In Asia, where competition in clearing has been slow to develop, Chi-East's use of an independent central counterparty (CCP) for clearing Japanese securities traded on its platform could encourage other markets to open up their clearing landscape in the longer run, says Ned Phillips, CEO of Chi-East.
Chi-East has now completed the roll-out onto its non-displayed trading platform of the full universe of 3,264 securities listed in Hong Kong, Japan and Singapore, including all SGX-listed shares, all Hong Kong main board-listed shares, components of the TOPIX 1,000 and all listed exchange-traded funds in the three markets. The firm aims to add Australian stocks later this year.
A joint venture between trading venue operator Chi-X Global and the Singapore Exchange (SGX), Chi-East says all of its initial participants – including Instinet, Deutsche Bank, Morgan Stanley, Nomura and UBS – have now successfully matched trades on the platform.
“As we're the first to use the CCP model in Asia, its important for us to prove that it works. With any new business model, there are some early adopters, but there's also a larger segment of the market that wants to wait and see. Now that we've set the model in place, the next step will be to explain to all the other firms to assure them that the trading process works and to show them that it's more efficient and the cost savings that are available,” Phillips says.
Chi-East's use of LCH.Clearnet for clearing Japanese securities is a first for Asia, a region where clearing and settlement has traditionally been monopolised by the domestic exchanges. Trades in Japanese securities on Chi-East's platform are executed by offshore clients and are cleared and settled through LCH.Clearnet's platform in London.
Singapore trades on Chi-East's platform are cleared and settled through SGX's central depository facility and trades in Hong Kong-listed stocks are cleared through Hong Kong Exchanges and Clearing's CCASS/3, a book-entry system in which trades are settled on a continuous bet or trade-for-trade basis.
Open door?
Overall, Japan has the most open market structure of the major Asian markets and last year allowed proprietary trading systems, including Chi-X Japan, operated by Chi-X Global, to clear and settle through the Japan Securities Clearing Corporation (JSCC). There is no specific regulation preventing independent CCPs from establishing domestic clearing operations in Japan, but a combination of high set-up costs and the JSCC's efficiency has put off potential competitors, market participants say.
Elsewhere in Asia, exchanges typically operate a post-trade monopoly reinforced by regulation and/or common ownership of clearing and settlement facilities. But Phillips believes Chi-East's deployment of LCH.Clearnet in Japan will add to the pressure for change in other Asian markets.
“Changes that happen in one market do have effects on other markets. We're not trying to say that just because the CCP model has been introduced in one market, it has to be introduced in another. But if we introduce choice and competition to bring more efficiency, and lower the costs of clearing and settlement, that's beneficial to the users. Other exchanges will look at that. It doesn't mean things need to change overnight but it will certainly help the cost structure for clearing and settlement in Asia,” he says.
Clearing competition is only a relatively new phenomenon globally. In the United States, the Depository Trust and Clearing Corporation (DTCC) operates as a post-trade utility, while post-MiFID Europe offers a range of models, with vertically-integrated entities such as Deutsche Börse and SIX Group of Switzerland competing against newer players such as EMCF and EuroCCP, a subsidiary of the DTCC. These latter firms, which entered the European market by clearing trades executed on the multilateral trading facilities that have taken trading market share from incumbent exchange groups, have combined with SIX's x-clear and LCH.Clearnet, Chi-East's clearing partner, to promote a new framework for post-trade interoperability with the aim of cutting overall trading costs. Phillips suggests the pace of market infrastructure evolution is accelerating in all markets.
“Years ago the change in market structure was much slower. But given the way that trading has changed in Europe and the US, as well as in Asia with more alternative platforms coming and changes in regulations, the speed of change of market structure is improving. As to when it will happen, hopefully soon, and it's going to be something that we'll keep pushing and working on,” he says.
Chi-East, which started its soft launch on 11 November, will set a date shortly for the release of post-trade data. The platform intends to post-trade price and volume data on a post-trade basis through Bloomberg, Thomson Reuters, Sungard and Fidessa.