'When it rains, it pours!' – so the saying goes, and for anyone living in Hong Kong, this should sound familiar.
For anyone working in the Securities Services industry in the Asia-Pacific region, this might sound like the motto of 2016, given the sudden renewed interest that some of the largest markets have shown in improving their infrastructure. For decades the post-trade world has been ignored relative to the development of the rest of the capital markets and regulatory environment. The result is that, today, some of the mature markets in this part of the world demonstrate an unexpectedly low level of sophistication.
Asia-Pacific markets take bold steps
While markets in Europe moved quickly to reduce systemic risk and embrace harmonisation, the post-trade world in Asia-Pacific still operates by and large using less than perfect delivery-versus-payment systems, un-harmonised settlement cycles, diverging rules on asset segregation and – last but not least – what IT experts politely describe as ‘challenges in managing obsolescence.’
Having missed the web-based wave of changes, Australia, Hong Kong and Singapore have now engaged in ambitious quantum-leap programmes to catch up – making sometimes radical choices, the scale of which is unprecedented and yet to be tested.
The most striking example comes from Australia, which aims to replace its aged mono-settlement cycle CHESS system with a Distributed Ledger Technology (DLT) platform. To this extent, ASX has partnered with Digital Asset Holdings and has passed the ‘Proof of Concept’ stage to enter into a market-wide consultation to gather buy-in from market participants. ASX has declared that its ambition is to avoid disturbing the market and therefore to introduce as little change as possible to the way the market operates today. So, technology for technology’s sake, at least in the short term.
On the other side of the spectrum, HKEx recently launched the Next Generation programme, or ‘NextGen’ as it is dubbed in Hong Kong. This ambitious plan encompasses changes of processes and systems across multiple asset classes and throughout the post-trade chain from clearing to depository services. HKEx is changing technology while improving operational, capital, and collateral efficiencies for all market participants. On the securities clearing side, HKEx is moving from a flat margin rate to a more sophisticated methodology. We also note the replacement of the Central Clearing and Settlement System (CCASS) launched in 1992 and the migration to an Uncertificated Securities Market. These changes are not only to adopt best-in-class practices and platforms for the Hong Kong market but also to support increasing cross-border activity with Mainland China, with further connectivity expected.
Last but not least, the early mover, Singapore Stock Exchange, and its much heralded (and much delayed) PTS programme covering clearing, settlement and depository functions. The Central Depository (CDP) will progressively decommission its proprietary legacy Client Accounting System and, over the next few years, will take steps to modernise its market infrastructure. First, by April 2017, all brokers in Singapore are expected to opt for new back office solutions. While this may be a ‘classic’ project for large institutional brokers, it is another story for smaller retail brokers, which may also explain the delay of the roll-out.
In subsequent steps, the new post-trade system will enable CDP to adopt global market practices, real time straight-through processing and industry messaging standards. On the settlement side, the ambition is to move to a true delivery versus payment, RTGS settlement and the potential shortening of the settlement cycle from T+3 to T+2.
With improved functionality, new performance and flexibility, PTS is expected to increase operational and cost efficiency, ultimately allowing SGX to attract more activity and liquidity.
A common goal
It is striking that regional expansion is a key ambition of all three exchanges and yet they are taking such very different approaches to achieve it. If it continues to pour in the Asia-Pacific region, it will be interesting to see who gets soaked!