Hong Kong and Malaysia to offer common bond settlement system

The move to accept securities issued in both countries is the first serious effort to develop common settlement since Asean +3 governments called for such a move in 2003

In a bid to cut bureaucracy and fast forward progress in establishing a common bond settlement platform, an objective first mooted seven years ago by the governments of the Association of South Asian Nations (Asean) plus China, Japan and Korea (Asean +3) countries, the central banks of Malaysia and Hong Kong have set up a separate taskforce to launch their own common platform. This will allow banks in the two countries to accept and settle their respective securities in real time as early as next year.

The Hong Kong Monetary Authority (HKMA) and Bank Negara Malaysia have formed a task force in collaboration with international central securities depository (ICSD) Euroclear, to explore "practical actions to address the same issues" that have been stated in a blueprint by the Asian Bond Market Initiative (ABMI), a project that was endorsed in 2003. To-date, industry particpants say there has been more talk rather than actual implementation of such a system.

The ABMI seeks to develop a more liquid and deep Asian bond market that would connect the existing fragmented Asian bond settlement infrastructure onto either a new, Pan-Asia ICSD; or through a link-up of the existing CSDs in the region. Various task forces and a group of experts have been set up to achieve this aim, the sheer number of governments and entities involved have hindered progress.

Meanwhile, many countries still view their CSDs as national assets and their differing taxation rules and laws governing whether a country's residents could access offshore securities often complicates efforts to link up CSDs. National interest has also prolonged the debate about who among the Asean+3 should host a new Pan-Asia ICSD, should one be set up.

"Although there have been some recommendations from the ABMI, the fact that a lot of different economies are involved in the initiative means it would take some time to implement them," says Stanley Chan, head of the financial infrastructure department of the HKMA. "But the common platform we propose start off from only a limited number of central banks, we think this is a more pragmatic approach to work things out over a shorter term."

Officials at Malaysian Electronic Clearing Corporation, the interbank payment settlement and securities depository division of the Malaysia central bank, were unavailable for immediate comment.

Bank Indonesia and Bank of Thailand have joined the taskforce as observers. Chan says this is because they still need to resolve some regulatory issues related with their securities settlement before they could start linking up with the CSDs of other Asian countries.

While both Hong Kong and Malaysia are members among the Asean+3 countries, Chan refuted suggestions the common platform model to be launched by the HKMA and Malaysia central bank might invalidate or overlap with existing efforts by ABMI.

In a white paper released earlier this month outlining the two central banks' common platform, the HKMA said the task force is mandated to improve the post-trade environment in Asia by automation of post-trade process, exploring cross-border collateralisation and reducing post-trade costs.

A common platform can be developed through linking up the various local CSDs in each country, the ICSD Euroclear, and also the real-time gross settlement systems (RTGS), which is a fund transfer system usually operated by a country's central bank where money is transferred from one bank to another on a real-time basis. In Hong Kong, the central money markets unit under the HKMA is the CSD that clears and settles bonds denominated in both Hong Kong dollar and non-Hong Kong dollar currencies.

Due to more efficient cross-border access to local CSDs, foreign investors' demand for Asian local currency bonds should increase, the taskforce argues. The common platform will also expand the pool of collateral that Asian central banks can accept as collateral when they manage liquidity in their local banking system, the HKMA adds.

Euroclear head of international collaboration, Philip Reichardt, says the Brussels-headquartered ICSD views the prospect of expanding triparty collateral management service in Asia - as envisaged by the common platform model - as a key value that Euroclear can expect from this collaboration with HKMA and Bank Negara Malaysia.

"This is a very important part of why Euroclear is involved as the development of bond markets is complemented by facilities which allow bond holders to use bonds as collateral for a wide range of financing operations," says Reichardt.

Triparty collateral management is a risk mitigation service aggressively pushed by both Euroclear and its other ICSD main rival, Clearstream. In a triparty collateral management service, an ICDS gets between the two sides of a bilateral trade as a neutral collateral manager that performs daily mark-to-market the collateral securities to ensure the transaction is sufficiently collateralised.