A Speech I Gave At Sungard City Day Singapore On Futures Post Trade Processing
Good Afternnon. My name is Steve Edge Principal of AsiaEtrading.com. It’s a great pleasure to be invited by SunGard to come and speak with you today and moderate this panel on the Challenges in Post-Trade Processes and Operations in Asia.
Asia’s derivatives industry is quite old in fact with cotton trading in India and rice in Japan among others. But it hasn’t been until the last decade or so that we have seen the derivatives trade flourish in Asia. In fact, in 2009 6.68 billion contracts traded hands in Asia last year. This is just the listed products and doesn’t include OTC.
The speed of trading has increased over the years as well. Exchanges like the Tokyo Stock Exchange, Bursa Malaysia, the National Stock Exchange of India to name just a few have all improved their trading platforms to reduce trading latency. When latency is reduced different kinds of traders will enter the market with more sophisticated machine driven trading strategies adding further volumes to the derivatives pie.
Derivative products in Asia have not only expanded but diversified. You will find most kinds of listed derivatives trading across the zone including index futures, index options, single stock futures, single stock options, commodities futures, currency futures, interest rate futures and a myriad of OTC futures as well.
Close relationships to develop and foster futures trading are abundant in Asia. The Singapore Exchange is a prime example with its futures products tied to Taiwan, India, Japan and even the US. The Singapore Mercantile Exchange has already signed a co-operation deal with TOCOM and the SMX isn’t expected to go live until next month. Bursa Malaysia and the Indonesia futures exchange are also colluding to improve crude palm oil futures trading.
One of the hindrances to processing this growing and diverse trading flow is that financial firms have legacy technology to contend with. We had the Asia credit crisis in 1997, the Dot Com bubble in 2001, SARS in 2003 and more recently the Global Financial crisis. All of these events have made firms averse to investing in the necessary technology to process the growing volume of trades efficiently. Let me ask how old is your post trade processing infrastructure at your firm? 10 years old? 15 years old? Anyone with 20 year old technology? That being said the financial industry is going to need a major upgrade across the board in Asia to reduce manual processing, operational risk and achieve true STP.
What are pressures the business is faced with?
As we know many. Regulatory Scrutiny, Delivering Acceptable Returns, Cost Reduction, Managing Risk Appropriately, Restoring Customer Confidence, Increasing Transparency, Finding Liquidity and Enhancing Operational Effectiveness. Given our time constraints today I will touch on only a few of these.
Asia has always been a highly regulated protectionist environment but is shifting to a more open market. The Singapore Exchange and Chi-X are forming a joint venture Chi-East that will compete head on with SGX. The Singapore Mercantile Exchange has been given license to operate directly against the Singapore Commodity Exchange the SGX’s subsidiary. The Australian Exchange and the Australian Securities and Investment Commission have also mandated exchange competition. Japan’s exchange competition regulation is finally evolving after 12 years of stagnation. This is only the beginning.
Asia has the advantage of observing the problems and successes of the west and can thus formulate tried regulatory policies that work the first time. For example, MiFID doesn’t require a national Best Bid and Offer like REG NMS does in the US. As a result advantage is given to those with access to many sources of liquidity in Europe who can then buy in one market and sell in another unfairly.
OTC Standardization and central clearing is not just a regulatory focus in Asia but globally as we all know why. LCH Clearnet and the SGX’s AsiaClear are already serving these products and stand to benefit from the move to Central Clearing Parties and standardization.
Acceleration of market reforms is evidenced by my previous comments. What once has been a slow moving regulatory environment is now becoming a more proactive and forward thinking institution. We are seeing Delivery versus payment and net settlement systems being put in place. Rolling T+3 settlement and T+1 in futures. Securities lending and same day payment of funds are now all being vigorously implemented.
The Holy Grail of course would be a pan-Asia regulatory policy like REG NMS or Mifid but that is still a long way off.
Transparency has also been thrust to the top of the list of market reform not only globally but also in Asia where it has lagged behind the west. Risk management and visibility of risk dominate priorities in the post-trade environment. We’ve all heard the stories of Lehman’s trading on Friday and then going bankrupt over the weekend leaving clearing houses and counterparties on the hook to deliver securities or cash. No one wants this to happen again. Real time risk to the firm or the client is a goal of improving transparency. Moving away from batching and upgrading legacy technology to manage the sheer volumes to produce Monte Carlo or VAR results allowing firms to be more nimble to act when necessary. Not only that but being able to find liquidity when needed to offset and mitigate risk.
Efficiency in the post trade environment has always been a challenge. 2/3s of the cost of a trade is bourne by the back office and needless to say in a competitive commoditized trading environment the focus is now on operations.
STP is the goal. One of the hurdles for achieving true STP is that no standard for messaging or for interoperability, although attempted, have been implemented that could be used for adopting STP across markets. The organizations using STP in their own organizational functions are using different messaging standards. Moreover, there is localized STP but only within clients who are networked with one Service Provider. The issue of inter-operability between STP Service Providers has not been effectively resolved. The benefits of STP are many. Shortening of the settlement cycle and turnaround time, Increased transparency, Avoiding costly duplication of work and manual intervention, Reduction in Operational risks and errors, Faster data capturing, processing and report generation, improving the cost effectiveness of the market and Better regulation by systematic audit trial can be realized. STP delivers and Increases the overall efficiencies in many aspects of the operations.
That’s all from me. Thank you very much for your attention. Now let’s move on to the main event. The panel – Challenges in Post-Trade Processes and Operations in Asia.