Asian post-trade landscape: CCPs, CSDs aiming for global standards
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19 November 2015Arin Ray
The Asian financial services market is highly fragmented along national boundaries. Lack of unified political will has resulted in regulatory and market practices that vary widely among the countries. The trading landscape in the Asian countries has undergone radical transformation in the last 10 to 15 years. As the countries in the region slowly open up their economies to the outside world, investors from the developed economies have flocked to emerging Asian countries in search of higher returns and portfolio diversification needs. This has resulted in expansion of products and asset classes. Electronification of trading activities has resulted in growing demand for electronic trading tools and ever-lower latency. Consequently, trading activity is high in the Asian countries; in fact many of them rank highly in the world in terms of equity trading volume at their exchanges as well as in exchange traded and over the counter derivative turnover. Continuous evolution in the trading landscape necessitates changes in the value chain, namely the post-trade functions. Post-trade functionalities generally include clearing, settlement, and custody services that are served by central counterparty clearing houses (CCPs), central securities depositories (CSDs), and custodians. The CCPs and CSDs are fundamental in ensuring smooth, efficient, and stable operations of trading markets. Historically post-trade industry has not received adequate attention, but that is changing now due to greater regulatory focus on managing risks at systemically important institutions. In a recent report we discuss the trends and developments taking place among Asia’s CCPs and CSDs. Some of the highlights from the report include:
- There is a great deal of “vertical integration” in the Asian post-trade industry, with exchanges holding majority stakes in most CCPs and many CSDs. There is also a trend toward “horizontal integration” among the Asian post-trade players with growing coverage of products and asset classes.
- Asian regulators have traditionally taken a conservative approach in shaping their financial markets. Therefore since the crisis of 2008, risk management has emerged as the single most important item on the regulators’ agenda. This has brought greater attention to policies and practices at the CCPs and CSDs.
- Liberalization of Asian economies is creating opportunities for trading and clearing new products and asset classes. The post-trade players are developing capabilities and infrastructure to support new products.
- Almost every Asian country is mandating central clearing of OTC derivatives and reporting of trades. Incumbent national CCPs are called upon to facilitate central clearing of OTC derivatives.
- There is not much competition in the Asian post-trade industry, and except in a few markets that is likely to be so going forward.
- Most Asian post-trade players, particularly the CCPs, are undertaking major technology transformation initiatives spanning years and spending significant resources to upgrade and overhaul their systems and processes.