When it comes to market infrastructure innovation, it is exchanges in Asia-Pacific that are leading the charge. A handful of markets in the region are implementing significant changes to their post-trade infrastructures in ways that have turned heads around the world. The Australia Securities Exchange (ASX), for example, is attracting attention as the first market infrastructure to replace its equity clearing and settlement platform, CHESS, with blockchain technology developed by Digital Asset.
In addition, Digital Asset has partnered with the Hong Kong Exchange (HKEx) to develop a blockchain platform designed to complete post-trade allocations and processing for Northbound trades under Stock Connect within a tighter settlement window. It is also undertaking a comprehensive upgrade of its post-trade infrastructure, across all processes and systems through a multi-year programme called NextGen.
Meanwhile the Singapore Exchange (SGX) has launched a new securities settlement and depository framework and system to enable the country’s transition to a T+2 settlement cycle.
Despite the fact these changes are taking place simultaneously, they are occurring within a region that is traditionally fragmented and the approach being taken looks somewhat different. The result could mean significant changes for brokers connected to those markets, and while there may be efficiencies on offer, they may have to incur increased costs depending upon the approach they take to stay connected to the individual markets.
To discuss this, market participants across the region gathered at a Global Custodian roundtable event in Singapore, sponsored by BNP Paribas Securities Services, to discuss why the region is so primed for post-trade change, but also why blockchain is fast emerging as the technology of choice for market infrastructures.
The Asia-Pacific region is relatively complex, with each market having its own currency, time-zone, rules and regulations, post-trade infrastructure and securities settlement windows.
However technological advancements are helping to break down those differences, offering the possibility for exchanges across the region to harmonise their infrastructure. For those venues that have used the same operating model for 10-15 years, they are now coming to the end of a technology cycle.
Exchanges in the region have confirmed that there is a common goal to find solutions that can not only remove those bespoke models but promote a level of harmonisation. Collaboration will be critical in achieving this goal, with global best practices and other international models being key.
What is clear is that the market infrastructures do not want to build bespoke systems any more. With the experience of TARGET2 Securities (T2S) in Europe, as well as the various stock exchange linkages, market infrastructures are becoming increasingly interconnected and will have to adopt common standards. This approach makes it easier to attract and onboard more market participants.
Market participants agree that there are significant opportunities with the technologies on offer in terms of cost reduction as well as provision of new services. Exchanges will have a central role in driving and guiding broker-dealers and other sell-side firms through this change whilst providing them with the necessary insight to the proposed changes early enough to allow them to analyse their existing business models.
Finding the right use case
For the ASX, blockchain is seen as a new internet with possibilities of launching various applications and features on top of the platform. Much like how Amazon, eBay and Google are products of the internet, blockchain technology is the underlying infrastructure of a shared and distributed database for which applications and services can be developed and offered either by the platform owner or their client base.
The evolution of technology could mean exchanges are able to become not only providers of risk management and resiliency, but are able to build value-added services on top of their infrastructure to banks, broker-dealers and buy-side firms. At the same time, the participants who directly connect to the platform could integrate the available data to the other information inside their organisations to supplement existing or new services to their client base.
Blockchain may not be the quick-fix solution for every challenge, so finding the right use case for the technology will ensure its success. The HKEx was able to identify its ideal use case for blockchain with, what is set to be, the first application built on top of Digital Asset’s platform.
Nevertheless, DLT may not be the one-size fits all solution that will meet their operational requirements in all the markets they operate in. Moreover, the way the big sell-side firms approach the DLT evolution may not all be the same depending on where they focus their business growth ideas and it is plausible that organisations will wait until the technology takes a greater role across the region before they directly connect to the platform.
Local players that are more domestically-focused in nature may not be at the same level of technological competency, and are strapped for budget to adopt certain technologies. Tools must be developed to support all firms accessing the technology, be that through APIs or a web-based platform for smaller-sized brokers. If blockchain technology is going to be the new norm and industry standard of operating models, all participants involved in rolling out this technology will have to ensure there is a choice of access for the different types of customers they have and deliver value.
From cost to value
Despite the level of optimism in the industry for the technology, conversations still largely focus on cost, particularly in Asia as previously mentioned. Looking at the big picture with regards to efficiencies is very difficult for smaller local firms when meeting international standards is not the top of their agenda.
In addition, a lot of the global players will have to balance the costs of technological innovation with some of the longer-term regulatory costs they have incurred and will be subject to. The danger with that is firms will overlook the use case of adopting new technology.
Yet conversations are becoming more progressive, with many now at the end of the latest regulatory cycle and can instead focus on being competitive, with investment in technology being closely tied to achieving that goal. Conversations between market infrastructures, securities services firms and the sell-side are not only focusing on the post-trade, but also on the execution side of the business.
The conversation with blockchain is now about how the technology can provide an end-to-end experience, stripping away the inefficiencies of execution while also reducing back-office risk as well as how it can interact with other digital technologies like Robotic Processing Automation (RPA), chatbots, data analytics tools and APIs to provide greater insight to industry members.
The sell-side would also potentially have to prepare for another scenario where a sudden wave of regulation could upend individual technology platforms and systems where an update would be needed for each one. The example of ASX could show how running a common, mutualised infrastructure will allow brokers connected to comply without the need of a company-wide update.
Collaboration is key
As market participants continue to work out how this technology will affect them, collaboration with market infrastructures, technology vendors and custodians will become more important than ever to both minimise the impact on their operations and gain the benefits on offer.
The deployment of blockchain for the Stock Connect trading scheme can be seen as the perfect example of collaboration working in action, given the fact that the technology is being used to improve a specialised segment of the settlement process.
The potential dangers of not working with other counterparties, market infrastructures, tech vendors is that the cost of constantly redesigning and coming to market with an operating model will be extremely high.
One way market participants could avoid this is the creation of standards for new technologies to not only guarantee the continuation of business, but allow new and legacy systems to communicate and interact with one another. Standards, being new or based on existing ones such as SWIFT’s ISO2002, would provide interoperability for investment banks and regional players that are facing multiple markets and multiple organisations.
In light of this, custodians will have to look at their own operating model and their service offering and adapt not only to keep up with the new technology, but also to ensure they stay relevant. Custodians will have to take a step back to evaluate all of the change currently happening in the industry and analyse how they can deliver new solutions to the sell-side community, leverage the post-trade infrastructure, and create value-added services based on the data that sits on these ledgers.
The Asia-Pacific region is taking a lead in evolving the conversation and debates around new technologies, and custodians will play a central role in helping market participants evolve with the changing technological landscape.