A recent DTCC survey of 50 firms across Asia Pacific revealed that many still rely on multiple touch points to monitor and receive settlement exceptions, such as email and individual custodian portals.
In the absence of a streamlined workflow, managing settlement exceptions is even more challenging for cross-border trades as various complexities associated with time zone difference and specific domestic demands come into play. That said, the attraction of offshore investments to generate growth opportunities continues to beckon. More so in today’s disruptive world.
Related: Why Does Settlement Exception Management Matter for Firms in Asia Pacific?
(l to r) Alexei Maras, Director – Strategic Alliances for DTCC in Asia Pacific, and Edwin Lee, SVP Sales and Marketing, HKEX.
Participating in the China Story
Given Mainland China’s growing economic significance and progressive financial reform initiatives, there is increasing interest among global investors in leveraging various market channels to access the country’s capital markets. Stock Connect is one such channel that has gained traction amongst global investors.
Alexei Maras, Director – Strategic Alliances for DTCC in Asia Pacific, recently held a one-on-one discussion with Edwin Lee, SVP Sales and Marketing at Hong Kong Exchanges and Clearing Limited (HKEX), to discuss opportunities for enhancing post-trade settlement for Northbound Stock Connect.
AM: For the benefit of global investors, what is Stock Connect?
EL: Stock Connect is a pioneering cross-border program that enables mutual market access between Mainland China and Hong Kong equity markets. The first link between Shanghai and Hong Kong exchanges was launched in November 2014, followed by the Shenzhen-Hong Kong Stock Connect in December 2016. The program for Northbound trading allows global investors to access China’s equity markets while domestic investors from China use the Southbound trading link to invest in designated securities listed in Hong Kong.
Northbound Stock Connect covers more than 1,400 eligible Chinese securities (called A-shares) that are listed and traded on either the Shanghai or Shenzhen stock exchanges, accounting for more than 80% of market capitalization.
As global investors’ participation in Mainland China’s onshore market grows, so do the post-trade and settlement complexities.
AM: How has the Stock Connect programme performed over the years?
EL: Our Stock Connect program has been growing stronger from its inception. Since its launch, the cumulative turnover of Stock Connect has reached over RMB 70 trillion (approximately USD 10.8 trillion) by end June 2021. Mainland investors’ holdings in HK-listed shares grew by 27 times while Hong Kong and global investors’ holdings in A-share stocks grew by 207 times.
In the first half of 2021, the Northbound average daily turnover increased by 54% year-on-year, reaching a record of RMB114 billion (approximately USD17.6 billion). We also saw a significant increase in transaction volume based on the number of client accounts set up and assets under holding. With the inclusion of China A-shares in MSCI and FTSE Russell indices, we expect global investors’ participation in Mainland China’s onshore capital markets will grow, and Stock Connect will continue to play a key role in facilitating access to Mainland China.
AM: Are there any challenges with using the Northbound Stock Connect trading link?
EL: As global investors’ participation in Mainland China’s onshore market grows, so do the post-trade and settlement complexities. For example, Mainland China has a T+0 settlement cycle whilst the Hong Kong market functions on T+2, resulting in a shortened settlement cycle for Stock Connect Northbound trades. In the current environment, there is only a four-hour settlement window to complete the pre-settlement and settlement processes involving upstream and downstream communications among parties to a trade.
AM: Can you elaborate on the operational concerns in the post-trade process?
EL: The current sequential process could introduce settlement risk to the buy-side as trades are settled based on single-sided settlement details provided by the broker/dealer. Due to a lack of transparency in the pre-settlement process, managing trade mismatches and exceptions and reconciling trade records have become more challenging and complicated, requiring costly manual intervention to troubleshoot and resolve settlement related issues. Standardization and automating post-trade systems in the middle office will help to address this industry problem.
AM: How is DTCC and HKEX addressing this industry challenge?
EL: Following bilateral consultations with market participants, HKEX has developed a solution to improve post-trade efficiencies for Northbound Stock Connect. In collaboration with DTCC and Digital Asset Holdings, HKEX is launching HKEX Synapse, a standardized, integrated platform incorporating DAML smart contracts to streamline communication and expedite the settlement process while maximizing connectivity and efficiencies for global investors.
AM: How does HKEX Synapse work with DTCC’s services?
EL: HKEX Synapse is integrated with DTCC’s Institutional Trade Processing (ITP) platform to generate a settlement workflow that operates as the single source of truth. Trades matched on DTCC’s central matching platform, CTMTM and enriched with accurate standing settlement instructions from ALERTTM, will be sent to HKEX Synapse for real-time processing and near instantaneous status updates to facilitate concurrent processing, exception resolution and timely trade settlement.
AM: What are the benefits that HKEX Synapse will bring to the industry?
EL: HKEX Synapse helps to standardize and streamline the post-trade workflows of Northbound Stock Connect. Market participants benefit from the improved connectivity and enhanced capacity to handle the growing volume of trades flowing through Stock Connect in a transparent, efficient and secure manner.
AM: When will HKEX Synapse be available?
EL: We are pleased to welcome the first group of participants joining our pilot program in June 2021 to help us further enhance the design and features of the program. HKEX Synapse is targeted to be released in 2022.
AM: Finally, can you explain why did HKEX collaborate with DTCC on HKEX Synapse?
EL: Aside from DTCC’s proven track record in global post-trade clearing and settlement, we believe our collaboration will enable us to develop a robust, secure, transparent and reliable platform that addresses the current constraints with cross-border trade settlement and cope with increasing international capital inflows into China’s onshore capital markets via Stock Connect. Additionally, we would also like to enable DTCC’s global client community of over 6,000 ITP clients in 52 markets leverage HKEX Synapse to realise the investment potential of China’s A-shares market.