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A New Beginning: Faster Settlement Processing for Stock Connect

By Corinne Lee | April 25, 2022

While many roads lead to mainland China’s equity market, the Stock Connect Program is the most preferred by far, with the average daily turnover (ADT) of Northbound Stock Connect increasing to a record high of approximately 18.84 billion in 2021, up 32% from 2020. Hailed as the “through-train” for international investors to board from Hong Kong, Northbound Stock Connect is the trading link that enables direct access to China’s equity market for offshore investors.

In collaboration with DTCC, Hong Kong Exchanges and Clearing Limited (HKEX) created HKEX Synapse – a new settlement platform for Northbound Stock Connect. Alexei Maras, DTCC Director, Strategic Alliances in APAC, held a discussion with Edwin Lee, HKEX Senior Vice President in the Markets Division, about the latest developments in Synapse.

Related: Improving Global Investors' Access to Stock Connect

AM: Can you explain what HKEX Synapse is?

EL: The Stock Connect Program has attracted tremendous foreign interest since its launch in 2014, given its unique ability to settle and clear trades through a link between clearing houses in Hong Kong and mainland China. The inclusion of China A-shares in global indexes, such as MSCI and FTSE Russell, has bolstered investor interest in the Chinese onshore equity market, making the A-share investment channel more relevant than ever. Although trade volume of the Stock Connect Program continues to grow, operational challenges remain, in particular time-zone and settlement cycle differences. While most markets, including Hong Kong, operate on a T+2 settlement cycle, mainland China’s T+0 settlement structure requires international trades to be executed and settled on the same day – with a settlement processing window of approximately four hours after market close.

We developed a solution, in collaboration with DTCC, to complement the existing post-trade infrastructure for Northbound Stock Connect and address the pain points of market participants.

In 2018, we designed a proof of concept with Digital Asset using its DAML smart contracts technology. Following consultations and feedback from 60 global industry participants including buy-side firms, custodians and brokers, the Synapse solution was created as an automated settlement platform that standardizes and streamlines post-trade workflows for Northbound Stock Connect. Synapse is integrated with DTCC’s Institutional Trade Processing (ITP) services to automate the trade confirmation and settlement notification process and provide a seamless settlement experience.

AM: How does it fit into the Stock Connection Program?

EL: The integration between DTCC’s Institutional Trade Processing (ITP) services and Synapse will enable ITP users to match their trades on DTCC’s CTM™ and attach the trade information with the correct standing settlement instructions (SSIs) from ALERT®. Settlement notification and trade information will flow from the ITP platform to Synapse for pre-settlement processing. Synapse will create and send trade details for simultaneous processing by custodians and clearing brokers.

Synapse will then deliver settlement instructions to HKEX’s Central Clearing and Settlement System (CCASS) for matching at the central securities depository level. Because settlement instructions are processed simultaneously by Synapse participants, and are transparent to said participants, parties will be able to identify and resolve trade exceptions earlier than in today’s sequential processing environment, reducing the risk of trade failure.

AM: How will Synapse make a difference to the settlement process of Stock Connect?

EL: The inclusion of A-shares into major indices has attracted many international asset managers, buy-side hedge funds and passive index-tracking funds to China’s equity market. Because of its ease of access, Stock Connect is becoming a preferred option over other A-share investment channels. Many of these international investors are new to the Chinese market and will need to adjust their operational processes to meet the tight settlement deadline. While international investors can leverage the current sequential process to settle trades based on single-sided settlement details provided by the broker/dealer, it exposes international investors to settlement risk.

Operating as a standardized and centralized platform, Synapse disseminates settlement instructions to all parties simultaneously, allowing for concurrent processing while providing full transparency on the processing status of the trade. Once the required consensus is reached and approvals received, Synapse will deliver the settlement instructions to CCASS for settlement. With real-time connection to CCASS, Synapse will also deliver settlement status updates to all parties of a trade immediately after a matching or settlement batch run. As a result, investors and their counterparties will have full transparency, better control, and more efficient management of the entire settlement chain.

AM: How does Synapse benefit the various counterparties in the settlement process?

EL: International investors will have real-time visibility on the settlement status of their trades, which can alleviate some of the pressures involved with the tight settlement window. By standardizing and streamlining post-trade workflows, it helps investors maximize connectivity and efficiencies in a transparent and secure manner.

Custodians will have insights into who has accepted and approved a particular trade, giving them the required information to manage and resolve trade exceptions quickly before the cut-off time. Additional functionality is also built into Synapse to effortlessly handle last-minute changes.

We have had conversations with the broker/dealer community and will be reengaging them to consult, obtain feedback, and ensure an equally seamless workflow.

AM: Will Synapse affect the existing trading arrangements? Can you share the experience of the first phase of the pilot program?

EL: The existing cross-border trading and settlement arrangements between China’s and Hong Kong’s stock exchanges and clearing houses for the Stock Connect Program remain unchanged.

Currently, we have a total of 13 tier-one users of the Stock Connect Program participating in the first phase of our pilot program, including seven custodians – BNP, BNY Mellon, Citibank, HSBC, Northern Trust, Standard Chartered Bank, and State Street. Our pilot users from the buy-side community include China Asset Management, CSOP Asset Management, HSBC Asset Management, Invesco, Mirae Asset Global Investments, and Mondrian Investment Partners.

These firms participated in the testing of the Synapse platform to understand how their settlement operations infrastructure can efficiently integrate within the Synapse environment. Their feedback has been instrumental to the success of the pilot; we look forward to working with them to further enhance HKEX Synapse’s design and features to ensure a successful project.

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