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Will regulations drive a unified post-trade space in Asia?

Asia is a continent of diversity and contrasts, and its post-trade and settlement space is no exception.

 

Some of the major financial centres (Korea, Hong Kong) are promoting a T+2 settlement cycle, while their neighbours of similar calibre (Singapore, China) are in favour of T+3. Some of these domestic markets are opting for single-sided reporting (Singapore), others for dual reporting (Hong Kong).  

Meanwhile, a number of countries are at the stage of implementing their market infrastructures, building up their CCP/CSD structures – and indeed are still establishing their RTGS systems - and they look up to their regional predecessors for a consistent approach in the post-trade space.

Asian market participants’ post-trade systems are at various stages of automation: from manual, labour-intensive and change resistant environments to sophisticated end-to-end post-trade platforms that use diverse technologies to span the entire trade processing lifecycle. Domestic standards and local guidelines represent another dimension of the diversity of the post-trade markets in Asia.

 

Will the current tide of global regulations drive the convergence of domestic markets and accelerate the removal of manual processing in the post-trade space? Will Asia’s markets, functioning already under such a fragmented financial and regulatory structure, have more difficulties than their international counterparts in responding to the regulations that arise from various financial jurisdictions, the US and the EU included?

 

At a minimum, for Asia, compliance comes with the cost of evaluating new pieces of legislation that have already proved to be complex, overlapping and conflicting. To this, we add impact assessment costs and the enhancements required to existing infrastructure in order to cope with the additional requirements.

Trade reporting is more and more a trending topic. An Asian player may have to report into both domestic and global repositories, faced with the requirement to maintain different message formats and flows. Harmonised message usage guidelines in the post-trade space and convergence towards one ISO standard would shorten the reporting and regulatory compliance path.

One requirement brought forward by global counterparties and causing significant headaches for regional players is the need for daily portfolio evaluation, as variation margins for un-cleared swaps are more time-consuming and carry a higher cost than the initial margins. Significant cost benefits can be achieved by applying stricter, harmonised variation margin rules across Asian jurisdictions.

Established Asian financial markets function in a vertically integrated structure: the stock exchange extended with a clearing and settlement function, creating CCP and CSD arms. The PSMS (pre-settlement matching system) is a smart enhancement to this vertical structure: it enables OTC and on-exchange trades to be matched on T+0/T+1, with  an impressive matching rate (99%), and it is the gateway to risk-free settlement. I view this as a highly efficient system that could naturally serve as a feed to trade repositories and increase market transparency.

 

Coming from a European background, it may be my prejudice that harmonisation and integration are the way forward to meet global regulations. Yet, in the case of Asia, I would say the financial markets can meet the global regulatory changes by simply fine-tuning their status quo and adding a certain degree of flexibility and standardisation.

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