How is the Asia Pacific enhancing its methods of trading and clearing securities?
There are a number of markets either reviewing or implementing enhancements and given the fragmented nature of the Asia Pacific region there are several different reasons driving these decisions. One of the drivers of change is the need to replace older technology. Market infrastructure technology in a number of markets is facing an end of life scenario and as a result, several central securities depositories (CSDs) and trading venues are looking to replace their existing technology.
For example, last December the Australian Securities Exchange (ASX) announced the replacement of their existing clearing and settlement infrastructure with a solution based on distributed ledger technology (DLT). This will be a first of its kind and the region is watching its progress closely; day one functionality is expected to be confirmed by the end of March this year, and there is keen interest to see the format it will take.
Other markets are considering whether following a similar approach also makes sense. The Hong Kong Exchange (HKEx), for example, is considering whether DLT should form part of their NextGen solution. Some of the smaller markets like New Zealand have gone down a different route with the Reserve Bank of New Zealand (RBNZ) deciding that their enhancements to the NZClear market infrastructure will be completed using technology already in use in other markets.
Aside from enhancing technology, markets are also reviewing settlement cycles. For example, Australia and Hong Kong are already on a T+2 settlement cycle. Other markets, like Singapore, have announced they will shorten their settlement cycle later this year, which is a proven way to remove a level of risk/uncertainty from the clearing and settlement process and to provide investors with quicker access to the assets they buy or the funds they receive from sales.
Another key topic driving change in the Asia Pacific is regulatory change. Like in other regions, regulators are paying close attention to areas that can improve the efficiency, safety and oversight of trading and clearing markets. One interesting trend is in the area of regulatory capital changes to promote the use of third-party clearing solutions in different markets. As a result of these regulatory changes we have seen an uptick in the number of brokers wanting to outsource their post trade activities to specialist providers like BNP Paribas.
The combination of regulatory changes, technology advancements and the need to remain competitive are prompting many market players across the region to reassess their operating models and change their solutions in order to take advantage of new opportunities or to protect existing business.
What should firms be focusing on during this clearing and settlement transformation?
The technical changes being implemented can impact on the way that a participant needs to communicate with the market. For example, the ASX, HKEx and Singapore Exchange (SGX) are all implementing ISO 20022 as the main instruction and reporting channel in their enhancements. BNP Paribas was the first to use the ASX ReferencePoint ISO 20022 service slashing the delivery of corporate action notifications from hours to seconds. The same for Singapore where BNP Paribas connects directly to the SGX’s new post trade systems with FIXML and ISO 20022 traffic on SWIFT for domestic clearing and settlement.
Changes are being implemented to settlement cycles–impacting funding requirements for example; service, impacting solutions the participant can provide to their underlying clients; and market rules—with the potential to impact participants’ operating model or legal documentation.
Firms that are not direct participants, but are impacted by the changes, should also consider whether the impacts should result in adjustments to their existing support model. If we look at such changes in other regions that are perhaps a little further through the process (for example, Europe with the implementation of T2S), the changed operating requirements resulted in a number of firms deciding to connect directly to the market as opposed to through a service provider, as before. Alternatively, when coupled with the regulatory capital change, the result can be firms who are currently on account operator-type solutions move to third-party clearing models instead to benefit from the reduced capital requirements and outsource a level of the regulatory obligation to a specialised provider, which can potentially reduce the internal costs associated with monitoring.
What opportunities will the new methods of trading and clearing securities present?
Technology is an enabler for change, and ultimately each market is looking to offer new solutions or services to enhance efficiency, reduce risks, or free up liquidity etc.
Savvy participants, will seize the benefits of these enhancements and, like BNP Paribas, offer clients additional data analytical services and/or more efficient connectivity with the market infrastructure.
Although the enhancements present opportunity for the region, what challenges should industry participants be aware of?
The challenge of correctly designing and implementing new ways to connect to the market should not be underestimated.
Historically, markets in the region have used proprietary connectivity solutions which are incompatible with global standards. The enhancements on the table today will follow global standard formats, delivered real-time, providing scalability and efficiency and a level of detail not available to participants previously.
When it comes to the shortening of settlement cycles, one critical element to note is that the first settlement date of the T+2 cycle is also the last settlement date of the T+3 cycle. This means that certain organisations can see a large increase in their liquidity requirements for one day and so this needs to be factored into their operational and treasury solutions.
How do these new enhancements place the region in terms of competitiveness?
The two main drivers for these market enhancements are either to defend current market share, or remain relevant and grow market.
The region remains fragmented and highly competitive, therefore unlike Europe where the common market setup means that new solutions like T2S benefit the region as a whole, in Asia Pacific there is no overall benefit to the region of individual market enhancements.
It is possible, however, that these enhancements will drive greater realignment of existing activity between the regional centres.
An interesting trend is the growing collaboration between different market providers who are increasingly sharing information about their journeys.
It is clear that markets in both Europe and the US have embraced digital change and the pace will undoubtedly continue; therefore, to remain competitive and potentially shift the power base, the likes of China, Hong Kong, Japan, Australia and Singapore are compelled to invest in innovative enhancements.
It is an exciting time for the Asia Pacific region and it will be interesting to see the overall structure in three to five years time to see who the winners of this enhancement phase are.
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