A review of options by Deutsche Bank for closer integration of clearing and settlement processes in the ASEAN region suggests that participating markets stand to benefit from a reduction in cost and risk.
A white paper, ‘Post-trade Integration in the ASEAN – Challenges and Opportunities’ co-authored by Boon-Hiong Chan and Marko Schulz of the Direct Securities Services team within the bank’s Global Transaction Banking unit, uses the creation of the ASEAN Trading Link for a pan-Asian trading environment across seven ASEAN exchanges as its starting point.
The paper focuses on challenges and opportunities that may arise from any future post-trade integration, drawing on the lessons of related developments in the European market infrastructure environment.
ASEAN securities trading and post-trade infrastructure developments have traditionally followed geographical boundaries but the region’s different regulatory structures, economic maturity and currencies add a certain level of complexity. “The scale and implications of any post-trade linking should not be underestimated,” the authors stress, though indicating that appropriate efforts in that direction will be rewarded.
The paper notes that there are currently no infrastructure links between any of the ASEAN central securities depositories or central counterparties (CCPs) nor are they planned in the current phase of the ASEAN Exchanges project. In addition to clearing, which is not necessarily performed by a separate entity in each location, cash settlement is a mixture of commercial and central bank money. Any post-trade link will need to take into consideration these differences.
It points to three potential methods of CCP integration: merging CCPs across markets to effectively create a pan-regional entity; allowing interoperability; or expanding the eligibility criteria of participants and allowing CCPs to participate as clearing members for each other.
“A single entity across the different markets can have clear benefits for the investment community,” the paper suggests. “If a broker-dealer or its clearing agent is able to post one line of collateral for the trades into the different underlying markets, it can have meaningful cost benefits. In addition, the CCP would act as a single entity to clear trades between the different exchanges and clearing participants.”
At a systemic level, there would also be an overall regional view of daily flows and events, which would help improve regional risk management. Such an option would, however, require substantial legal, regulatory and technological reforms, rules on fair level playing field as well as harmonisation and standardisation across the ASEAN countries.
The complexities in any CCP-linked model include the different currency and liquidity in ASEAN markets, different permissibility around netting and segregation of positions, as well as the related scope and availability of eligible collaterals. To mitigate additional credit exposure, the paper suggests, ASEAN CCPs may need to raise capital and post collateral to each other. In addition, any CCP link would require consideration on how to interact with CSDs as well as further analysis of the direct impacts and benefits to the broker and post-trade communities as a whole.
“Regardless of which CCP-linked model is finally adapted for the ASEAN environment, a key success factor will be ensuring that a broker can manage a single line of margin and collateral for all participating markets from a single clearing membership,” the authors stress.
The paper notes that, as with CCPs, CSDs have a variety of potential models for interoperability and intra-regional settlement. “CSDs merging into a single entity across the different markets could bring similar benefits as the idea of a single CCP entity,” it suggests, though this single entity would also face practical challenges, resembling those of the single-entity CCP.
The authors acknowledge that, “No progress comes without risk. Progress towards closer post-trade integration of CCPs and CSDs in the ASEAN region will be a journey.” Any reform to the trading and post-trade environment is likely to be most successful, they conclude, “if public and private sector stakeholders can work closely together to establish what could become a unique approach to regional integration, using the experience of other regions as a guide.”