Econ_June_09_2018

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64 Finance and economics The Economist June 9th 2018
I F YOU are selling shares, they are worth
not what you paid for them, but what
someone elsewill offer. For the Royal Bank
of Scotland (RBS), the sum that counts is
£2.71 ($3.62). On June 5th UK Government
Investments, which manages the state’s
stakes in companies, said it had placed 7.7%
of RBS at that price—10p below the previ-
ous day’s market close—with institutional
buyers, reducing its holding to 62.4%. The
government paid £5.02 per share to rescue
the bank in 2008. So on those 925m shares,
taxpayers have lost £2.1bn.
The state has long looked unlikely to re-
coup its fivers, let alone the £6.25 per share
that the National Audit Office, a public-fi-
nance watchdog, reckoned last year was a
fair benchmark after adding the cost of fi-
nancing the bail-out. (In 2015 it sold 630m
shares, or 5.4%ofRBS, for £3.30 a pop.) Even
if the stockmarket valued RBS as highly as
the book value of its assets—which is true
of few big European banks—the price
would still be only £4, a level it last saw
more than three years ago. Short of cash
and eager to return RBS to private hands,
the government may as well take what it
can. It sold its last shares in Lloyds Banking
Group, also bailed out in the crisis, in 2017.
On that rescue it made a small profit.
In the nine years after the crisis, RBS’s
losses amounted to a staggering£58.4bn, as
write-downs, fines and restructuring costs
piled up. After the hubristic purchase in
2007 of ABNAMRO, a Dutch lender, which
led to its undoing, RBS was briefly the
world’s biggest bank, with assets of over
£2trn. Now it is about a third of that size
and ranks only tenth even in Europe. Its in-
vestment bank, which brought in more
than a third of operating profit before the
crisis, accounted for under a tenth of a far
smaller sum in the first quarter of 2018.
Yet RBS is still one of Britain’s biggest
banks—and underneath it all, these days is
in fair shape. In the first quarter its return
on equity was 9.3%, a bit short of the 10%
that analysts still regard as par but decent
by European standards. Its ratio of equity
to risk-weighted assets, a key measure of
capital strength, is a robust 16.4%. Last year
it made its first net profit since its fall.
The sale is another step in the bank’s
slow emergence from the shadow of the
crisis. Only last month did RBS say that it
had agreed inprinciplewithAmerica’sDe-
partment of Justice to settle, for $4.9bn in
cash, charges that it had mis-sold residen-
tial mortgage-backed securities between
2005 and 2007. It might have been worse:
$3.5bn was covered by provisions RBS had
already made. The settlement cleared the
way for thisweek’s share sale.
Another legacy of the past is still to be
cleared up. Last year, as part of the price of
the bail-out, the government and the Euro-
pean Commission agreed on a scheme un-
der which RBS will give up about 3% of the
British market for small businesses, which
it leads. The bank is putting up £425m to
build up smaller banks’ capabilities, plus
£350m for incentives to customers to
switch banks. The bosses of the body that
will divide the cash were appointed only
inMay. Financial crises cast long shadows.
RBS isn’t in the sunshine yet. 7
Royal Bank of Scotland
Cut your losses
Britain’s government resumes sales of
shares in the nationalised lender
BUYINGand selling shares in India is not
for the faint of heart. Its own central-
bank governor reckons equity capital is
taxed up to five times. Never fear. There is a
well-established alternative. Investors can
just as easily buy financial instruments
that track share prices but are not them-
selves shares. Such “derivatives” are used
across the world to mirror markets in
everything from platinum to pork bellies.
But theyalso raise awkwardquestions: can
the exchange that generates prices by
matching buyers and sellers stop a rival us-
ing the data to create its own derivatives?
A quarrel between the Singapore Ex-
change (SGX) and the National Stock Ex-
change (NSE) inMumbai touches that very
issue. Since 2000 global investors wanting
exposure to Indian shares but not Indian
red tape and tax have gone via SGX. Under
a licence from NSE, punters could trade a
derivative linked to the Nifty 50, an index
which is to India what the FTSE 100 is to
Britain or the S&P 500 is to America.
Because the contract paid out the value
of the Nifty on a given date, arbitraging al-
gorithms run by outside traders ensured
the derivative tracked the index closely:
buying the Nifty in Singapore or Mumbai
amounted to much the same thing. But in
February NSE ended the arrangement. It
now thinks all trading can happen in India
thanks to new regulatory arrangements
that make it just as amenable to global cap-
ital as Singapore.
That claim is doubtful. In any event,
SGX is clearly not keen to find out. Instead
of licensing the Nifty brand and paying the
NSE for a steady flow of data, as hitherto,
SGX said itwould switch towhat is in effect
a home-brewed duplicate. Whereas the
“real” Nifty is designed to match the price
of an underlying basket of 50 shares, the
newproduct is designed tomatch the price
oftheNiftyderivative instead. It is, in other
words, the derivative of a derivative.
That is just a fancy way of breaching
copyright, the NSEargues. It owns theNifty
trademark and SGX ’s product is but a thin-
ly veiled clone of its own. SGX does indeed
seemto bemakingno effort to differentiate
itself. The marketing literature for its new
derivative says it aims to track 50 shares
that together represent 65% of the Indian
market, just like the Nifty. The only differ-
ence is that it does not mention it by name.
Lawyers on both sides are brushing up
on intellectual-property law. An arbitrator
in Mumbai is due to make a ruling by June
16th, though appeals are expected. SGX has
some precedents on its side. In 2005 a New
York judge ruled that ICE, a commodity ex-
change, had broken no law when it lifted
publicly available energy prices from NY-
MEX, a rival, to fuel its own derivatives
contracts. “Settlement prices are not copy-
rightable because they are facts, and not
original, creativeworks,” he said.
Nobody is arguingagainst SGX ’s right to
set upaderivative on individual shares list-
ed inMumbai; it recently started doing just
that. But tracking the whole Nifty requires
using one monthly value, calculated by
NSE, to “settle” the derivative. Arguably
this calculation is closer to an art than pub-
lishing a single fact. American courts have
found firms that provide such indices (for
example, on which stocks are included)
may indeed limit their outside use.
Though the row hurts both sides, no
deal seems in sight. MSCI, which crafts a
popular emerging-markets index that
guides the investment of trillions world-
wide, haswarned that trying to throttle the
dissemination of price data would make it
harder for money to flow into India. It has
argued that stockmarkets are natural mo-
nopolies that should in effect be com-
pelled to sell their prices towhoeverwants
them. Informationwants to be free, but try
telling that to those compiling the data. 7
Stock exchanges
Whose price is it
anyway?
MUMBAI
India’s and Singapore’s bourses tussle
overwho ownsmarket data