Diversity is a defining characteristic of Asia. In economic terms, investors come to the region to take part in its incredible economic potential, and find that it is realised by a wide range of countries at different levels of development. On the flipside, this variety has practical implications, as each individual market has its own set of rules governing post-trade processing. Everything from clearing and settlement to custody can be very different from one market to the next.
It is therefore not only important for money managers to understand the regulatory environment in the Asian markets where they invest, they also need to think about how the region might develop in the future. Will it become a fully integrated market, along the lines of the Euronext in Europe? Or will the individual markets remain distinct, but move closer to each other in terms of rules and practices?
These questions were considered at a panel discussion at NeMa Asia 2016, which was led by Adam Vine, Global Co-Head Banking and Director, Head of Asia Pacific, Thomas Murray Data Services. He framed the debate by asking the panellists whether the region is heading towards integration or harmonisation.
There was general agreement among the panel that full-blown integration was unlikely in Asia. Although there are clear benefits of an integrated model – such as a single order book and increased liquidity – it remains an aspirational goal. Harmonisation of market practices in post-trade practices is much more realistic; but even this modest goal is impeded by the absence of a region-wide body to drive change.
“As a general comment, pan Asia I’m not sure if there is the political will or need to drive harmonisation,” said Ryan Cuthbertson, Global Head of Product, Direct Custody and Clearing, HSBC Securities Services. An external event or force, he said, is needed to entice markets to become more efficient and decrease frictions between them.
“As intermediaries in the industry, we can help guide the conversation and share best practice, but ultimately harmonisation really needs to be driven by political co-operation,” said Mr. Cuthbertson.
Bernie Kennedy, Senior Business Advisor in the COO Office at Hong Kong Exchanges and Clearing Limited said that there are clearly synergies that can be gained across the region. She said that Asia could benefit from lessons learnt in the US and Europe to drive basic efficiencies, and pointed out as an example, that a common approach to regulatory reporting in Asia would significantly improve both market participants reporting efficiency and provide a common regulatory view of market activity.
“We should learn from what’s happened in other environments and take that on board now rather than hit an inflection point in the form of regulatory pressures,” she said.
At the same time, the panel was in agreement that although Asian market infrastructure could be improved, especially when it comes to reducing friction between markets, the region is by no means fundamentally flawed. On a day-to-day basis regional markets are able to complete their mission of facilitating the trades of investors in a timely manner. The upshot is that improvements to the system will be evolutionary rather than revolutionary, with an eye towards what has happened elsewhere.
“We have the ability to cherry pick from what’s happened in Europe,” said Mr. Cuthbertson. “I don’t think we need a blunt instrument to drive harmonisation. We can use a scalpel instead.”
The willingness of individual markets to coordinate more with their regional peers is partly dependent on the level of economic development, said Mr. Cuthbertson. Each country is at a different stage of the growth cycle, with different economic needs, and varying appetites for foreign investment.
Despite this diversity of interests, Asia has made significant progress towards some uniformity in recent years. Mr. Cuthbertson highlighted the region’s push towards a standardised T+2 settlement cycle, as well as a positive trend in corporate governance – especially with listing requirements, transparency standards, and proxy voting. In addition, ISO 20022 is gradually becoming accepted as a standard messaging protocol.
The challenge going forward will be maintaining the momentum. Full integration might be an unrealistic goal, but the evident progress that has already been made in Asia suggests that the region is already taking seriously the ongoing process of reducing friction between markets.