In a new report (‘Asean greater financial market interconnectivity: An evolving journey’), Deutsche Bank suggests that interconnectivity does not necessarily mean major regulatory overhaul, although key changes will be needed.

According to report author Boon-Hiong Chan, head of market advocacy Asia Pacific & Mena product management, these changes could include introducing a greater range of tradable securities such as Islamic finance products and IPOs that may be accessed by brokers via the Asean exchanges.

“Incentives could also be considered with respect to the costs of existing infrastructures in order for trading volumes to gradually migrate from these infrastructures to the trading link. Remote trading memberships and third party clearing could also help to create incremental trading volumes and potentially reduce the costs of servicing each trade.”

One future scenario involves exchanges acting as gateways for non-Asean trading volumes to increase overall liquidity and velocity, while other exchanges could participate by setting up remote settlement.

“Along this journey, more analysis needs to be done to address potential systemic risks, including sudden cross-border investment reversals, volatility or scenarios where liquidity flows can bypass some markets,” adds Chan. “The impacts of global standards such as increased investor transparency requirements, anti-money laundering standards, data protection and tax initiatives will also need to be taken into consideration.”

The report states that Asean financial markets’ interconnectivity initiatives have the potential to bring greater scale, depth and efficiency to the market, thereby helping to increase the region’s competitiveness and enhance its global identity. At the same time, each Asean market could also maintain their potential to be individually competitive or innovative.

Overall regional success will hinge on a central, clearly-identifiable regional forum that will coordinate, track and address potential opportunities and challenges, Chan concludes. “This forum, supported by policymakers’ commitment, will be critical to maintaining the necessary momentum, directions and multilateral dialogues.”