APAC’s capital markets are being transformed by the introduction of shorter settlement cycles, advances in technology, and new regulations.

Ian Strudwick, Managing Director, Head of Asia Pacific at Broadridge, looks at how these changes will impact the region’s banks and brokers in 2024.

1. T+1 in North America piles pressure on APAC firms

Starting in May 2024, the United States, Canada, and Mexico, will shorten their settlement cycles to T+1. As 50% of all Asian cross-border settlements involve North American securities, APAC financial institutions will be affected by these changes.¹ 

Due to the time-zone differences between North America and APAC, APAC banks will have to perform all their post-trade processing (and other activities like FX management, corporate actions, and securities lending) on T date once T+1 takes effect, which could result in more trades failing to settle. If trade fail rates increase, local firms will likely face higher costs or even stiff financial penalties.

To avoid this scenario, APAC firms will either need to expand their physical presence in North America, adopt a “follow the sun” operating model, or automate their middle and back-office operations.

Amid growing concern that APAC financial institutions are not doing enough to prepare for T+1 in North America, expect more firms to accelerate their planning in early 2024. Read the latest T+1: a problem for Asia report to get ready.

2. Shorter settlements in APAC could gather momentum

A handful of APAC markets are talking about shortening their own settlement cycles.

Having phased in T+1 for listed equities last year, India’s regulator plans to roll out a voluntary T+0 settlement cycle to sit alongside T+1 this year, before introducing instant settlements in 2025. ² 

Although India’s rollout of T+1 went ahead without much incident (barring a brief spike in fails), experts warn that having T+1/T+0 operating in parallel to each other risks causing liquidity fragmentation between retail and foreign investors, with the former expected to settle on T+0 and the latter on T+1. ³

Elsewhere, the Australian Securities Exchange (ASX) is also speaking to its shareholders about the possibility of moving to T+1.

Although one or two APAC markets are shortening their settlement cycles, most of the region is sticking with T+2. However, this could change once North America goes live with T+1. Banks and brokers should plan ahead for more APAC markets to adopt T+1. They could do this by replicating some of the work done already with their preparations for T+1 in North America.

3. AI will continue to be disruptive

APAC-based banks and brokers are increasingly embedding artificial intelligence (AI) into their workflows.  Our clients in Asia are excited about the opportunities to use AI to automate manual data reconciliation and aggregation.  They also told us that they are counting on being able to use AI to get actionable insights about their business processes. Chat technology will allow decision makers to be closer to the data thus allowing for deeper connections. 

Generative AI tools, such as Generative Pre-trained Transformer (GPT) technology, are evolving at a blistering pace, with highly customized GPTs now being integrated into the front, middle-, and back-office. For instance, BondGPT, answers complex bond-related questions and assists traders in their identification of corporate bonds in real time, a process that previously often took 20 minutes or more.⁴

Other providers are incorporating GPTs into chatbots, where they can help clients with Know Your Client (KYC) or account transfers , allowing firms to free up internal resources.

APAC’s appetite for AI is only expected to trend upwards in 2024 as providers harness the technology to improve user experiences and obtain operational efficiencies.

4. Distributed Ledger Technology (DLT) is still a priority

Although DLT has suffered a few setbacks lately, the industry is still taking an active interest in the technology’s development.

Broadridge’s award-winning Distributed Ledger Repo platform is one example of a scalable DLT solution operating in the market today , which is taking cost and risk out of the $10 trillion repo market. 

With appetite for digital assets (i.e. security tokens) growing, the industry will continue to collaborate on ways to drive better interoperability between the different DLT protocols. 

Without DLT interoperability, the digital asset market will struggle to reach critical mass.

APAC markets will spend a lot of time working on DLT initiatives in 2024.Watch for Broadridge’s fourth-annual Digital Transformation and Next-Gen Technology Study in February 2024 for more insights into AI and DLT investment decisions and practical use cases.

5. The focus on trade lifecycle simplification intensifies

APAC firms are looking for ways to simplify their trade lifecycles as they navigate difficult market conditions such as complex geopolitics, market volatility and the introduction of shorter settlement cycles.

Many firms are now turning to their service providers who are using innovative technology solutions to make their trade lifecycles more seamless.

Achieving tangible results here will not be easy, however, due to many institutions being saddled with legacy technology stacks operated by multiple vendors, and their ongoing reliance on siloed processes and systems. 

Technology partners who can simplify every aspect of the trade lifecycle with modular solutions will give banks and brokers an edge, enabling them to lower the cost of ownership while also becoming more agile to grow their businesses. 

Expect more APAC banks and brokers to explore how they can simplify their trade lifecycles in 2024. Keep an eye out for the upcoming survey from Datos Insights about trade lifecycle simplification due to be released in Q1 2024. 

6. ESG gains a bigger foothold in APAC

First Europe, then the U.S., and now APAC: environmental, social, governance (ESG) investing has become a worldwide trend, sparked by global events (e.g. COP pledges on reducing fossil fuels, etc.), regulation, growing client demands for sustainable returns, and risk management considerations (i.e., avoiding stranded asset risk). 

Regulators in Singapore, Hong Kong, and Taiwan have each introduced reporting and disclosure guidelines for ESG funds that are aimed at reducing the risk of greenwashing while making it easier for retail investors to understand what they are buying. ⁵

Japan’s $71 billion sustainable fund market is also facing a clampdown from the country’s regulatory body. Now, only funds that consider ESG as a “key factor” when constructing their investment portfolios are permitted to market themselves in Japan as being ESG funds. ⁶

Japan is also imposing mandatory disclosure standards on domestic companies, while the Japan Exchange Group, operator of the Tokyo and Osaka Stock Exchanges, is introducing a “name and shame” policy to encourage better governance at listed companies. ⁷

Global sustainability disclosure regulations (i.e. the EU’s Sustainable Finance Disclosure Directive, Corporate Sustainability Reporting Directive, the U.S. Securities and Exchange Commission’s (SEC) climate related disclosure requirements) are forcing APAC companies with international footprints to report on ESG. This will create additional workloads for impacted organizations.

ESG will likely become an increasingly important priority for APAC financial firms, including banks and brokers, as we move into 2024.

7. China continues to open up

Following in the footsteps of Stock Connect, Bond Connect, and ETF (exchanged traded fund) Connect, Swap Connect became the latest mutual market access scheme linking mainland China with Hong Kong. The higher interest rate environment has led to increased demand for bonds and swap products.

Launched in May 2023, Swap Connect lets overseas investors trade onshore OTC derivatives, while at the same time also permits onshore investors to access OTCs in Hong Kong.

Although Swap Connect has been welcomed by foreign investors as they can now hedge their onshore China bond exposures, there have been teething issues - with some traders encountering difficulties when unwinding their positions.⁸

Enhancements to existing China access channels and additional market reforms will continue in 2024.

8. Securities finance comes to the forefront

Securities finance is gaining momentum in APAC as more countries loosen restrictions around short-selling. Additionally, firms are also embracing securities lending as they try to obtain additional revenues amid challenging return conditions.

Bursa Malaysia announced rule changes permitting more financial institutions to engage in short-selling⁹, and the Philippines Stock Exchange finally gave its approval to allow short-selling in 2023.¹⁰

This comes as regional investors, many of whom are struggling to produce returns, look to generate supplementary income through securities lending. As more firms start participating in securities lending, they will need to implement wholesale changes to their middle- and back-offices. A shift away from on-premise technology installations to hosted, cloud-based solutions will be critical in enabling firms to make the transition.

More buy side and sell-side firms in APAC will replace their legacy systems with cloud-based solutions in 2024 as interest in securities finance grows. Read our recent article about the merits of hosted solutions in the securities finance space for more information on this topic. 

9. Appetite for global OMS to grow further

Sell-side firms across APAC recognize that they need best-in-class Order Management Systems (OMS) if they are to remain competitive at both a regional and global level.

According to a recent Datos Insights survey, 51% of firms said dealing with regulatory changes is their top challenge, followed by keeping up with globalisation (49%) and market fragmentation (41%).

Decision-makers at sell-side firms cited assistance with global connectivity, regulatory compliance, robust reporting capabilities, and workflow automation solutions as being their key requirements.

Sell-side vendors are developing market modular, globally focused tools. These solutions can adapt and simplify increasingly complex workflows across the spectrum of key front-office functions along with compliance, middle-office, and connectivity services within one OMS ecosystem.

These tools essentially provide the building blocks for firms to develop custom solutions tailored to their regional and asset class needs.

Expect more sell-side firms in APAC to pay greater attention to cost pressures, forcing them to find ways for their OMS to do more with less in 2024.

10. Brace yourself for new derivative reporting obligations

Updates to OTC derivative reporting rules across APAC will have a notable impact on the operations at banks and brokers.

Efforts to harmonize derivative reporting are currently underway as more markets introduce mandatory Unique Product Identifier (UPI) reporting.

The Commodity Futures and Trading Commission (CFTC) will become the first regulator to make UPIs compulsory on January 29, 2024, followed by the EU on April 29, the U.K. on September 30, and then Australia and Singapore in October. Reports suggest Japan is expected to impose UPI reporting in April 2025. ¹¹

The new provisions are likely to be quite complicated, and the deadlines — especially in Singapore and Australia — are incredibly tight.

APAC firms will be spending a lot of time ensuring they are prepared for the looming OTC reporting changes in 2024–2025. Join the “Navigating APAC Derivatives Reporting Rewrites in 2024 and Beyond” webinar on January 25, 2024 to get ready. 

References

_{1 Swift – November 30, 2023 – Preparing for T+1: The global impact of north America’s move
2 The Trade – November 29, 2023 – India to rollout optional T+0 from March 2024 as part of roadmap to instantaneous settlement
3 Business Insider India – November 7, 2023 – Foreign investors up in arms as SEBI plans shift to T+0 settlement
4 Finextra – November 15, 2023 – Generative AI’s next generation: Enter the agents
5 Lathan & Watkins – August 26, 2023 – Regulatory updates in Asia ESG- August 2023
6 Bloomberg – February 8, 2023 – Funds that inflate green credentials face strict new rules in Japan
7 Financial Times – October 15, 2023 – Japan stock exchange adopts name and shame regime to boost corporate valuations
8 Risk – July 28, 2023 – Swap Connect growth hampered by unwinding issues
9 New Strait Times – June 14, 2023 – Analysts say new rule for short selling will have a positive impact on market ecosystem
10 Nikkei Asia – November 2, 2023 – Philippine exchange greenlights short-selling for first time
11 Regulation Asia – November 22, 2023 – Japan finalises OTC derivative reporting requirements}