Held over two days in November, The Network Forum Asia looked at transformation in post trade for a region that is fuelled by strong growth, enormous pockets of talent and a zeal by regulators and governments to reform their markets to attract more foreign direct investment (FDI). flow reports on how the industry is driving ahead with innovation, by spearheading a series of tangible, disruptive programmes which will dramatically refashion client experiences and initiatives that are attracting interest in the region

Sleepless in Singapore

The Network Forum (TNF) Meeting in Singapore on November 12 and 13, 2018, revealed several trends in Asia-Pacific that will keep the securities industry awake at night

The potential throughout Asia-Pacific (APAC) is unbounded, and its success is being fuelled by strong growth, enormous pockets of highly-educated talent, and a zeal by regulators and governments to reform their markets, making them more enticing to foreign direct investment (FDI). The two-day Network Forum (TNF) Meeting in Singapore on November 12 and 13, 2018, revealed how these trends will set the pace for 2019.

Ambition and alarm in APAC

Growing attention is being focused on China’s One Belt One Road (OBOR) programme, an economic and diplomatic initiative poised to reshape global trade. On the flipside, however, trade tariffs have overshadowed US-China relations over the preceding 18 months. The ongoing dispute risks being dragged out further following the US mid-term results, as there is broadly bipartisan support for tougher action on China. A failure by the two economic giants to reach a deal could exacerbate sanctions, with the US looking likely to increase tariffs on $200 billion worth Chinese exports from 10% to 25% if the negotiation gridlock continues.

An expert at TNF said that some corporates were shifting supply chains out of China to circumvent the US tariffs, although a handful of firms are doing so as part of their broader cost-cutting strategies, a decision which could benefit other emerging economies such as Vietnam and the Philippines. The tariffs have also accelerated the adoption of regional free trade agreements including the TPP (Trans-Pacific Partnership), further deepening economic ties within APAC.  While the TPP is a positive for APAC, the tariffs are potentially damaging to the local markets heavily reliant on exports including Singapore, Thailand and Malaysia.

Creating a securities market in China

Many experts have been fixated on China as it liberalises its capital markets enabling foreign investors to enter the country and trade domestic securities. On the equity side, Stock Connect has created links between the stock exchanges in Shanghai and Shenzhen with Hong Kong. Meanwhile, it is expected that a link between the Shanghai Stock Exchange and London Stock Exchange (LSE) will be up and running soon, possibly before the end of the year. Beijing also recently said its 20% limit on repatriating funds via the Renminbi Qualified Foreign Institutional Investor (RQFII) and Qualified Foreign Institutional Investor (QFII) would end, assuaging investors who may have otherwise avoided the market altogether 1 .

The bond market is going through change too. Through CIBM Direct and Bond Connect, investors can now access China’s $12 trillion fixed income market. Foreigners also have the choice under Bond Connect to use an offshore custodian in Hong Kong, which could tempt firms who were initially reluctant to trade China bonds because they did not want exposure to onshore counterparties. Foreign ownership of local bonds is hovering at 2%2 but one speaker predicts this could rise to 15% or 20% following enhancements to Bond Connect, such as the roll-out of real DVP and block trading, as well as clarification about its tax rules.

These measures have contributed to index inclusion for a limited number of Chinese equities. However, MSCI recently proposed it would double the weighting of Chinese A shares in its Emerging Markets Index to 434 by May 2020, a development which could result in around $66 billion of active and passive money flowing into the country 3. There was also speculation at TNF that MSCI could potentially quadruple the weighting even further 4. Reforms in the bond market have also emboldened Bloomberg Barclays and FTSE Russell to phase in Chinese bonds onto their indices, in what will lead to more flows.

India becomes investor friendly

Hot on the heels of China is India, a market which Sriram Krishnan, head of securities services for India at Deutsche Bank, said offers enormous potential for foreign investors. “India is a popular market right now for investments, with economic growth reaching 8% over the last quarter, while inflation is at sub 5%. Liberalisation of India’s capital markets have been ongoing since the early 1990s, and it has made huge digitalisation strides and simplified its tax structure through the Goods and Services Tax.  While India has historically been criticised as being a difficult market to conduct business, things are changing,” he said.

The Securities Board of India (SEBI), the country’s financial services regulator, has loosened restrictions on foreign investors accessing the market, splitting FPIs (foreign portfolio investors) into three separate groupings, each subject to variable levels of KYC (know-your-customer) checks and documentation disclosures. Krishnan said a category one investor – such as multilateral institutions (e.g. World Bank), Central Banks or sovereign wealth funds – will typically face less gruelling registration and KYC requirements than a category three investor, which may include a hedge fund, family office or individual investor. 

Market access is also more streamlined because designated depository providers like Deutsche Bank have been entrusted with performing the whole registration process for FPIs on SEBI’s behalf. One speaker said FPI on-boarding used to take 30 to 40 days to complete, but the reforms have reduced this to one week. An expert added SEBI had eased KYC rules for resident and non-resident Indians owning non-controlling stakes in FPIs, amid criticism that its beneficial ownership provisions risked preventing Indian-owned FPIs from accessing the market, which could have resulted in $75 billion of FPI capital exiting the country.

Regional integration helps drive investment

The negative impact of fragmented financial services regulation should not be underestimated, with one speaker at TNF citing figures from the International Federation of Accountants (IFAC), which estimated such divergences cost the economy around $780 billion 5. The IFAC study also found regulatory arbitrages devoured anywhere between 5% and 10% of the annual revenue turnover at financial institutions. Furthermore, 51% of the survey’s respondents said internal resources had been directed away from risk management to focus instead on compliance matters 6.

Speakers at TNF, however, were quick to point out that standardisation efforts inside APAC were on-going. Most notably, a handful of local markets moved to a T+2 settlement window in 2018 following in the footsteps of the US and EU, subsequently bringing these countries into line with international best practices and rules such as the Central Securities Depository Regulation. In March 2018, the Stock Exchange of Thailand transitioned to T+2 from T+3, while the major stock exchanges in Japan – namely Tokyo Stock Exchange, Osaka Exchange and Nagoya Stock Exchange – are all projected to shift from T+3 to T+2 in July 2019 7.

Regional trading linkages are also being explored. A new trading link between Bursa Malaysia and Singapore Exchange is in the pipeline in what could facilitate greater cross-border investments, cheaper trading costs and liquidity optimisation 8. The latest linkage comes despite a previous effort – involving the stock exchanges of Singapore, Malaysia and Thailand – ending in failure after five years of trying 9. A TNF speaker also said the ASEAN Capital Markets Forum (ACMF) – which comprises the 10 members of ASEAN – had reached agreement on allowing investment advisers to offer services across participatory countries by streamlining the registration processes and waiving additional licensing requirements 10.

Fund passporting faces teething issues

In a region as affluent and sophisticated as APAC, the case for a regional cross-border funds regime is very strong.  Since 2014, two local fund distribution programmes have been launched – the ASEAN CIS covering Singapore, Thailand and Malaysia, and the Mutual Recognition of Funds (MRF) between Hong Kong and China, as well as the UK, France and Switzerland. A third – the Asia Regional Funds Passport (ARFP), which will connect the fund markets of Australia, Japan, Korea, New Zealand and Thailand, was supposed to commence in August 2018 11, although its start date has since been pushed back to February 1, 2019 12.

Anand Rengarajan, managing director, head of securities services for Asia-Pacific at Deutsche Bank, said the distribution schemes to date had not attracted large flows and very few managers were actively using them. “There is a lot of wealth in Asia, but unless these markets find some sort of a consensus about taxation, then all of these schemes will struggle. MRF has found it difficult because China has for a long time imposed capital controls, and authorisations have been slow. However, China is making it easier for foreign asset managers to distribute through its WFOE (wholly foreign owned enterprise) structure, which scraps the requirement for international managers to enter into a JV with a local firm.”

Other factors could, however, impede ASEAN CIS and ARFP, added Rengarajan. “Cross-border distribution works inside the EU because many of the participatory countries adopt the euro, but we do not have a shared currency in APAC, and this creates FX risk for firms. Despite this, the ASEAN CIS and ARFP will learn from the mistakes which UCITS made when it first began, and it should be noted that UCITS took around ten years to build up momentum and become the success it is today,” he said. While there is nervousness in Luxembourg and Ireland that these APAC passports are an attempt to subvert UCITS, Rengarajan said this was untrue, pointing out localised fund products such as the Singapore Variable Capital Company (VCC) were more of a challenge to European fund structures.

In a video interview with Global Custodian magazine, Rengarajan explained why investors should be taking note of these and other developments in the Asian markets.

Toiling over the AFME DDQ

Despite most global custodians and broker dealers integrating the Association for Financial Markets in Europe’s (AFME) due diligence questionnaire (DDQ) into their network management activities, due diligence on agent banks is still a long way off from being fully harmonised. AFME’s efforts to standardise DDQs have received a lot of industry support, but network managers continue to insert their own proprietary – often duplicative - questions into the already crowded document.

Network managers have sprinkled the DDQ with supplementary questions because they believe due diligence needs to remain bespoke, as the institutions and markets which they oversee and are accountable for are very different and in a state of perpetual transformation. While the actions by network managers are perfectly understandable, the superfluity of questions is consuming a lot of resources at agent banks, prompting a handful of providers to contemplate passing the costs of filling the DDQ onto global custodians and broker-dealers, a proposal roundly rejected by the majority of clients.

Round-up of TNF

It is irrefutable that APAC markets are going to find the next few years very difficult if China’s war of words with the US continues. Nonetheless, the region has made enormous progress through massive infrastructure programmes such as OBOR, economic liberalisation policies and initiatives to strengthen and deepen harmonisation across their expansive capital markets. While tariffs and other macro factors will pose serious risks to market stability, the region is sufficiently dynamic and resourceful to withstand these threats.


1 Reuters (June 12, 2018) China eases QFII foreign investment rules in boost to channel use
2 Bloomberg (September 13, 2018) China revamps $12trn bond market to lure foreign investors
3 Financial Times (September 26, 2018) MSCI eyes near doubling of China weighting in EM index
4 Global Custodian (November 13, 2018) MSCI proposing significant increase of China A Shares in Emerging Markets Index
5 IFAC (April 11, 2018) Patchwork financial regulation a $780 billion drag on the economy
6 IFAC (April 11, 2018) Patchwork financial regulation a $780 billion drag on the economy
7 Asia Asset Management (May 30, 2018) Japan stock exchanges to shift to T+2 settlement cycle in July 2019
8 Reuters (February 6, 2018) Malaysia, Singapore launch new trade link to boost liquidity
9 Reuters (February 6, 2018) Malaysia, Singapore launch new trade link to boost liquidity
10 Asia Asset Management (October 15, 2018) ASEAN regulators unveil bond standards, mobility framework for advisers
11 Fund Selector Asia (May 9, 2018) Asia passporting schemes targets August launch
12International Adviser (October 31, 2018) Asia region funds passport finally set to launch

All change

The Network Forum Asia was all about transformation in post trade.This post-conference wrap-up reflects on how the industry is moving away from the manual backwaters and driving ahead with innovation, by spearheading a series of tangible, disruptive programmes which will dramatically refashion client experiences

A year makes a big difference in post trade. Anyone doubting this need only consider the words of Deutsche Bank’s head of securities services Asia, Anand Rengarajan, who remarked at last year’s The Network Forum in Hong Kong that the industry was around 12 to 18 months away from being at the cusp of a transformational change. “Fast forward to today, and I firmly believe we have now reached that cusp. People are no longer saying they are thinking about implementing change, but they are actually doing it,” he said at this year's event. The 2018 forum in Singapore explored who is doing what, and how.

Blockchain evolves beyond POCs in Asia

The development and application of Blockchain in APAC is at a more mature cycle than anything that is transpiring in Europe and North America. Applying Blockchain in post trade could unleash a number of advantages, including cheaper costs, heightened efficiency, reduced duplication, fewer errors and an end to a number of manual processes, freeing up resources at market participants. A handful of APAC post trade infrastructures have transitioned away from DLT (distributed ledger technology) POCs (proof of concepts) and are now on the verge of totally reshaping their operating systems through live use cases.

Australia and Hong Kong ratchet up the Blockchain

ASX has partnered with Digital Asset to re-platform its post trade equity system CHESS using DLT, with an expected completion date pencilled in for between September 2020 and March 2021. Meanwhile, TNF in Singapore coincided with the announcement from Hong Kong Exchange and Clearing (HKEX) LTD that it would use a DLT solution offered by Digital Asset to process northbound transactions on Stock Connect, which currently faces a number of operational impediments, most conspicuously the four-hour time window to complete trading and settlement 1, a problem which speakers said increases the risk of trade failures.

Through DLT, HKEX believes it can enable users to outline their settlement workflows in advance helping to bridge time-zones, and facilitating real-time synchronisation across post trade market participants 2. “Market infrastructures are making huge changes to their operating model, and the post trade system is certainly going to become more efficient as a result of its adoption of DLT. Deutsche Bank is increasingly using fin-tech solutions to enable improvements in its own business,” commented Jeslyn Tan, head of product management, securities services at Deutsche Bank, speaking at TNF.

Getting the most out of data

Having accrued huge repositories of data across their networks and clients, custodians have an unrivalled view into how markets work and function. The only problem, however, was that the information was fragmented and unstructured, while banks did not possess the technology to dissect the data and analyse it effectively. This is no longer the case as providers increasingly divert resources into artificial intelligence (AI) applications such as natural language processing and machine learning, technologies which can dissect information held in data lakes and produce insights or analytics-led content for clients.

“We are changing the way we use data. Deutsche Bank has a lot of data and it is looking at methods by which it can apply machine learning technology to go through all of that information, and provide insights into what it means. We are analysing data focused on trade fails and trying to identify some of the common causes behind them. By doing this, we can then apply predictive analytics to assess which trades are at risk of failure in the future. As the Central Securities Depository Regulation (CSDR) beds down, such technology will become increasingly useful, as firms look to avoid mandatory buy-ins and fines,” said Tan.

Digital assets and crypto-custody nowhere near ready

At TNF in Vienna, a number of experts were projecting that digital assets – a broad sweep of instruments consisting of tokenised securities, initial coin offerings and crypto-currencies – were on the brink of institutionalisation, as a small coterie of fund managers and other investors with strong risk tolerances started trading in the market. Their entry into the asset class is being abetted by forward-thinking regulatory bodies such as the Monetary Authority of Singapore (MAS), which is reportedly developing a DVP capability in conjunction with SGX to enable settlement of tokenised assets across multiple Blockchain platforms 3.  

While trading volumes are still fickle, technologists such as CoinBase – and a very small number of custodians are trying to tap into crypto-custody, conscious existing digital exchanges are unsupervised, deterring regulated investors from trading digital assets.  The benign protections at digital exchanges are regularly targeted by cyber-criminals, stealing investors’ online private keys. Most investors have had no recourse to their lost funds.  By creating solutions facilitating auditability and transparency in this opaque market, custodians could help institutionalise digital assets.

A return to antiquated past practices

Securities markets have made huge strides over the last two decades through dematerialisation and more recently technological innovation. The emergence, however, of digital assets could result in a slight pivot away from dematerialisation. A speaker at TNF said the only way to make digital assets safe from cyber-criminals was to take them offline, and store the private keys – usually held on USB sticks – in multiple vaults scattered across the world. While quite regressive and arguably the antithesis to the entire concept of digitalisation, this cold storage approach offers the most robust security to investors.

While these cold storage safety checks can insulate digital assets from hackers, they cannot protect them from insider attacks by nefarious employees. Nonetheless, the same speaker acknowledged that most institutional crypto-custodians will have third party insurance to mitigate the financial impact of such risks. Even though cold storage crypto-custody solutions offer the best security, the product is severely constrained by its limited latency, as it can often take investors several hours to withdraw their assets, a compromise that may not be acceptable for a number of clients.

Start small, then aim big

Banks have historically approached technological change on an enterprise-wide scale, a process which consumed enormous amounts of budget and took a long time to execute, often falling short of expectations. In a world of agile fin-techs, this is changing, highlighted Christopher Daniels, data product manager at Deutsche Bank, speaking at TNF. A balance between rapid delivery against tangible client problems and steady product enhancement needs to be found at banks, and it is best accomplished with a more constrained budget. “It is critical that innovators at banks do not ask for lots of budget, as it tends to bloat the delivery process,” explained Daniels.

“Large-scale projects at major organisations can slow down the pace of innovation, as there will typically be a programme director, a project manager, a business analyst and a technology analyst etc. This creates unnecessary distance between the product owner and the developers, resulting in things getting lost in translation and losing the valuable input that developers can have in helping guide the approach. Working to a limited budget forces organisations to be nimble.  We operate on lean budgets, and we have developed production data products in 20 weeks, following an initial POC process to demonstrate the value” he continued.

Simultaneously, innovation projects should not be rushed needlessly. “It is about going slow to go fast. Sometimes time spent on a foundation ensures projects can keep moving on at pace without leaving too much technical debt behind them. It took us time to build data standards but it rapidly accelerated the onboarding of more data to the analytics platform thereafter. It was a painful process but we needed agreement on those standards before we could proceed,” said Daniels.

Putting the client first

While a number of companies have successfully developed innovative technologies, far fewer have found genuine applications for them. Technology in isolation does not work if it fails to solve a valid client or business problem. If disruption is to happen, the technology needs to create value and be relevant to the specific requirements of clients, said Tan. This is leading to more banks engaging with clients on technology design matters, in what is helping them launch services and products that correspond with what their end customers want and need. “Co-creating products with clients is very important,” explained Tan.

Changing the psychology of failure

In an industry as systemically important and client-centric as banking, a product failure can have catastrophic consequences on customers and the market. While risk management is absolutely essential in any enterprise, it should be exercised appropriately, and not used as a means to stifle or suffocate innovation in technology. For banks to develop exciting new technologies and products, and compete with start-ups, they need to accept that some failures will happen along the way, said Daniels. “If you’re not making mistakes you’re not innovating,” he said. Tan concurred, adding banking culture needed to replicate the ethos of large technology companies, and become more tolerant of innovations that do not succeed.

Cyber-security: Silly mistakes have unfunny consequences

While securities services is innovating on a scale unmatched anytime in its history, so too are the threats facing its core business. Avoidable mistakes – such as failing to activate VPN when joining public Wi-Fi networks or not using two factor authentication when accessing email – are still the primary causes behind most cyber-attacks. A participant at TNF said an increasingly common ruse adopted by criminals was to doctor business email address domains of colleagues or clients, replacing an “O” with a zero, or an “I” with a one, allowing them to extract sensitive information – such as online banking passwords – from victims.

A report by SWIFT recently said that securities markets were at a high-risk of being hacked, while the International Securities Services Association (ISSA) also warned it would be complacent for the industry to assume it cannot be attacked by cyber-criminals 4.   Banks must ensure they are shielded against such risks, by enacting robust cyber policies and procedures empowered by regular systems’ testing, effective corporate governance and leadership engagement on cyber. Delegates were told that despite cyber being an everyday occurrence now, the companies which manage breaches badly tend to be the ones who are punished by the authorities.

Nonetheless, banks do face some impediments. A major problem is that there is a serious shortage of cyber-security expertise in the market. Another issue is that regulation of cyber-crime is somewhat sporadic across different jurisdictions. The EU implemented the General Data Protection Regulation (GDPR), but countries across APAC have taken a far less homogenised approach. Cyber regulation in the Philippines is admittedly very tough as company directors can face imprisonment in the event of a data breach. In contrast, Hong Kong has adopted quite lax regulation around data controls, although this is changing.

Cyber-crime 2.0

Nation states certainly pose a potent cyber-threat, although one speaker said the biggest risk came from well-funded organised criminal networks. He conceded criminals had become highly adept at mastering social engineering, allowing them to effectively target unsuspecting employees. The more sophisticated hackers are even bypassing supposedly secure and impenetrable voice security systems that have become popular at consumer banks by using voice replication tools to gain access to users’ accounts. 

As providers increasingly adopt disruptive technologies like Blockchain and AI, the cyber-threat will undoubtedly change, as criminals attempt to subvert these new systems. Transactional data stored on a private Blockchain could, for example, be left completely exposed if a hacker was able to crack the encryptions and cryptographic safeguards used by the technology. The expert said AI tools posed a particular challenge, as they are being increasingly used to analyse and predict customer behaviour, information which if obtained or compromised by enterprising cyber-criminals could cause enormous damage.

Innovation takes charge

The securities industry has overcome a number of barriers and it is now making progress on developing innovative technologies, which will bring countless benefits to its operating model. However, the industry remains vulnerable, and new technology is likely to lead to different challenges and risks, not least from cyber-criminals.


1 Coin Desk (October 31, 2018) Hong Kong Stock Exchange taps Digital Asset for post-trade Blockchain trial
2 Finextra (October 31, 2018) Hong Kong Exchange preps DLT-based post-trade allocation and processing   platform
3 FX Week (November 16, 2018) MAS and SGX develop DVP for digital assets
4 Global Custodian (November 19, 2018) Securities markets ‘most at risk’ of cyber-attack, says SWIFT report

Are you putting your data to work?

Regulatory change has brought with it a heightened focus on cash liquidity within the financial services industry. Treasurers need visibility into their company’s cash positions globally to optimise their available liquidity, reduce funding costs and maximise return on cash

Furthermore, financial institutions are having to prove to regulators that they know their available sources of liquidity and have adequate capital reserves in the event of a crisis.

Deutsche Bank’s Securities Services partnered with the bank’s Data Labs to develop a data analytics model on their Enterprise Analytics Platform (EAP) that graphically shows clients’ cash liquidity usage and how this corresponds to Deutsche Bank’s funding provision in the market. As a result, Securities Services is able to provide more detailed liquidity insights at the client level and review its market funding allocations to ensure they are appropriate to cover these needs.

This data transparency enables clients to better understand when in the day their peak liquidity usage occurs, empowering them with the opportunity to modify their cash account funding behaviour and ensure adequate capital is reserved.

The output of this live model highlights areas for potential resizing of treasury funding required in the market to support securities settlement and, subsequently, optimise the usage of cash within the organisation.

If managing intraday liquidity is a complex and critical activity for your treasury functions, learn more about how Deutsche Bank’s Securities Services data analytics capability can help you.

DB Data

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