With pressure building for firms to manage regulatory and economic pressures, The Trade Asia asked post-trade group DTCC to identify the top 10 themes changing the face of clearing and settlement in the region.
1. Stock Connect expansion
The Shanghai-Hong Kong Stock Connect will shortly be joined by the planned Shenzhen-Hong Kong Stock Connect as China continues to open up its capital markets.
In terms of the Shanghai-Hong Kong Stock Connect volumes continue to grow. Central trade matching volumes for Hong Kong clients have substantially increased. Firms interested in using the Stock Connect are moving beyond the due-diligence phase into active participation as issues, such as tax uncertainties, are resolved.
2. Hedge fund interest in Stock Connect
Hedge funds have engaged with the Shanghai-Hong Kong Stock Connect but not directly. They are clearly interested in trading in the Shanghai market but to date have been reluctant to get directly involved. Many are using synthetic/derivative structures to gain exposure to China.
3. Operational challenges and China
China’s short settlement cycle clearly presents a challenge for many institutional investors. Although there are operational and legal challenges, many firms are investing in resources to participate in, and actively use, the Stock Connect.
4. Regulatory headaches
New regulation is likely to cause a collateral supply challenge for some firms in Asia this year. However, the recently revised implementation date for non-cleared derivatives margin rules to September 2016 from the end of this year will be welcomed by institutions in Japan, Hong Kong, Singapore and Australia. This will give them additional time to develop, implement and test new systems.
5. The collateral supply challenge
The implementation of Basel III and new regulations for the mandatory margining of non-cleared derivatives could create a collateral supply challenge for some firms. This supply challenge will be exacerbated by specific Asian market dynamics and structural issues, specifically the lower levels of sovereign debt issuance (often used as collateral) in Singapore, Australia and Hong Kong as well as the regionalisation of clearing.
Regulators have expressed that they will work to tailor the local regulations with the goal of minimising the supply challenge. Another collateral supply challenge stems from prohibition of re-hypothecation of collateral, which presents liquidity management challenges due to a potential increase of funding costs and inventory control for firms.
6. Mandatory clearing regulations will evolve
While there are jurisdictions that already have some form of mandatory clearing of certain derivatives we expect to see more detailed proposals by the regulators to significantly broaden these requirements, both in the scope of the types of derivatives cleared as well as additional regions proposing their own rules.
7. Improving OTC derivatives data
We will see a focus on the quality of OTC derivatives data that is reported and further asset classes being required to report. More asset classes are to be regulated and regulators are expected to progressively widen the base of reporting to include more asset classes, such as foreign exchange in Singapore, and look for transparency on trades that have occurred in one jurisdiction but are booked offshore.
8. A focus on data sharing
Regulators in some jurisdictions will start tightening standards for validations to ensure that reported data is reliable. Firms are quickly realising that trades confirmed electronically can be reported more easily from central platforms. With more than 40 million open positions reported globally – the majority of the world’s OTC derivative trades are now captured by a trade repository.
More data sharing agreements between jurisdictions are likely as regional regulators strive to achieve transparency by tapping into data reported in other jurisdictions. While reducing the burden on the industry, this does raise the bar on cooperation and data sharing between the regulators.
9. Regulatory scrutiny
Regulations implemented in the wake of the global financial crisis are likely to come under greater scrutiny and the trend towards shorter settlement cycles will continue apace.
Divergent regulations introduced following the global financial crisis continue to cause challenges for global firms, notably in Asia where the region’s international firms are dealing with not only local regulation but also U.S. and European regulations. Some of the complexities caused by this will continue to be a focus, particularly if global investment activity picks up and there is less of a home bias in investment activity.
10. Shorter settlement cycleAustralia, New Zealand and Singapore are increasingly poised to implement T+2 for cash equity transactions in early 2016, with the US also moving steadily towards implementing its own two-day cycle, while Japan plans to implement T+1 for its government bond transactions in 2017. Other markets in the region will be watching intently how this continues to unfold over the next 12 months.