Breaking boundaries

Breaking boundaries

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The Asia Pacific region covers a diverse patchwork of market practices and the post-trade environment is no exception. One reason markets have remained so distinct is the lack of supranational institutions and agreements to facilitate so-called regulatory bridging. 

Each nation, particularly in the emerging markets of the South East, has its own local culture and practices, although typically within a conservative regulatory environment. 

The immediate challenge is dealing with disjointed regulatory reporting regimes and post-trade systems that have evolved over time, while the bigger drivers forcing change to post-trade practices across Asia are the pressure to reduce costs and scalability. Contrary to the case in other regions, the direct impact of initiatives such as Dodd-Frank, MiFID and AIFMD on Asian banks and hedge funds has been relatively limited. 

Most of the work taking place focuses on securities and security derivatives including equity CFDs such as the ASEAN trading link initiative, which provides access to seven exchanges across the region and a single interface for both trade and post-trade messaging. 

“The aim is to create single points of access for cross-border trading activity,” says Chin Wei Min, head of Accenture’s capital markets practice in Asia-Pacific, based in Singapore. “While full integration hasn’t been as fast as some market participants want, we do ultimately expect to see Indonesia, the Philippines and Vietnam, including both the Hanoi and Ho Chi Minh exchanges, joining.” 

In terms of market integration, it is hard to overstate the significance of Shanghai-Hong Kong Stock Connect for connecting capital across Asia to opportunities in the Chinese economy, an effort that will be replicated with the launch of the Shenzhen-Hong Kong Stock Connect later this year. 

The move to shorter settlement cycles in the region should also promote harmonisation. In March 2016, Australia and New Zealand will be moving to a T+2 cycle, with Singapore and Japan to follow suit in coming years. Many Asian markets already operate on T+2, which is becoming the new standard globally. 

Other integration initiatives include regional passport schemes and, while these directly affect retail access to new markets, over time they will encourage more trade flows between markets overall. 

A number of initiatives aim to simplify certain post-trade processes, mostly focusing on the processing of securities, such as the Common Platform Model For Asian Posttrade Processing Infrastructure, designed to provide streamlined access to multiple central securities depositories (CSDs). 

However, post-trade automation is hampered by fragmented IT systems and differences in the execution paradigms in various Asian countries and even different processes within banks for each asset class. 

This fragmentation means many manual touch points are required to process trades across the region. “We know from objective research that, on a scale of ten, there are emerging economies that score around three to four for post-trade automation versus other markets in Asia that score between eight and nine,” explains Matthew Chan, head of product & strategy, Omgeo post-trade Asia-Pacific, DTCC. “This gap could significantly impede efforts as from an institution’s perspective there is more risk entering a country with lower operational standards.” 

Confirmations & messaging 

One measure reflecting the level of post-trade automation is trade date confirmation (TDC) rates, where a trade is confirmed on the day it is executed. In some of Asia’s more advanced markets, the TDC rates are higher than in the US. 

For example in equities, Japan and Singapore have TDC rates of 98% and 93% respectively compared to 83% in the US. As well as reflecting the level of automation, it also exposes how efficiently firms are using technology to reduce counterparty risk. 

In terms of messaging, the ISO 20022 communication standard is helping to reduce complexity, especially cross border, with Japan adopting the standard in post-trade and Singapore’s CPP is also in the process of adoption. The ABMF (Asian Development Bank) has played an instrumental role in developing ISO 20022’s use as good practice. 

“Regarding ISO 15022 and 20022 standards adoption in global markets, certain Asian markets are as advanced as markets across Europe and North America,” says Aite Group research director Virginie O’Shea. 

“To some extent, the newer markets have been able to leapfrog developmental stages and adopt later versions of ISO or XBRL tagging, for example. Looking at various asset classes, many markets simply do not trade heavily in derivatives, so there is little need for the infrastructure and services space to support processing of these instruments in an industrialised fashion.” 

In fact, Asian markets account for 15% of OTC derivatives with Japan and yen-denominated derivatives representing 8% of global outstandings, according to the Asian Securities Industry & Financial Market Association (ASIFMA). 

“Apart from yen, the volume in derivatives in each of the region’s countries is small and typically focused on FX,” explains Yutaka Imanishi, CEO of TriOptima Asia-Pacific, an ICAP subsidiary. “Historically, the region has lagged behind the US and Europe in implementing post-trade solutions. 

However, since the financial crisis, Australia, Hong Kong, Japan and Singapore have moved to reduce counterparty credit risk, operational risk and costs, and capital costs by encouraging the use of post-trade practices. 

Clearing through a central counterparty (CCP) has also been mandated in many Asian markets, and 70% of trades are currently cleared through a local CCP or DTCC in Australia, Hong Kong, Japan and Singapore. This is similar to levels in the US and Europe.” 

Central counterparties 

Many markets are implementing regulations to meet global standards for centralised clearing of OTC derivatives via CCPs including Australia, Hong Kong, Japan, Singapore, China, Mexico, India and South Korea. 

Before 2012 there were only two CCPs in the Asia-Pacific region: the JSCC and SGX. Now there are seven CPPs, a sudden surge, but each market is clearing its own currency. Nonetheless, interoperabilty is increasingly up for discussion, given the exchanges’ need to upgrade efficiency levels in post-trade settlement. 

“Conservative regulations have deterred international players from operating in the Asian clearing and settlement arena, and incumbent CCPs have therefore been called upon to facilitate central clearing of OTC derivatives,” says Arin Ray, an analyst with Celent’s securities & investments practice. 

“There is little competition in the Asian post-trade industry, and that is not going to change soon. In some markets, such as Australia, regulators are considering introducing competition. In markets such as India, regulators are considering permitting interoperability among CCPs.Together, this would transform the post-trade landscape. 

Most Asian post-trade players, particularly the CCPs, are undertaking major technology initiatives to upgrade their systems and processes, and are looking to complement in-house capabilities with third-party solutions that allow quicker time to market.” 

The siloed nature of technology infrastructure between different markets remains a big issue and the harmonisation of regulation and post-trade settlement poses many challenges, with heavy investment required to futureproof post-trade technology. 

“Most CCPs in the Asia-Pacific region use proprietary application programming interfaces, resulting in high connectivity costs for firms that participate in multiple markets,” adds Aite Group research associate Will Woodward. “Furthermore, we are yet to see any standardisation with regards to risk and margin methodologies used by CCPs, which could also hinder market activity.” 

CCPs in the region are however diversifying in the products they offer for clearing and introducing mandatory clearing of some established asset classes such as interest rate swaps. 

“The impact of Basel III and changes in margin rules are causing market participants to review how they themselves manage margin and whether there are any economies to be had through the clearing of multiple assets at a single CCP rather than on an OTC basis,” says Steve French, head of regulatory services at Traiana. 

“As has been seen with initiatives such as the ASEAN trading link, CCPs are building new open interfaces to allow clearing members to connect using the affirmation/ matching platform of their choice for bi-laterally negotiated trades and via the venue of their choice when executing electronically.” 

CSD solutions 

While banks continue to remove legacy platforms, to eradicate duplication of effort and cost and improve scalability, many are rethinking their strategy according to Accenture’s Chin Wei Min. In addition to lacking the resources to create solutions internally, many now anyway prefer an outsourced approach. 

He says outsourcing has generally been a common strategic path for a number of years but banks are increasingly exploring solutions in the utility services space. 

“The CSDs are driving a lot of automation,” adds Boon-Hiong Chan, head of market advocacy, Asia-Pacific & Middle East, global transaction banking, at Deutsche. “They are looking at processing efficiency, protecting data and how they can deliver market utility solutions to address industry challenges.

For example, the Asia Fund Standardisation Forum launched by the Korean CSD attempts to address the Asian fund services industry’s use of manual processes that can create some operational risk. 

Its goal is to promote standardisation, looking to create a market utility and, from an automation perspective, encourage working more closely. This is progressing and it should eventually lead to new and improved products and services.” 

Greater focus on fintech for the application of newer technologies such as blockchain to existing workflows and business models should also drive further efficiencies. 

This will involve a greater focus on data and, in particular, better linkage of data used within market participant firms – ranging from trade processing, such as Standard Settlement Instructions (SSI), to legal entity data used for compliance with know your customer and anti-money laundering regulations.

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