FTSE makes peace with Shanghai bourse on A50

In Shanghai this week, a highly political lawsuit that has dragged on for three years finally came to an end. The Shanghai Stock Exchange said yesterday it had come to a settlement with index provider FTSE International and its China joint venture FTSE Xinhua on its infringement lawsuit dating back to 2006.

The two FTSE companies will provide an economic compensation to the Shanghai bourse, and rectify the past problems of capturing and manipulating data from the Shanghai bourse without the bourse's permission by signing a memorandum of understanding that recognises and attributes credit to Shanghai Stock Exchange and its affiliated data company.

The sum was not disclosed.

The case stems from a dispute between FTSE International and the Shanghai Stock Exchange back in late 2005. The Shanghai bourse accuses FTSE of stealing data from it and feeding this data to a third party for alternative uses, including the launching of ETFs, such as the iShares FTSE Xinahua A50 ETF in Hong Kong, as well as third party derivatives and structured products, such as the FTSE Xinhua A50 futures in Singapore.

In November 2006, a Pudong court declared the Shanghai Stock Exchange as victorious in the case. This sparked panic among ETF, derivatives and structured product issuers that the bourse may stop its data feed to Xinhua Finance, which in turn is responsible for feeding data to FTSE and FTSE Xinhua on how they compile the underlying upon which their products trade on.

That never happened. The existing products continued trading with their data feed uninterrupted, although FTSE did pay the full price for attracting the SSE and thereby the Chinese government's wrath. It had lost a very sizeable book of potential business.

The case was highly unique to China and also seen as highly political. Nowhere else outside of China has such a legal dispute occurred. For example, when MSCI Barra compiles an index in Hong Kong, it never requests permission from the Hong Kong Stock Exchange; few bourses in developed markets would think of claiming exclusive ownership to information such as market capitalisation or stock prices.

Well-placed industry participants have said the case is shallow. The bourse did not react to how many third parties FTSE was selling its index information to until Singapore Exchange launched the world's first A-share futures products, four years before such a product was available in China. The move embarrassed the Shanghai Stock Exchange, which had just announced its plans to create an international A-share ETF based on the CSI 300 Index.

The imbroglio may have hampered FTSE International's ability to develop onshore product for China or impaired its relationship with joint-venture partner Xinhua Finance.

For example, last year the markets were abuzz with rumours over why Singapore's UOB Asset Management abruptly binned plans to launch an ETF using the FTSE Xinhua A50 Index, in favour of the Shanghai Stock Exchange's SSE 50 Index.

FTSE also has yet to sign a deal with a Chinese asset manager to develop cross-border QDII ETFs. So far MSCI Barra has a deal with Penghua, Standard & Poor's licenses its S&P 500 to Southern, Dow Jones has a deal with Harvest, and Nasdaq has formed a relationship with Guotai. Even Hang Seng Investment has a deal for its ETF with China Asset Management.

Market sources say that FTSE's resolution will give face to the SSE and pave the way for it to catch up with its rivals when it comes to China-related business.