Securities depositaries look at cross-border linkages

It seems like a good time of year to be talking about the future of global capital markets infrastructure, and for a change most of the talking is being done in this time zone. ACG5, the fifth annual meeting of the Asia-Pacific CSD Group, which links the region's Central Securities Depositaries (CSD) was held in Kuala Lumpur last week ahead of the global level conference, CSD6, in Sydney from October 10 to 12.

This will be followed by SWIFT's annual industry forum, Sibos, in Singapore the week after that, which brings together a wider range of market participants.

High on the agenda of the CSD's discussion list, and also to some extent at Sibos, is the issue of cross-border linkage and the relationship between depositaries, clearing and settlement agents, exchanges and central counterparties.

In 1989 the Group of Thirty (G30), a US-based consultative group on international economic and monetary affairs, first called for the development of an effective and fully developed CSD in each country. Since then the focus of G30 recommendations have become increasingly international - taking into account the role of depositaries and settlement and clearing bodies - and it is these recommendations and the question of how to implement them that tend to dominate industry conferences. But talk of establishing an 'AsiaClear' to take on a similar role to the Depositary Trust and Clearing Corp. (DTCC) in the US, or Europe's increasingly consolidated clearing and settlement systems, might be premature.

"We have a much less fragmented infrastructure than we had just a few years ago," says Udo Jenner, director and chief representative of Euroclear in Asia Pacific. "But it's a case of chicken or egg. You don't create trading volume by creating infrastructure links and I think that this may have been the misconception for some time."

This lack of trading flow between markets in Asia Pacific is one of the main reasons holding back consolidation and interconnectivity between the region's markets. Besides being heavily focused on their domestic equities markets many investors are only interested in US or perhaps European stocks. Even though the popularity of sector-based funds has increased there is still a limited flow of trade, particularly between the region's les developed markets.

Besides the element of currency and sovereign risk involved, there are many restrictions that make it difficult, for example the issue of currency convertibility. This makes it harder for investors to get involved in a market such as Korea, China or India, and also means that international or regional clearing agents canÆt play a role. Similarly, being forced to hold a stock for a minimum time frame deters investors who want the ability to get in and out of a market.

Further development of benchmarks and yield curves in the region's fixed income markets would be necessary to further increase cross-border investment volumes in the region. Any region-wide infrastructure would also need to extend beyond the major markets of Tokyo, Sydney, Hong Kong, and Singapore, further complicating the political aspects of any prospective regional infrastructure.

That said, the improvements in securities market infrastructure that have been made domestically in each market over the past few years have laid the groundwork for future developments. Indonesia inaugurated a real-time clearing and settlement system. Malaysia increased its settlement cycle to T+3 and Hong Kong introduced a US dollar clearing system - a move that other markets in the region might soon follow.

Asia's markets should be able to quickly develop effective cross-border infrastructure should changes in market volume and political will occur, especially if the region's market participants continue to increase efficiency and tailor international best practices to their needs. Coming into the process relatively late has also helped.

"The advantage the Asian markets have is that they don't have many legacy systems," says Jenner. "In Europe, the infrastructure has evolved over many years, having built onions, in effect when you peel back one layer of skin there's yet another. And if you need to cut it in pieces you just have to start from scratch."