Monday 28 October 2019

Blockchain is innovating Asian stock exchanges, but there is a genuine need for collaboration to ensure the end user benefits from its full potential.


Stock exchanges in Asia Pacific are powering ahead with blockchain but there's a need for genuine collaboration to ensure the end user benefits from its full potential.

Harmonising trade across Asia Pacific has long seemed a pipe dream for investors grappling with the frictional costs of trading, with multiple counterparties (exchanges, central securities depositories, central counterparty clearing houses, global custodians, broker-dealers and agent banks) sitting between the issuer and investor.

" Stock exchanges are rapidly gaining ground on the adoption of Blockchain, integrating the technology into their core systems and activities. "
With so many intermediaries in the securities chain, global connectivity can at times be impeded, especially as a great deal of post-trade infrastructures utilise their own, bespoke interfaces and proprietary messaging applications.

Among its many uses, blockchain or the distributed ledger technology underpinning it has long been vaunted as a potential solution to the challenges facing securities markets as cost pressures and the need for new, speedier ways of trading and augmenting practices intensify.

Right now across Asia Pacific, a number of potentially pivotal developments are taking place in the trading and post-trade space, with providers testing and even integrating blockchain technology into their core systems and activities.

ASX leading the charge

The Australian Securities Exchange (ASX) has been an early mover when it comes to blockchain innovation, announcing that its 25-year-old Clearing House Electronic Sub-Register System (CHESS) would be replaced with a DLT solution. ASX has partnered with Digital Asset Holdings to create a working prototype for cash equities clearing and settlement processes. BNP Paribas Securities Services has participated in the working group for this transition programme over recent years.

Experts say a DLT-supported platform will enable ASX to deepen its product pool and provide for a better, safer client experience.  ASX has since confirmed that it will go live with DLT in March-April 2021.

HKEX turns to blockchain

Unlike the ASX's move to adopt DLT enterprise-wide, Hong Kong Exchanges and Clearing (HKEX) is working with Digital Asset and BNP Paribas to enhance its post-trade infrastructure. This is aimed more specifically at accelerating the processing of northbound transactions on Stock Connect, which links the HKEX bourse with its counterparts in Shanghai and Shenzhen.

Designed to offer international investors easier access to Chinese A-shares, Stock Connect has encountered some issues that have prevented institutional investors from taking part. Investors trading China A-Shares via Stock Connect currently only have a four-hour time window to settle their transactions, forcing institutions to pre-fund their trades, thereby exposing them to settlement risk.

The absence of real-time delivery versus payment (DVP) also precludes some regulated fund products such as Undertakings for the Collective Investment in Transferrable Securities (UCITS) and Alternative Investment Fund Managers (AIFMs) from trading on Stock Connect. Nonetheless, a number of leading providers including BNP Paribas have developed integrated broker-custodian models or special segregated account structures to facilitate real-time DVP for clients. BNP Paribas and HKEX have been working extensively to further improve the process for end investors.

HKEX is developing a prototype solution to enable market participants to specify their settlement workflows in advance, helping to bridge time zones, while allowing for real-time synchronisation of the post-trade status between asset managers, brokers, custodians and the Hong Kong Securities Clearing Company, HKEX's CCP. It is hoped that this DLT solution will help increase foreign investor flows through the Stock Connect access scheme.

Singapore improves its efficiency

The Singapore Exchange (SGX) is also integrating blockchain technology into its core infrastructure alongside ASX and HKEX. In November 2018, SGX and the local regulator the Monetary Authority of Singapore (MAS) confirmed they had successfully developed DVP capabilities for the settlement of tokenised assets across multiple blockchain platforms.

" Stock exchanges will continue to leverage blockchain technology which can bring about major improvements in securities trading for end investors and intermediaries. "
The prototype shortens the trade settlement cycle and reduces settlement risk. And the simultaneous exchange and settlement finality of digital assets and securities on different platforms vastly improves operational efficiencies during the course of the transaction. SGX and MAS are also assessing whether to automate the DVP settlement process through smart contracts, or self-executing, algorithmic legal agreements.

In March 2019, SGX and SWIFT announced their intention to trial a platform for e-voting based on blockchain technology. The proof-of-concept (PoC) trial sets out to test a DLT voting solution involving issuers and a central securities depository (CSD), with data managed over a permissioned private blockchain. If successful, the platform could set a global standard for fund managers and corporate issuers.

The proof of the pudding is in the collective eating

The proliferation of blockchain proof-of-concepts (POCs) underway across banks, infrastructures and institutional investors have led to calls for securities markets to ensure initiatives are harmonised as much as possible across organisations. The technology risks being developed in narrow, siloed ecosystems, possibly preventing future interoperability if firms don't agree on universal standards and implement joint governance frameworks to underpin blockchain.

Just as SWIFT enhanced industry-wide efficiencies and reduced market risk by shaping the standards underlining financial messaging, leaders in the blockchain movement should define a similar approach. This could be done by integrating DLT with ISO 20022 or through an entirely new solution. A failure to find common ground on market standards could result in a blockchain that is too highly fragmented to deliver any real cost benefits for the end users.

It's only the beginning

It is very likely that stock exchanges will continue to leverage blockchain technology and pursue proof of concepts which could bring about major improvements in securities trading for end investors and intermediaries. Anticipated improvements could principally come in the form of lower trading costs and the removal of a number of the risks involved, and could lead to firms accumulating healthier returns.



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