The Global Financial Crisis of 2008–2009 brought into sharp focus the state and quality of financial market infrastructures, especially within Asia. As a consequence, financial market participants across the region are tasked with the important challenge of managing a dynamic trade and post-trade landscape. Creating a stable and efficient market structure is critical for facilitating capital flow, sourcing liquidity and enhancing trading volumes, especially for less mature Asian markets. 

Equally important is the ability to detect and prevent systemic risk build-up from undermining the international financial architecture and reducing the level of fragmentation. Given the spate of recent global regulatory initiatives, new product development and technology innovation relating to trading venues and financial markets are undergoing rapid evolution.

We spoke to three of our speakers, pre-conference, to ascertain their views on key issues impacting the future direction of Asian markets.

The CPSS-IOSCO Principles of Financial Markets Infrastructure

Alain Raes, CEO APAC, SWIFT:

“For most countries, adherence to CPSS-IOSCO principles is part of a greater internal process—to foster a better environment for all market participants. Asia is no different.

Any financial market infrastructure (FMI) with international aspirations will want to adhere to the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI). The requirements for adherence are quite broad and hit on very generic issues of FMIs and adherence may be achieved in many ways. This is evident from some of the formal responses given by FMIs (by way of the Financial Sector Assessment Program).

What is worth noting is that adherence helps FMIs become better but does not address design optimality toward international connectivity.

The aim of PFMI is really to enhance the environment, both directly and indirectly, for FMI participants by reducing systemic risks, fostering financial stability and achieving greater transparency. This ultimately means a better and safer environment for all market participants.

It is difficult to say exactly what will prevent future crises, but we do believe that the implementation of CPSS-ISOCO PFMI is fundamental to ensuring the efficiency, stability and resilience of FMIs as well as supporting the global financial system.

This can be achieved by making sure that systems and best practices around technology and risk management, transparency and good governance are built, used consistently and are sustainable.”

New margin and capital requirements and collateral management

Eli Cohen, Head of Legal (Regulation), Singapore Exchange

“The main issue is the potential impact of the European Market Infrastructure Regulation (EMIR). It seems that EU authorities will insist on compliance with the specific margin requirements of EMIR in order for non-EU central counter parties (CCPs) to obtain authorisation as third country CCPs (TC-CCPs) pursuant to Article 25 of EMIR. As 18 CCPs in the APAC region have applied to the European Securities and Markets Authority (ESMA) for TC-CCP authorisation, a change of the margin rules to comply with European requirements is likely to have a major impact across the region.

This is particularly important because the European capital requirements rules (CRD IV) deviate from the Basel III standard based on the IOSCO Principles for Financial Market Infrastructures (PFMIs) and require CCPs to be authorised by ESMA as TC-CCPs under EMIR to qualify for the substantially lower capital requirement.

These capital rules impact not just Asian CCP clearing members that are EU financial institutions but also clearing members that are Asian subsidiaries of EU financial institutions.

I would suspect that as mandatory clearing is rolled out through Asia, higher capital requirements for non-centrally cleared derivative contracts will become less important.

At the moment, we are still seeing widespread use of cash collateral. Currently, there seems to be sufficient pools of cash in markets where other assets are not being used. That said, at SGX we do believe that there will be a need for collateral optimisation in the future.

We have begun to develop a cross-border collateral optimisation platform which will allow financial institutions to move their assets seamlessly across markets where it is needed, when it is needed to maximise collateral value.

We expect that in the next 2–3 years, such developments will transform the use of collateral on a global basis, at least among the major financial centres.”

Prospects of ETF growth in Asia

Shunichiro Unno, Director—Information Services, Tokyo Stock Exchange

“Investors can have exposure to a growing Exchange Traded Funds (ETFs) market in Asia at a low cost. ETF products are well diversified, backed by underlying securities that represent the market index. In addition, investors can trade ETFs on the marketplace like stocks during trading hours.

The growth of ETFs in the region is both institutional and retail driven. Institutional and retail investors have different requirements for ETFs, but a wide variety of ETF products can satisfy the various requirements.

I don’t think that fragmentation of the Asian marketplace has limited the expansion of ETF providers. Many ETFs are actually cross-listed on various Exchanges.
Although ETF trades are growing rapidly in this region, there is still much room for them to penetrate the Asian market. Investor education and financial literacy must raise awareness of investors on the advantages of ETFs.”

Categories:

Exchanges, Markets & Exchanges, Risk & Compliance

Exchanges,Markets Exchanges,Risk & Compliance,

Exchanges,Markets & Exchanges,Risk & Compliance,

Keywords:Asian Banker Summit 2014, Alain Raes, Eli Cohen, Shunichiro Unno, SGX, SWIFT, Tokyo Stock Exchange, CPSS-IOSCO, ETF