My Say: Preparing the post-trade environment for the Asean Exchanges

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THE Association of Southeast Asian Nations (Asean) has an influential role in the growth of the Asia-Pacific and enhances its bargaining power in the global economy, but it is not immune to the headwinds facing other markets.

 Despite the hurdles facing the region, Asean potential remains compelling. Indeed, the demographics of its combined population — some 600 million — coupled with its proximity to China and India, suggest it can grow by more than the 5% average of the past decade. It is also feasible that these countries, buoyed by a growing labour force and maturing infrastructure, can transition to developed status.

Integration across the Asean region has brought a number of benefits, not least in making it more attractive to global investors. Pivotal in this has been the creation of the Asean Trading Link, a gateway offering easy access to the region’s exchanges for securities brokers.

For example, individual investors can buy 2,300 shares of a company in Malaysia, Singapore and Thailand at their convenience and benefit from tax exemption on capital gains. Furthermore, integrated securities trading strengthens capital markets development, deepens liquidity pools, and encourages cross-border investments and greater investor confidence.

The Asean Exchanges initiative awaits completion with more participating economies, but was further boosted by the establishment of a post-trade settlement platform that benefits brokers through greater operational efficiencies.

To increase investor interest while minimising costs around the introduction of new technology, the Asean Trading Link may consider including additional cash equity products, such as newly issued IPO shares and Exchange Traded Funds, as well as financial products brokers can currently trade through proprietary arrangements. Such a broader range of tradeable products can encourage higher trading volumes.

As brokers decide to start migrating volumes to the Trading Link when reviewing their technology, an increased market-wide adoption can drive greater levels of end-to-end process automation for cost and risk-management benefits.

Connectivity across the post-trade infrastructure associated with the Asean link can deliver significant positives, depending on the interconnectivity model. This does not necessarily mean major regulatory overhaul, although changes will be required with key areas, such as investors’ ownership, rights and enforcement remaining clear and even strengthened.

But while the Asean initiatives can bring greater scale and depth to the market, there are a number of broad developments that could influence progress. For example, the initiative has to take into account the effects of global reforms such as the Organisation for Economic Co-operation and Development (OECD)’s Common Reporting Standards (CRS), and increased Know-Your-Customer/Anti-Money Laundering (KYC/AML) standards. If the implementation of these is not looked at holistically across the Asean region, it could impact the overall goal of bringing member countries’ financial markets closer.

In Feb 2014, the OECD released the Foreign Account Tax Compliance Act (FATCA)-like CRS to create a global standard for automatic exchange of information on financial accounts. Unlike FATCA, there will be no withholding taxes as penalties. CRS are focused on tax-related reporting that can require accounts to be used to identify ultimate control and beneficiaries.

 This can present additional reporting and potential legal complexities for the financial communities and interconnectivity projects. As of today, about 65 countries have agreed to adopt the CRS. While most of these countries are in Europe, participating Asian countries include China, India, Indonesia, Japan, South Korea, Malaysia and Singapore.

 KYC and AML standards play key roles in the strengthening of financial markets governance and in promoting sustainable growth. As their implementation unfolds across the economies, consistent details, standard of care and level of transparency will also be major considerations for financial markets participants to ensure effective compliance.

 The drive for greater transparency and its spillover effects on the uses of omnibus structures, which facilitates cost-effective, post-trade interconnectivity, remain unclear in the Asean region.

 The challenges for the Asean region’s evolution are no different from those affecting the global economy. Regulatory change and market developments cannot be viewed in isolation — the high level of interdependency is such that the Asean region’s member countries and investors must adopt a cohesive “big picture” view.

Strengthened by an Asean regulatory process and a shift towards adapted best practices, the region can collectively move closer to its ultimate goal of regionalisation and deeper markets, making it a more seamless, integrated and attractive market for all participants.

Boon-Hiong Chan is head of market advocacy Asia-Pacific & Middle East, product management, and global transaction banking at Deutsche Bank   

This article first appeared in Forum, The Edge Malaysia Weekly, on December 8 - 14, 2014.