapers alerting readers (who would be investors in the stock market) about the role of Power of Attorney (PoA) that they hand over to brokers.

I am amused. The NSE is spending a lot of money in these ads. Instead, it can spend one-tenth of it by just auditing the records of 5% clients of its top 20 brokers (by number of clients) and checking the PoA documents signed by the investors and handed over to brokers. These lie with with the broker and NSE has regulatory powers to inpsect any broker's records.

But as I said in a post earlier this month, the stock exchanges are amazingly loathe to take any tough action against its brokers.

Anyway, the NSE ad reminded me of a story I had written last year and submitted, in December 2008, to the magazine I work for, for a potential new, but undecided, specialised and frequent section in the magazine.

That story talked of the dangers of the documents that investors were being forced to sign by brokers and DPs. Here is that story:


One-sided agreements

Its a wild west out there among brokers and DPs. Put on your Client Eastwood hat to take them on.

The underlying principle behind legal agreements is that they protect the rights—and spell out the obligations—of ALL the parties to the contract or agreement. The stock market has its share of legal agreements but they are getting increasingly opposed to the rights of you—the investor.

To carry out your investment activities in equity shares you have a trading account with a NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) broker and a demat account with a NSDL (National Securities Depository) or CDSL (Central Depository Services) depository participant (DP). The legal umbrella is the client-broker and client-DP agreement. Willy-nilly you sign them.

Well, this umbrella is leaking. What's worse is that brokers are making you sign various authority letters and powers of attorney. We take a look at these legal agreements to see whether they offer you protection or potential hazards.

Client-broker agreement. In the last seven years, brokers have almost resorted to incorporating all kinds of clauses that are heavy on your obligations but feather-light on the broker's. More than 95 per cent of them dwell on your do's and don'ts and the remaining tiny portion is on jurisdictional and dispute issues. This wasn't the case two years ago. Then, these agreements contained specific clauses on broker's obligations to deliver shares and pay funds within 24 hours of settlement pay-out to the client and dispatch of contract notes within 24 hours of the trade. Such clauses have performed the Houdini act. In their place have come new ones that are nothing but a sleight of the hand for investors.

The NSE and BSE have been mute witnesses to the mutation of this crucial legal document. Pick up any agreement of any big broking firm and one sees this new trend. Although exchanges' rules and regulations also define the rights and obligations of broker vis-a-vie their interactions with investor-clients, not-so-savvy investors are not likely to know the existence of these and therefore vulnerable to being taken for a ride by some unscrupulous brokers. Their brokers will point to the agreement and say "See! Your complaints are not covered here. So chill!" The chill should have been going down the spines of the officials of the inspection department on uncovering such agreements during their yearly sojourn of brokers' offices. But so far the two exchanges have chosen to ignore this investor-related area in their regulation of the markets.

Irrevocable power of Attorney. The rolling settlement cycle got shortened to T+2 from April 2003, and since then there has been pressure on you to pay funds or deliver shares to your brokers on time. Taking advantage of this situation many brokers today coerce you to give them your irrevocable power of attorney (PoA) to manage your demat account (and with some brokers whose associates are banks even your bank account) so that you are saved from the effort of handing debit instruction slips to your DP against your sales on time. These PoAs also go further to include your investments in mutual funds, government securities and other securities through the broker who could be an authorised mutual fund agent and investment agent to government agencies.

But the problem arises when you are given no other option but to give your broker or DP such a PoA. Says the NSE official: "As far as any authorisation is concerned the investor has got complete freedom not to give it and the broker can't refuse service on that ground. Brokers' internal arrangements can not override our or Sebi rules."

This would be reassuring if the reality reflects it. But walk in to any office or branch of a large- or medium-sized brokerage firm and enquire about opening a new trading account and demat account with either of them and you will find their representatives clearly telling you that if you do not sign on the POA, they will not process your application form at all. A majority of brokers do this and NSE and BSE do nothing about it. This is despite alternative solutions made available by NSDL and CDSL enabling investors to move shares through the internet. Brokers and DPs are stingy in informing their investors of such an alternative solution.

What makes matters worse is that the PoA does not specify that it will be used only for settlement for trades done through the broker. They give unhindered and all-pervasive rights to the broker to do what it wants to with your demat account including making off-market transfers. Where the PoA confers rights to your broker to operate your money account with certain specified banks then your entire savings account balances are at risk if there is malfeasance committed by any official of the broker. The chances of this are not exactly remote because in most PoAs the brokers are also conferring upon themselves the right to choose one or more substitutes, that is external persons, to execute the rights under the PoA. Potentially it could really become a wild west out there.

In the past even DPs used to take PoAs. In November 2005 NSDL detected anomalies in the account-opening process of one of its DP, Indiabulls Securities, wherein not only the PoA was made mandatory but it took away all rights of the investors to operate their demat account and only the DP retained that the right. Taking a cue from its inspection of Indiabulls NSDL ended up issuing a circular to all DPs to discontinue with the PoA compulsion and desist from doing four things through the PoA – (i) restraining the investor from operating his demat account, (ii) denying delivery instruction slip books, (iii) merging shares kept under various client accounts and (iv) having a lien on the clients' shares.

Other authorisations. Many brokers additionally take an authority letter to maintain a running account wherein the broker keeps the shares you bought or the funds received against your sales unless you ask for it in writing to be returned to you. This too is being forced upon investors.

On 3 December, posing as an investor, this BW reporter walked in to the Annie Besant Road (Worli, Bombay) branch of LKP Shares & Stock Brokers, and enquired with an official, Jolly Shah, about wanting to open a trading account and a demat account. On asking, she showed the documentation docket that included the client-broker agreement but also included a set of documents termed as 'Voluntary documents'. The first document in the 'Voluntary documents' was that of a running account authorisation. This reporter asked her whether it was a must for him to sign that document she said 'Yes'. On questioning how LKP is making it compulsory for investors to sign on a 'Voluntary document' she took offence and did not answer.

Both the exchanges are not taking action against the scores of brokers who are subtly but surely forcing the signing of documents that according to NSE's rules and regulations they can't force any one to sign. The running account authorisation is pernicious because under it the broker gets to retain the shares or funds for almost any reason or even without a reason when the investor buys or sells shares. As per NSE's and BSE's rules the broker has to transfer the shares/fundswithin 24 hours of the pay-out. The forced running account authorisations are violating this important exchange rule. BW queried both the exchanges but did not receive any response.

As an investor you can complain to the stock exchange if you have similar experiences. If it's with a NSE broker write to cc_nse@nse.co. if it's a BSE one write to corporate.affairs@bseindia.com. Safe investing!

life in financial markets: self-inflicted powerlessness

Since the last 10-12 years, as I have been covering the financial markets as a journalist, I have noticed that stock exchanges and depositories do not use the full force of their rules, regulations and bye-laws to reduce incidences of fraud or serious negligence by their member brokers and depository participants (the intermediaries).

There is a mix of two reasons -- one, their own lack of willingness and two, the capital market regulator's (Securities and Exchange Board of India's) un-spoken arrangement with them that they pass on suspect cases to itself and it will take action. The second factor leads to a monopolisation of regulatory power and that, according to me, is not good. Sebi is not at all an efficient and honest regulator. More often that not, it goes after the small fish or the wrong ones! The big ones and the real brainchild behind fraud and scams are very very rarely caught.

Anyway, I wrote something (in the magazine I presently write for) on New York Stock Exchange's recent against its brokerage firm, Citigroup Global and compared that with the Indian scenario. Here it is:

Revelation

When the New York Stock Exchange, on 7 October, transparently levied hefty fines on three of its member-broker firms, including Citigroup Global Markets, for market rules violations it was an implicit message to its Indian counterparts to get similarly transparent and tough.

Citigroup paid a consent term amount of $150,000 to NYSE for violating the cut-off time restrictions on 'market on close' orders and 'limit on close' orders several times during 2007 and this year.

The National Stock Exchange and the Bombay Stock Exchange have never made public any penal action taken against any of their broker-members for rules violations. The Securities and Exchange Board of India (Sebi) does take such action but under consent orders filed by intermediaries to settle these cases, Sebi does not disclose the details of the violations.

No details of violations such as date or dates and trades are revealed in Sebi's consent orders using which market intermediaries are able to hide their spurious actions under the carpet. A leaf from NYSE's book is, therefore, worth taking.

life in financial markets: coming soon -- a global equity-based product on the NSE?

Today, if an Indian small individual investor, such as me, wants to invest in global ETFs and securities I hardly have much option other than go through icicidirect.com (which is the only one that does not demand a minimum Rs 5 lakh worth of initial global investments) and 3-4 others like Kotak Securities, India Infoline etc. Even with them one has to convert Rs into Dollars and transmit the same to the international dollar account before executing trades on NYSE or any other exchange. The whole process is very cumbersome, time consuming and costly.

Shouldn't, therefore, an efficient stock exchange such as the National Stock Exchange of India (NSE) list on itself ETFs (exchange traded funds) and/or equity-based securities/funds that are based on indices or securities from outside India (and run/managed by international ETF providers) or that are already listed on exchanges elsewhere outside India? This will make it possible for an investor like to me to buy or sell the global ETF/security right here in India and settle the trade on NSE in rupees. Its unfortunate but the NSE has been delayed in doing something about it despite having NYSE-Euronext as one of its shareholders (holding 5% stake).

Well, a little bird tells me that the NSE, indeed, is in the final stages of launching such a global ETF/product and an announcement is likely to be made within a week or month. As an investor, I hope I am not disappointed by the choice of the global ETF that NSE initially brings to India. I would also prefer to see a robust range of global products listed and traded on the NSE. I am particularly very bullish on alternative energy ETFs listed and traded on stock exchanges in US, UK, Singapore etc.

Lets see what NSE gets here.


UPDATE (11 MARCH 2010): The global product has finally come. Read my 11 March 2010 blogpost