The securities market in Hong Kong is recovering. Equity brokerage houses are moving back to Hong Kong but they want to trade and settle regionally. The current issue is not about volumes but the automation of middle-office functions and the management of corporate actions.
Key points of the session:
- The Asian market is fragmented and operates under a variety of regulatory regimes.
- It is unlikely that an Asia-wide regulatory framework will appear in the near future.
- Service providers are increasingly offering full post-trade outsourcing.
- SunGard’s Stream Rims product can alleviate a wide range of operational difficulties.
Speakers:
- Michael Stanhope [MOD] – Moderator – CEO, Hubbis
- Tim Garnons-Williams [TGW] – Senior Business Analyst, SunGard Global Trading
- James Drumm [JD] – Executive Director, Omgeo Pte Ltd, Asia
- Bruno Campenon [BC] – CEO, BNP Paribas Securities Services, Hong Kong
- Paul Egan [PE] – Managing Director, Global Transaction Services, Citi
What does the panel see as the major themes and issues?
BC –Market data is critical; particularly so regarding corporate actions where the information is required in a timely and precise manner.
Further, in the post-trading activity, you have three areas of risk to manage: information technology; operations; and risk management – market risk, liquidity risk and credit risk. One seeks to address these three areas with solutions that are efficient and not too costly.
What are the differences between operating businesses in London compared with Asia?
PE – Europe is a homogeneous, regulated region. So it is easy to do everything from one regional base, say London. In theory you can keep the cost base focussed and centred on a certain area. In Asia that is not the case – there are a few markets you can join and outsource some of your functions to third parties but most of the markets are very restrictive. As a broker you’ve got to be in the country concerned, with bricks-and-mortar premises but you want to concentrate on your core business, you don’t want to have an expensive back-office operation. So to answer, the problem with the Asia region is that it’s very fractured, in terms of different markets have different ways of doing things.
TGW – But from a Hong Kong broker’s perspective wanting to trade in say Korea or Singapore you don’t have to be a broker in the location – you apply the Direct Market Access concept, routing your orders to a local broker who passes the executions back which you can then convert to your client trades and arrange settlement. The back-office system manages that kind of relationship. So the cheapest way to get into a new market is via Direct Market Access. After that you then consider whether you want an office in the local market – become a direct market participant. Regarding client trades, they need to be created and you need to instruct your depository to move stock to them. An ASP based solution such as Stream RIMs can provide the flexibility of multiple market competency to manage this process.
BC – Europe is still somewhat fragmented and this has got more so with the advent of MTFs. In Europe it’s not a matter of covering one market but 20 markets. I can’t see Asia becoming less fragmented within the next five years – it will take a long time for the regulatory regimes to come together.
JD – Yes, there is fragmentation in both Europe and in Asia. I think that Asia will, however, look at what’s going on in Europe where we know there are pending initiatives. In Asia there is very little regulation, especially around post-trade/pre-settlement. There is local regulation: India is well-regulated, as is Japan, and there’s the CSRC in China. But in terms of holistic regulation there is more currently in Europe.
PE – We, service providers, are here in Asia because the infrastructure is not right, there is no regulatory consistency. The environment is not right for the future, it must change, but it will not change easily. Asia is a burgeoning region but it is very fragmented and I cannot realistically foresee any region-wide regulation.
Can we discuss the risks you must manage?
BC- The most complex is market risk – an order can be taken and executed but before settlement the client could go bankrupt and if the market has moved adversely there is a problem. Obviously we can collateralise this risk but it remains a problem with high-frequency trading where there is no before-the-fact control – how can you implement a procedure that pre-checks trading? There are solutions to this but it is a difficulty.
TGW – What is the solution if the order-flow is not going to go through you to get to the market?
BC – You put a ‘sniffer’ on the line which tracks the trades going through, calculates the cash implications, and prevents trading when an agreed limit has been reached. This will be, of course, totally with client agreement.
TGW – At SunGard we manage the order from the client all the way through to execution and pass it on to the clearer or possibly the broker doing the clearing on his own behalf. A very important part of settlement for a broker is ensuring delivery of stock from clients. Getting confirmation from the custodian, that trades have been matched, plays a large part in the risk control situation in which a broker has to operate. We also manage the status updates coming through from custodians and warn brokers that their clients have not matched their settlement instructions.
JD – Statistics show that 70% of trades that fail are a result of poor information for settlement instructions entered to the front-end. It is a crucial issue – yet again the problem is about inaccurate data.
Generally in Asia, self-clearing and self-custody remain quite high when compared with Europe. Why is that?
BC – This is particularly the case in Hong Kong. The market infrastructure was not 100% ready as it is in Europe. But this is changing. Service providers are not only providing an outsource service but added value services on top. In fact the client can effectively outsource all post-trade procedures to a single service provider like us. We take care of everything except pre-trade and execution. We also take care of the relationship with the custodian – for the broker everything becomes simple.
JD – So the custodian model has turned into a prime-broking model?
BC - Not quite, we don’t execute the trades. But from a post-trading perspective the answer would be yes.
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