Asia Securities Industry & Financial Markets Association

Partnering to Develop Asia's Capital Markets

www.asifma.org Follow ASIFMA on Twitter and LinkedIn

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ASIFMA's mission is to promote the development of liquid, deep and broad capital markets in Asia, which is fundamental to its economic development and growth.

ASIFMA’s Mission

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ASIFMA is an independent, regional trade association comprising a diverse range of over 70 leading financial institutions from both the buy and sell side, including banks, asset managers, law firms and market infrastructure service providers. Together, we harness the shared interests of the financial industry to promote the development of liquid, deep and broad capital markets in Asia. ASIFMA advocates stable, competitive and efficient Asian capital markets that are necessary to support the region’s economic growth. We drive consensus, advocate solutions and effect change around key issues through the collective strength and clarity of one industry voice. Our many initiatives include consultations with regulators and exchanges, development of uniform industry standards, advocacy for enhanced markets through policy papers, and lowering the cost of doing business in the region. Through the GFMA alliance with SIFMA in the US and AFME in Europe, ASIFMA also provides insights on global best practices and standards to benefit the region.

About ASIFMA

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ASIFMA operates as an independent regional organization with global integration through membership in GFMA with global alliance partners AFME in London and Brussels and SIFMA in New York and Washington, DC.

• AFME in Europe - The Association for Financial Markets in Europe advocates

stable, competitive, sustainable European financial markets that support economic growth and benefit society.

• SIFMA in North America - The Securities Industry and Financial Markets

Association in the US develops policies and practices to strengthen financial markets and encourage capital availability, job creation, and economic growth while also building trust and confidence in the financial industry.

Global Alliance

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ASIFMA divisions work closely with members, regulators and policymakers to help drive the development of broader and deeper capital markets in Asia. Each division has a board and/or committee made up of members who guide its activities and take part in working groups and informal discussions to contribute to regulatory reform proposals and the development of the industry best practices.

ASIFMA Divisions and Committees

Fixed Income Government Securities Funding/Repo Credit Markets Securitization and Structured Credit

Equities Securities Trading Foreign Exchange*

Policy & Regulatory Affairs Asset Management (AAMG) **

GFMA Priorities: Legal Entity Identifier, TBTF Resolution, OTC Derivatives *FX initiatives are managed by the Asia-Pacific representative of the Global Foreign Exchange Division (GFXD) of the Global Financial Markets

Association (GFMA), which is funded and supported separately by GFXD members. **AAMG is managed by its own steering committee and has separate membership fees.

• Change Drivers in Financial Market Infrastructures

• Benefits of Standard Securities and Transaction Identifiers

• Interoperability

• Straight-Through-Processing

• Deposit vs. Payment

• Decreasing Settlement Timing to T+2

• Shanghai-Hong Kong Stock Connect

Content Overview

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Industry best practice

Regulatory pressure

Opportunities for innovation

Risk management

• Improve risk management, increase efficiency and transparency in securities markets

• Increase need for high quality collateral (due to Basel III, OTC derivatives margin and collateral requirements, etc.)

• Enhance resiliency and better manage financial shocks, i.e. IOSCO Principles for Financial Market Infrastructures

• Using industry standards and solutions rather than developing proprietary designs reduces cost, enhances efficiencies, and increases market access for global investors

• Demand for new services such as liquidity and collateral management, trade reporting, DvP, etc.

• Opportunity to enhance customer service and meet customer demand to enhance collateral efficiency

• Standards used by financial market infrastructures can reduce settlement, operational and legal risks

• Reduce systemic risk • Enhance resiliency and

reliability

Change Drivers in Financial Market Infrastructures – Four Pillars

Benefits of Standard Securities & Transaction Identifiers and Message Codes • Enhance transparency • Improve settlement efficiency • Enable financial institutions to more effectively monitor and manage risk • Reduce risk of errors across cross-border transactions • Streamline the identification of counterparties, contracts, trades, currencies, and

products

Current System of Identifiers: • Fragmented and inconsistent in and between regions • Hampers market and regulatory efforts to improve market transparency • Requires reconciliation of different trade identifiers across jurisdictions and market

players • Increases risk of error for settling cross-border transactions

ASIFMA supports the widespread use of standard securities and transaction identifiers, including:

• Market Identifier Codes (MICs); • Business Identifier Codes (BICs); • Legal Entity Identifiers (LEIs); • International Securities Identification Numbers (ISINs); and • ISO 20022.

Standard Securities and Transaction Identifiers

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Benefits of interoperability of financial market infrastructures in Asia: • Enhance settlement efficiency; • Reduce the cost of trading; • Improve price discovery; • Reduce settlement, operational and legal risks; and • Increase collateral mobility and cross-border investment flows.

Fragmented market infrastructures across the region: • Hamper the efficient mobilization of collateral; • Increase costs for cross-border transactions; • Slow settlement timing; and • Increase operational risk.

Interoperability between domestic and international financial market infrastructures is crucial for cultivating efficient capital markets to enable the transfer of collateral assets between cross-border investors.

Interoperability

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STP is important to improve settlement processing and efficiency and reduce risk for cross-border securities transactions. STP enhances settlement efficiency by automating post-trade processing of securities transactions. Key Benefits of Adopting STP: • Facilitates shortening of the settlement cycle; • Avoids costly duplication of work and manual intervention; • Reduces risks and errors; • Simplifies data capturing, processing and report generation; • Increases the overall efficiencies; • Reduces costs; and • Enhances transparency by creating a systematic audit trial. Main Challenge to Adopting STP in Asia: Use of different proprietary messaging codes and securities identifiers across CSDs

Straight-Through-Processing

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Bilateral settlement between sellers and buyers is conducted on a delivery versus payment (DvP) basis. Benefits of DvP: • Enhances bilateral settlement efficiency; • Reduces settlement risk in bilateral transactions; • Ensures delivery occurs if and when payment is made; and • Increases legal certainty. Opportunity for CSDs to improve efficiency and security of bilateral settlement by: • Managing securities inventories; • Receiving and transferring securities; • Valuing assets; and • Administering margin calls. ASIFMA encourages CSDs to continue to develop and implement true DvP systems and provide intraday settlement finality.

Deposit vs. Payment (DvP)

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T+3

• Malaysia • Thailand • Vietnam • Philippines

Considering transition

• United States

T+2

• EU • Japan • Singapore • Hong Kong • India • Korea • Taiwan

Moving from T+3 to T+2

Decreasing Settlement Timing to T+2

Benefits of Shortening Settlement Cycle to T+2: • Helps mitigate counterparty and operational risks; • Optimizes collateral efficiency; • Reduces trading costs; • Increases efficiency in cross border transactions; and • Move to electronic confirmation and affirmation provides a clear audit trail. Challenges to Adopting T+2 in Asia • Diverse time zones, public holidays, and currencies; • High levels of manual processing; • Straight Through Processing will be necessary; and • Technology infrastructure may need development.

Despite challenges, it is important to harmonize global settlement cycles, if possible. Divergence in settlement cycles globally or regionally can fragment liquidity, increase potential for fails due to differing cash and security settlement cycles and create potential funding bottlenecks.

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ASIFMA harnessed the input of a diverse range of market practitioners to identify and address key obstacles to a successful launch of the Shanghai-Hong Kong Stock Connect.

ASIFMA Committees and Working Groups for Stock Connect:

Key Successes: • Proactive engagement with regulatory bodies to provide industry concerns and recommendations; • Chinese tax authorities released clarity on the relief of capital gains tax prior to the launch; • Additional testing with HKEx and SSE; • Fee discount for certain Settlement Instructions (SI) transactions; • Created a FIX Implementation Guide for Stock Connect to provide practical suggestions on how to

communicate Shanghai Hong Kong Stock Connect orders; and • Industry agreed use standard SEDOL and MIC codes.

Remaining issues to address: • Pre-trade checking (T-1); • Beneficial ownership; • Pre-allocation; • DvP; and • Best execution requirements.

Looking forward, ASIFMA anticipates that this model could be replicated in other markets.

Shanghai-Hong Kong Stock Connect

Stock Connect Steering

Committee

Operations Working Group

Legal and Compliance

Working Group

Joint Tax Working Group

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Summary

Standard codes

STP

T+2

Interoperability

Standard messaging codes and securities identifiers across CSDs enhances settlement efficiency, reduces the risk of errors and enables STP

STP improves settlement processing and reduces risk for cross-border securities transactions. STP enhances settlement efficiency by automating post-trade processing of securities transactions.

Helps mitigate counterparty and operational risks, and optimizes collateral efficiency

Interoperability of FMIs improves collateral efficiency, improves price discovery and enhances risk management.