Having implemented a robust and targeted public health response to COVID-19 during the early stages of the crisis, Asia is on course to see its economies recover faster than many others. In the case of China, positive growth has already returned. The downturns across some of the more developed markets in the region – principally Australia, Korea, Japan and New Zealand – have not been as severe as many initially predicted, and their gross domestic products (GDPs) are expected to rally strongly in 20211. In emerging Asian markets such as India, the economies will likely rebound later this year as well. Despite all of the disruption, a number of Asian countries are continuing to make material improvements to their capital markets through a combination of digitalisation and liberalisation.
Digital transformation goes up a gear
Even before COVID-19 forced the industry to collectively adopt new digital channels, regulators and financial market infrastructures (FMIs) across Asia had been embracing technological change for some time, and using it as a means to drive efficiencies in post-trade operations. “A number of regulators and FMIs in the region have a long track record of utilising technology to facilitate improvements across the value chain. We see a significantly higher pace of new fintech adoption and platform upgrades across Asia. There is a broader push for a digital infrastructure which is generating good traction in areas like market access, corporate actions and tax,” said Aashish Mishra, Asia Pacific Head of Direct Custody and Clearing at Citi.
Automation, for instance, has been widely deployed in activities such as corporate actions and proxy voting in the region. Impressive advancements have been made around e-voting in key markets such as India, Indonesia, Thailand and Taiwan. Indonesia is developing a mechanism to support an electronic initial public offering (IPO) process having introduced e-proxy voting and online AGMs (annual general meetings). Elsewhere, Japan is looking to disseminate meeting information electronically, while Singapore could potentially make virtual AGMs a permanent feature in its local market.
Digital enhancements to previously paper-heavy account opening procedures and regulatory authorisation processes have been ongoing for some time too. India has developed an e-KYC process, making it easier for foreign portfolio investors (FPIs) to access the local market. Account openings have also been streamlined in Taiwan through the introduction of the e-request form.
More recently, COVID-19 acted as a catalyst for digital transformation, with Asian regulators introducing emergency measures to ensure capital markets continued functioning normally, including allowing the electronic submission and execution of documents. Indonesian authorities, for example, have digitalised the tax documentation requirements for foreign investors. Whereas investors previously needed to provide signed Certificate of Residence/DGT forms, authorities have said they will now accept scanned versions and/or documents with e-signatures from countries which recognise digital signatures. Such efforts have been critical in ensuring markets were resilient to the COVID-19-related disruption. “It is vital that these measures stay in place beyond COVID-19 as they have helped drive greater automation in many APAC countries,” said Mishra.
Asian FMIs embrace DLT
“FMIs in Asia have an impressive record of innovation and reform, with a number of ambitious upgrade programmes being rolled out,” said Bryan Murphy, Global Head of Intermediaries Client Coverage at Citi. In addition to FMIs in markets such as Hong Kong, Taiwan, Japan and New Zealand implementing platform upgrades, a number of infrastructures are also starting to leverage disruptive technologies such as distributed ledger technology (DLT).
DLT is being used extensively across a number of major regional markets to improve the investment process and existing post-trade operating model. “Technology such as shared ledgers can ensure that golden source data is disseminated and distributed along the value chains in a controlled and permissioned manner,” explained Ryan Marsh, Global Head of Distributed Ledger Technology & Digital Innovation at Citi. The expectation is that this will improve efficiency by increasing the speed and integrity of data, synchronising activities, removing duplication and reconciliation, and reducing risk. As a result, DLT could help markets shorten the investment and settlement cycle, potentially achieving immediate settlement at the point of trade.
A number of other domestic regulators have also taken a keen interest in digital assets. The People’s Bank of China is widely considered to be a global leader in central bank digital currencies, namely central bank issued crypto-currencies, having concluded a pilot project developing its very own digital Yuan.
While Asian markets have made remarkable progress integrating digitalisation into post-trade, some of the technologies do pose practical problems. “T+0 immediate atomic trading and settlement is a challenge which the industry needs to overcome. Most markets currently settle on T+2, but a shift to T+0 would require counterparties to pre-fund their trades leading to potential liquidity problems. Clients, however, could have the option to rely on their custodians’ balance sheets,” said Mishra. Other logistical issues exist too, not least the difficulties involved in assimilating DLT into existing, legacy technologies, a process which could be incredibly risky if executed badly.
Most significantly, the absence of common industry-wide standards has resulted in a number of different Blockchain protocols emerging, which will be problematic for market participants when trying to interoperate with each other’s systems. “Just as we have developed common standards for financial messaging, we must reach a consensus on DLT,” commented Marsh. The same impediments ring true for digital assets. Without standards or a common regulatory approach towards supervising digital assets, these instruments may struggle to attract investment.