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Three Key Takeaways for Capital Market Firms in North Asia Post COVID19

By Corinne Lee | August 18, 2020

In a matter of a few months, we’ve seen how the global pandemic has changed the way we engage and do business in the professional world. Will these stopgaps remain or is a sea change in process improvement needed to remain relevant in the new world?

At DTCC’s first ever webinar conducted in Mandarin, where over 100 market participants from the buy-side, sell-side and custody services in Asia attended, the discussion centered on leveraging automation and streamlining processes to drive transformation as firms transition to normalcy.

Here are key takeaways shared by speakers, George Jia, DTCC Country Manager & Director, Greater China; Gary Ng, PwC Partner, Risk Assurance, Hong Kong; and Edwin Lee, Hong Kong Exchanges and Clearing Limited (HKEX) Senior Vice President, Post-Trade Business Development.

Process Automation for Changing Business Needs

Current trends in post-trade processing are leaning towards a self-service, digital approach to improve performance and efficiency. Client interactions of the future will depend on automated processes which will not only process data more quickly, but the actionable insights gained will help firms obtain a competitive advantage and provide an enhanced overall client experience. Further, a high-performance, low cost solution, process automation will help to reduce the cost of maintaining costly legacy systems while providing value to time-sensitive operational activities such as managing margin calls and trade settlements, collecting data across multiple systems and performing reconciliation between internal systems or with external parties.

Exposure to the CSDR

The Settlement Discipline Regime (SDR) component of Central Securities Depositories Regulation (CSDR) is expected to come into effect in February 2021, with the objective of improving the safety and efficiency of securities settlement and Central Security Depositories (CSD)-operated settlement systems in the European Union (EU).

The extra-territorial impact of SDR will see some firms in Asia coming into scope – in particular, Asian firms that trade with counterparties in the EU or Asian firms that trade in EU-domiciled securities will need to ensure that trades are settled within the mandated T+2 timeframe. To prepare for compliance, Asian firms must first determine their exposure to SDR and analyze the current causes of failed trades.

Of critical importance is the need to ensure operational and technical readiness – i.e. ensuring existing operational processes and workflows are equipped to handle the regulatory requirements of SDR. There are consequences for failure to settle trades on time – cash penalties and mandatory buy-ins. While the extension period varies before a buy-in becomes effective – seven to 15 days for illiquid securities and four days for liquid securities, the onus is on the purchasing counterparty to execute the buy-in through a buy-in execution agent. Asian firms will potentially have to engage in buy-ins due to the European selling counterparty’s failure to settle trades on time. With only one executive agency currently available to manage buy-in requests of Asian and European firms, this may result in concentration risk for the industry.

To avoid trade fails, early preparation is essential. Asian firms that are still using manual post-trade processes will need to leverage post-trade automation tools to help optimize clearing and settlements. Additionally, Asian firms can also look to analytical tools to measure and compare operational performance against that of counterparties and industry peers – to drive operational and settlement efficiency.

T+0 vs. T+2: Streamlining Post-Trade Processing

Global Index Inclusion 2019 was a monumental year for China A-shares – shares of Chinese companies that trade on China’s stock exchanges – as index providers including the Morgan Stanley Capital International (MSCI), Financial Times Stock Exchange Russell (FTSE Russell) and S&P Dow Jones raced to add weight to their respective indices. Institutional investors who follow passive investment strategy would need to adjust their portfolio and begin to invest into China via the Stock Connect program, a cross-border trading link between China’s equity markets and the Hong Kong Stock Exchange. Given differences in settlement cycle – T+0 versus T+2 for securities – between countries and regions, the industry needs to consider an integrated, streamlined and efficient post-trade processing workflow to enable operational efficiency. With the increasing number of transactions coupled with growing client accounts, the industry needs an innovative solution to address settlement related challenge.

While bespoke solutions are currently available, a standardized, transparent, scalable and secure post-trade workflow that enables near instantaneous status updates to all parties to a trade is needed.