RBI to vet S&P, Dow trading on NSE

The issue of allowing trading in indices such as the Dow Jones and the S&P 500 on the National Stock Exchange (NSE) is being considered by the Reserve Bank of India (RBI).

NSE had applied to the Securities and Exchange Board of India (Sebi) for starting futures trading in these indices. The capital markets regulator sought RBI's opinion as these are listed abroad, as are the underlying assets.

If allowed, it will be for the first time that both these indices will be traded on an exchange outside the US.

RBI has been known for being conservative on any trading that could impact currency exchange values. However, NSE has designed these contracts in such a way that the dollar movement does not get reflected. Also, both the indices will be denominated in rupee. Sebi is comfortable with the idea.

The design proposed by NSE is like this: For example, if the Dow Jones closes at 10,200 points, its rate in India will be 10,200 multiplied by a fixed number representing the lot size for that contract. This means the indices, when traded in India, will not reflect the movement in exchange rates but only in the indices. So, the index number multiplied by the lot size will be the size of the contract. It will be denominated in the rupee only.

At present, an exchange-traded fund based on the Hang Seng, the Hong Kong stock market's benchmark index, is listed on NSE. The net asset value of that ETF has been declared after considering rupee-dollar movements. Sources say since RBI has allowed trading in that ETF, there may not be any issue in allowing trading in the Dow Jones and the S&P 500.

NSE entered into cross-listing arrangements with the Chicago Mercantile Exchange (CME) in March. Under the arrangement, the S&P CNX Nifty Index (the Nifty 50) is already being traded on CME as a dollar-denominated futures contract.

In turn, NSE has exclusive rights for starting trading in the S&P 500 and the Dow Jones Industrial Average (DJIA) rupee-denominated futures contracts for trading in India. This is being made available to NSE via sub-licences from the CME Group, Standard & Poor's and Dow Jones, respectively.