Big Picture

The Ties That Bind: Market Connectivity Continues to Increase Despite Opposing Rhetoric

Whether it is geopolitical tensions in North Asia, the UK’s exit from the European Union or new U.S. trade policies, globalisation would appear to many to be in retreat in many regions of the world. Wherever one looks, social, political and economic boundaries appear to be isolating nations, reversing a trend that only a few years ago seemed all but unstoppable.

However, are we experiencing a similar move across financial markets?

We firmly believe this is not the case. For one, regardless of political rhetoric, the powerful interconnections forged via technological developments over the past several decades bind people and economies together in a way that transcends national borders. Similarly, regulators globally continue to take steps to knit markets closer together, progressively lowering the level of financial market fragmentation.

Technology entwines

Technology creates instant connections that link financial markets regardless of national borders or politics. Many would say that the interconnectivity forged since the dawn of the internet is now irreversible.

The technological ties that bind are getting deeper. One need look no further than the modern, electronic stock exchanges that enable high-frequency trading of international assets at the click of a button and shorter and shorter trade settlement windows. Equity settlement cycles have accelerated from five days to three (T+3) over the past five decades, and now an increasing number of jurisdictions are shifting to two-day (T+2) settlement. Unknown to many, current technology already supports same-day (T+0) settlement in the U.S.

The ongoing advancements in financial technology – commonly referred to as fintech – reinforces this movement to stronger and more direct ties between markets.

The adoption of cloud technology has been a key enabler of the fintech developments that are weaving global markets ever closer together. The cloud enables companies and agencies to develop and test new ideas in a cost-effective manner, which supports financial infrastructure innovation.

The result has been a flowering of applications that enable financial services providers to share computing power and application platforms seamlessly and, through a utility model, pay based on use rather than maintaining expensive servers that sit idle much of the time. This shared infrastructure also facilitates communal protection of these shared assets. For example, individual users of a financial services utility can submit cyber-threat information to help maintain a secure online environment for all users of that service.

Regulators pave the way in Asia

Of course, these developments may raise regulatory concerns. However, it may surprise many to learn that financial regulators have been enthusiastic supporters of fintech innovation across Asia-Pacific.

In October 2017, for example, the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS) announced a project to develop a cross-border distributed ledger-based trade finance platform.

Similarly, several Asian jurisdictions have been forward-leaning in their efforts to accommodate cross-border capital-markets activity, including crafting creative ways to permit Asian firms to use of infrastructures outside of their borders.

These types of solutions are important steps to ensure global and liquid markets using today’s technology, and will remain important if new tools such as distributed ledger technology (DLT) become more widely leveraged. For example, MAS’ Project Ubin, a blockchain-based clearing and settlement solution could help set a new standard for trade settlement across asset classes and markets, but cross-border solutions will be necessary to allow that vision to become reality.

The shape of things to come

If financial regulators and fintech development continue to weave markets more tightly together, we believe markets in Asia-Pacific – and other regions of the globe – are likely to continue to tighten the ties that bind, regardless of the isolationism suggested by recent political actions.

This optimism arises from a combination of irreversible technology developments that already connect countries and markets together and forward-looking regulatory regimes that are facilitating smoother international connections in the markets for currencies, securities and commodities.

In fact, DTCC has been in close consultation with regulatory agencies across Asia-Pacific and international markets to share insights and discuss how new technologies and regulatory action can facilitate efficient and transparent trading across borders. In the end, regardless of political rhetoric, the future of the financial markets will remain global.

Larry is Vice Chairman of DTCC and Chairman of the Board of DTCC Deriv/SERV LLC.

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