He announced the SGX initiative at a conference organised by Citigroup in Singapore discussing integration in Southeast Asia, attended by senior officials from stock exchanges in Indonesia, Malaysia, the Philippines, Thailand and Vietnam. Citigroup Corporate and Investment Banking hosted an event entitled Crossing Borders: Towards an Integrated Asean Market, in Singapore on 19-20 July.
ôWe would like to see the establishment of a regional clearing and depositary utility, owned by the exchanges, to facilitate clearing and custody for cross-border trading in Asean,ö Hsieh says.
Counterparts such as Yusli Mohamed Yusoff, CEO at Bursa Malaysia, Muhammad Senang Sembiring, director of trading at Jakarta Stock Exchange and Francis Lim, president and CEO at Philippines Stock Exchange, expressed initial support for the idea and promised to review it.
Mike Sleightholme, CitigroupÆs Asia-Pacific head of direct custody and clearing, notes the Asean region is the worldÆs fourth-largest trading area, covering around 600 million people in 10 countries, but can improve cooperation in capital markets in order to meet the challenges of attracting global portfolio investment.
Currently, brokers assume counterparty risk for cross-border deals, interfacing with various clearing houses and third-party custodians. Hsieh suggests the proposed utility would assume that risk, such that any custodian linked to it could access the entire region.
Hsieh notes that the amount of trading within Asean is tiny compared to flows of capital entering from the rest of the world. The regionÆs markets are fragmented, each developing at a different pace, and with most operating as monopolies. These factors result in the regionÆs markets having different market practices and operating processes, which creates frictional costs for cross border capital flows.
This is unlikely to change soon; Hsieh believes the examples of tie-ups prevalent in Europe and now across the Atlantic are unlikely to work in Asia. Entities such as Euronext, which brings five national exchanges under one roof, prosper because Europe provides a common regulatory framework that doesnÆt exist in Asia. Local politics, meanwhile, gets in the way of merging AseanÆs stock markets.
But Hsieh says looser partnerships focused on back-office operations can serve a similar function: ôWe can integrate in the post-trade area, by harmonising market standards and practices. This is akin to creating a common gateway to Asean that reduces costs and barriers, and if this is achieved, it can then support other initiatives.ö
Global custodians will have a role to play as regional exchanges integrate, Hsieh says. Custodians bridge structural differences among capital markets and underwrite risk so that customers can operate in a standard operating environment. He says his proposed utility should act like a global custodian by adopting standards for processing, clearing and settling trades, accurately and at low cost. Adopting international standards in areas such as messaging protocols then makes it easier for exchanges to use off-the-shelf products as well.
ôWe are open to any business cooperation that makes sense and lowers costs to our users,ö Hsieh adds. ôUnless local markets in Asean cooperate, they will remain fragmented and small, and risk marginalisation.ö