SIBOS 2014, Boston -- While the impact of regulation on financial institutions continues to dominate the agenda at this year's Sibos, the promise of increasing connectivity in Asia is stirring much more positive feelings especially among securities service providers.

 

From the Shanghai-Hong Kong Stock Connect to the Asean funds passport scheme, banks are anticipating that the breaking down of investment barriers in the region is going to help their top-line revenues. This comes not a moment too soon as spread compression and the unusually low interest rates have been a drag to earnings for the past several years.

 

The Shanghai-Hong Kong Stock Connect, which should come into play this October, marks one of the most significant developments opening the China market to international investors. The speed in bringing this mutual market access programme by both the Shanghai Stock Exchange and the Hong Kong Stock Exchange is unprecedented.

 

This is especially given the operational complexity in matching standards in both markets not least the different trade settlement cycles. "This is probably the most challenging timing cycle I have ever seen anywhere in the world," says Tony Freeman, executive director at Omgeo which is a specialist in middle office. While Hong Kong operates on T+2 for both securities and cash, China has T+0 for securities and T+1 for cash. "China is basically a domestic market," he adds.

 

It will be particularly challenging for overseas investors who want to participate as many are operating in a different time zone. Adds Freeman: "It is counter-intuitive as investors will need to know what their trade will be tomorrow. The failure of a trade is not an option."

 

The Asean funds passport scheme, which today includes the markets of Singapore, Malaysia and Thailand, attempts to replicate Europe's UCITS platform for mutual funds, and forms part of the region's aspiration to create an Asean Economic Community by the end of 2015. "Education will be critical to create opportunities going forward," believes Shrinath Bolloju, managing director and head of institutional cash and securities services, Asia-Pacific, for Deutsche Bank.

 

Not all the issues have been resolved, he notes, including resolution of disputes and the harmonization of rules. But trade bodies working to launch the scheme as well as regulators are cognizant of the importance of clarity in the legal framework to make it match the success of UCITS. "Connectivity in the region is critical," adds Bolloju. "It helps to deepen markets and increase liquidity thereby minimize the impact of external shocks."

 

The opportunity for service providers will be varied with integrated houses that operate a broker-dealer plus custody likely to be the biggest winners. One market participant notes that given the very tight settlement cycle, the ability to minimize time delays and allow for fungibility of securities will be critical. "It also will require a re-engineering of the process and change in behaviour," a service provider comments. "It means operating on a 24-hour cycle as opposed to 8am to 6pm."