The key to launching a successful regional trading facility in Asia is in the post-trade arrangements, says Andrew Freyre-Sanders, global head of client electronic execution for equities at Royal Bank of Scotland. Chi-East, the sell-side only dark pool joint venture between the Singapore Exchange (SGX) and alternative trading venue operator Chi-X Global, has almost got it right.
“When a new venue launches, one of the first questions is: How are you going to solve clearing and settlement?” says Freyre-Sanders. “Chi-East wants to create normalised execution across four Asian markets but to do so they need to solve the challenge of integrating four national clearing processes.”
Chi-East's launch in Hong Kong, Singapore and Japan on 11 November 2010 was a bold step towards creating a truly pan-regional trading venue in Asia. But its pan-regional ambitions were hindered by the last-minute withdrawal of market data by the Australian Securities Exchange, which prevented its trading of Australian securities. Brokers that have connected to Chi-East include Deutsche Bank, Instinet, Morgan Stanley, Nomura, UBS and The Royal Bank of Scotland.
Regulated as a recognised market operator by the Monetary Authority of Singapore, Chi-East conducts clearing and settlement via the existing market mechanisms in Hong Kong and Singapore – Hong Kong Exchanges and Clearing and SGX respectively. In Japan – and once it launches in Australia – it offers clearing through a central counterparty (CCP), European firm LCH.Clearnet.
The need to connect to multiple clearers has drawn comment from some brokers as being overly complex. Freyre-Sanders acknowledges this but says Chi-East adds value that other regional venues cannot. He says that the majority of trading platforms that operate on a pan-regional basis in Asia use one or more sponsoring brokers that report and settle trades with the domestic exchange rather than the executing brokers doing it themselves.
There are two downsides to this. First, it is the reporting broker who gets to claim the market share on Asian exchanges if different from the executing broker. In addition, each trade executed on an alternative venue without a clearing function must be cleared as a single ticket rather than netted and that makes smaller trades uneconomical to process.
Chi-East CCP model avoids these problems while still giving access to a wide range of stocks and allowing trading in the dark to minimise market impact. But its different approach to clearing and settlement in each national market means it has more appeal in some markets than others.
For trading Singaporean stocks, trades are automatically reported to SGX, so the broker is required to implement connectivity to Chi-East and establish an audit trail to ensure that fills reported back for orders match the trades made.
For Hong Kong that same connectivity is required. In addition the selling broker is responsible for reporting the trade to HKEx, adding a further loop to the process. “When I trade Hong Kong stocks in Chi-East I get a fill but it is the notification of a fill. My true fill is when Chi-East simultaneously sends an order to us as buyer and the other broker saying I’ve crossed. The seller then has to then report that to the exchange. Once that’s done the completion of the trade is between me and the other broker,” Freyre-Sanders explains. “We prioritised doing Singapore and Hong Kong because although the technological hurdle was higher we felt the clearing and settlement was very clean once we’d got the tech implementation done.”
Chi-East's use of its own CCP in Japan and Australia leaves brokers that trade on Chi-East and the local exchanges with two separate clearing houses to deal with – LCH.Clearnet and the local clearer – creating more “moving parts” overall. The charges for Australian clearing through LCH.Clearnet are not significantly different to those on offer from the Australian CCP, CHESS, but, from a middle-office settlement perspective, the flows are more complex, according to Freyre-Sanders. In Australia and Japan, Chi-X Global is establishing national trading venues – planned in the case of Chi-X Australia which is waiting on regulatory permission and operational in the case of Chi-X Japan which launched on 29 July 2010. For some firms that may create a dilemma between using a market-specific alternative trading venues or Chi-East.
Chi-East's clearing arrangements played a role in RBS prioritising trading on the Hong Kong and Singapore markets, and its strategy has proven successful so far.
“We haven’t had any negative client feedback at all because as far as clients are concerned we’re just doing crosses on exchange in Singapore and Hong Kong, so they have no issues as long as we get a better price. A few had raised clearing and settlement arrangements not being clear in Chi-East Australia and Japan and said they were not as comfortable,” Freyre-Sanders says.