As reported by flow in ‘Hello Beijing’, at Sibos 2024 People’s Bank of China (PBOC) Governor Lei Lu outlined how China continues to open up its financial sector, interlinking cross-border payments and forging international cooperation with the rest of the world. Onshore access channels now available to foreign investors are explained in the flow article, China’s post-zero Covid investment boom and include:

• Stock Connect, launched in 2014 to allow Hong Kong’s investors to access mainland China stock markets.
• The now consolidated Qualified Foreign Institutional Investor (QFII)/Renminbi Qualified Foreign Institutional Investor (RQFII) regime.
• Bond Connect, a mutual market access scheme for investors from mainland China and overseas to trade in each other’s bond markets.
• The China Interbank Bond Market (CIBM), China’s largest domestic bond market and the world’s second largest.
• Swap Connect, a scheme modelled on Bond Connect and Stock Connect, giving offshore investors access to the onshore interest rate swap market.

China’s reform zeal appears not to be slowing, as regulators continue to make improvements to the local capital markets. “The PBOC recently confirmed that global investors can use their onshore bond holdings held under Northbound Bond Connect or CIBM as margin collateral for Northbound Swap Connect transactions,”¹ Tony Chao, Head of Securities Services, Greater China, Deutsche Bank, told flow at Sibos.

By having access to more non-cash collateral, offshore investors will benefit from cash optimisation and lower liquidity costs when using the Swap Connect channel. At the same time, the measure will make onshore bonds more attractive for offshore investors while also promoting better synergies between Bond and Swap Connect.² This initiative comes shortly after PBOC and the Hong Kong Monetary Authority (HKMA) both announced that onshore bonds could be used as collateral for HKMA’s RMB Liquidity Facility.³

Repo market reform is another priority for regulators. “China’s onshore bond repo market is potentially opening itself up further to offshore investors currently using the CIBM,” continued Chao. “This means the repo market will now be accessible to non-bank financial institutions, such as asset managers and insurance companies. We expect guidelines on this particular topic will come out in the next few months.”

China is also enhancing regulatory oversight of its domestic market. The report China Compass: the comprehensive guide to investing in China, launched at Sibos by Deutsche Bank and law firm HanKun, explains how regulatory pronouncements in China were primarily focused on developing capital markets. Recent proposals are more about improving supervision of listed companies and securities fund institutions, along with the delisting and trading processes – measures aimed at “promoting high-quality liberalisation of capital markets”.

While China has made excellent progress liberalising its capital markets, more could still be done, particularly within the repo space reflected Sibos panelists at the session, ‘Meet the experts: Open and win-win: The China bond market’s global integration’. “Most Chinese repo transactions are pledged, without a transfer of ownership, which is contrary to global standards, and this ultimately leads to reduced liquidity,” said Lance Chen, Head of Network Relationship Management, APAC at Clearstream.

However, on 1 November, it appeared the tide was turning. The China Daily reported that the PBOC “conducted the first operations of a new reverse repo tool and injected 500 billion yuan (US$70.3bn) into the banking system in October, boosting its policy toolkit while promoting internationalised interbank bond market development”.⁴

Panelists on Future-ready securities: innovating securities markets with ISO 20022’ left to right: Colin Parry, CEO, ISSA, Hannah Elson, Global Head of Custody, J.P. Morgan, Juliette Kennel, Head of Standards, Swift; and Giles Elliott, Head of Strategic Business Development, Capital Markets, TCS

By November 2025, the payments industry will have transitioned from legacy message and data formats to ISO 20022, as part of the Committee on Payments and Market Infrastructures’ (CPMI) efforts to streamline cross-border payments.⁶ This was discussed at length in the Sibos Big Issue debate, summarised in flow’s ‘Embracing ISO 20022 for a connected future’ regarding the standard’s impact on cross-border payments.

The question now is whether the transition to ISO 20022 in payments will galvanise the securities services industry into following suit, by moving away from its legacy ISO 15022 format. This was discussed at the Swift Standards Forum panel, ‘Future Ready Securities: Innovating Securities Markets with ISO 20022’. In short, the ISO 20022 standard provides flexibility in that it does not require securities services market participants to update, which results in ‘multiple versions’– unlike the existing ISO 15022, which ensures everyone is on the same version.

The other issue in moving to a new standard is the legacy and the operating models already in place. As Hannah Elson, Global Head of Custody at J.P. Morgan noted, “We are talking about Standards that are embedded through end-to-end operational processes, so think about how many issuers, how many market custodians, how many market infrastructures, how many investors – we all have operating models built around these standards. The idea that you could suddenly have the whole world change its entire end-to-end operating model is just not realistic.”

“Currently there is no business case to support a global migration of the Securities Services industry to ISO 20022,” said Juliette Kennel, Head of Standards at Swift, speaking to flow after the panel session. “However, if there are entities or markets that want to start using the Standard, then of course e they should. On the Swift network, we enable the use of ISO 20022 and ISO 15022, so the two standards are interoperable and can co-exist.”

Speaking in a separate panel session, ‘Navigating the future of global capital markets’, Deutsche Bank’s Anand Rengarajan agreed. “Any market change, whether it is T+0, same day FX or ISO 20022, will be accepted by the industry, but only if it delivers value. Technology change costs a lot of money to implement. If a firm is going to spend millions of dollars upgrading its infrastructure to support ISO 20022, then the benefits need to be clear.”

“Any move to ISO 20022 is most likely to work where there are direct connections to the CSDs”
Juliette Kennel, Head of Standards, Swift

Kennel added, “There are several drivers that have pushed the adoption of ISO 20022 in securities markets. The first is market infrastructure led, where initiatives such as Target2Securities (T2S) require firms which connect directly to T2S to use ISO 20022. The DTCC has also chosen to use ISO 20022 and participants that connect to both these systems are obliged to use the standard. Regulation is also a factor, for example the EU’s Shareholder Rights Directive 2 (SRD2) requires that ISO 20022 be used for shareholder identification and general meeting messages.”

International Securities Services Association’s (ISSA) CEO Colin Parry reminded delegates of the ISSA report, Principles for ISO 20022 Migration (May 2024),⁶ which helpfully lays out the market considerations for a migration to ISO 20022, the possible migration approaches and implementation considerations, the challenges of ongoing management of ISO 20022, and the role of vendors. But, as Kennel told flow, “Any move to ISO 20022 is most likely to work where there are direct connections to the central securities depositaries (CSDs). And the further you go away the harder it will be. And so, if the goal is global adoption of ISO 20022, then the need for market buy-in at the ‘extremities’ of the ecosystem will be of paramount importance.”

Panelists from ‘Navigating the future of global capital markets’ left to right: Charifa El Otmani, Director, Capital Markets Strategy, Swift: Amarilis Prado Sardenberg, Partner, Interlink; Goran Fors, Deputy Head of Investor Services, SEB; and Anand Rengarajan, Global Head of Sales and Asia Pacific Middle East and Africa, Securities Services, Deutsche Bank

Turning to the issue of interoperability between blockchains (or rather the lack of it, resulting in islands of liquidity), it fell to Angie Walker of Chainlink in the Swift Standards Forum session, ‘How AI and DLT can enhance corporate actions’ to explain the role of data oracles in liquidity management as an asset transferred from its primary investor to the secondary markets between a range of blockchain networks.

On 21 October at Sibos, Chainlink announced the results of an industry initiative combining technological advancements in AI, oracles, and blockchain to structure and standardise corporate actions data onchain. Participants include market infrastructures Euroclear and Swift, as well as major financial institutions – UBS, Franklin Templeton, Wellington Management, CACEIS, Vontobel, Sygnum Bank – and three blockchain ecosystem partners – Hyperledger Besu, Avalanche, and ZKsync.⁷

Through this initiative, data oracles paired with multiple large language models (LLMs) were used to convert unstructured corporate action information into structured data using ISO standards, before being distributed onto a shared infrastructure in real-time, according to Walker. In a second panel, she referred delegates to a case study published as a paper by Chainlink Labs: Cross-chain settlement of tokenised assets using Chainlink CCIP.⁸ This sets the company’s blockchain interoperability standard in the form of the Cross-Chain Interoperability Protocol (CCIP) enabling existing infrastructures to connect to blockchains and instruct smart contracts to send arbitrary data and enable token transfers across private and public blockchains.

On 5 November, Swift announced the successful completion of a pilot with UBS Asset Management and Chainlink for settling tokenised fund subscriptions and redemptions on its network “hereby allowing the straight-through-processing of the payment leg without the need for the global adoption of an on-chain form of payment”. This, said Swift, “helps in the automation of the entire lifecycle of the fund redemption and subscription process”. The project is part of the Monetary Authority of Singapore’s Guardian programme.⁹

Barnaby Nelson, CEO of The Value Exchange, a global market research house focused on market structure and connectivity unpicked the evolving area of funds tokenisation in ‘How is DLT delivering transformational value to investors?’ Panelists, including HSBC Group Head of Digital Assets and Currencies John O’Neil and Euroclear’s APAC CEO Philippe Laurensy, agreed that the pace of tokenisation was determined by client and investor demand, but had the power to transform core asset management and asset servicing businesses.

One panelist explained how they had begun with fixed income, had some success in issuing digital bonds and could see “there is demand from investors for real-world assets” such as tokenised physical gold.

“DLT is a data play, not a settlement and nor is it a transfer play,” said Euroclear’s Laurensy. He explained how in an ecosystem where everyone replicates the same tasks of reconciliation, KYC, sanctions screening etc, these cannot be monetised – you can’t charge clients for compliance. However, “the data play is about making datasets,” he said. “Take a funds prospectus, put that into a smart contract and put that smart contract onto a ledger that everyone can access – then you create the value.”

Interviewed by flow after the session, Nelson reflected, “The key is what lies beyond the act of tokenising a fund – in terms of the business benefits and P&L impact that it can drive. We see consistently that tokenisation is often misunderstood as being a source of operational savings but, in the funds space, it is really an enabler of distribution and of performance returns. How can you reduce the overheads of a fund to the point where it can be sold effectively to wealth and retail investors? How can you drive performance by offering these same investors access to high-income (but often illiquid) assets?”

Concluding, he said that in Asia his firm sees more than 6.6 million high net worth investors who are ready to move their portfolios to access better access to this kind of investment reach and personalisation. “Tokenisation is the bridge between today’s world and those benefits.”

No Sibos would be complete for the securities services community without a raincheck on settlement compression. Settlement cycles are slowly becoming more homogenised as markets increasingly look to transition to T+1.

Two panels, ‘Post-Trade in Harmony: Traditional wisdom meets Innovative Thinking’ and ‘Hype or hope? T+1 reality check’ focused on the relative ease of the North America transition to T+1. Panelists agreed that ‘it would be easier if more markets moved to T+1’ and that ‘time zones are a challenge’. While consensus was that most markets would make the move, delegates were reminded of how the process of consultation and preparation takes huge planning and engagement, when Karen Webb, Head of Issuer Services, Securities and Payments (ASX Operations Pty Ltd) and Mimi Yan, Co-Lead of the Operational Issues WG of the UK T+1 Technical Taskforce and Post-Trade lead, Financial Markets Standards Board gave progress updates on Australia/New Zealand¹⁰ and the UK respectively.

Panel session ‘Hype or hope? T+1 reality check’ from left to right: Wenwen Ren (China Asset Management Company); Mimi Yan (FMSB); Camile Papillard (BNP Paribas); Chermaine Lee (Swift – Moderator); Karen Webb (ASX Operations Pty Ltd)

Yan reflected on the “thousands of hours contributed by members of the markets” involved as the T+1 Technical Group (TGT) of the UK Accelerated Settlement Task Force (AST)¹¹ prepared draft recommendations for implementing the agreed transition to T+1 (bringing equity settlement in line with that of gilts, by a date to be communicated, and by end of 2027), split across key focus areas for participants, including the importance of automation and adherence to market practices. With the consultation now closed, the final report is expected around the end of 2024. These are just two of the ongoing consultations – the European Securities and Markets Authority (ESMA) has been consulting on shortening the settlement cycle for more than a year.¹²

Given that more investors are young, with expectations that buying securities is like a car purchase, according to Deutsche Bank’s Rengarajan, settlement needs to accelerate. “Younger retail investors are asking, ‘why is that they can order a car, which has thousands of components, and get it delivered on the next day, but it takes two days in many markets to receive a stock after making a payment,” he said.

CEO Perspectives left to right: Julia Streets, Streets Consulting; Jos Dijsselhof, SIX; Valerie Urbain, Euroclear; Samuel Riley, Clearstream; Madhabi Puri Buch, Securities & Exchange Board of India (SEBI)

A high point of the securities service’s agenda was the line-up of market infrastructure leaders, where delegates heard from SIX, SEBI, Clearstream and Euroclear in ‘CEO perspectives: The future of securities market infrastructures’.

A key theme underpinning the wide range of topics they tackled was stability and reliability. “For us to operate and provide services to customers, being stable, reliable and available at all times – whether there is a war or a crisis or something happening in the financial markets – is crucial,” said Jos Dijsselhof, CEO of Switzerland’s SIX. He stressed that “the most important investment in the stability, predictability and security of our systems is educating and making our people aware of their role and their impact on the business”.

“The Cloud is pivoting to offer an alternative to recovery when on-premises applications or back-ups are compromised”
Valérie Urbain, CEO, Euroclear

Euroclear CEO Valérie Urbain agreed that stability and resilience are the licence to operate in a financial market infrastructure. “We need to work hard to ensure that if something happens, we can recover – and we come back to the theme of Sibos that the ecosystem needs to collaborate.” She explained that Euroclear works closely with fellow market infrastructures, regulators and other ecosystem participants to “step up preparedness”. This has involved running models and simulations of market disruptions and cyber-attacks.

While the Cloud has often “been perceived as adding risks”, she felt that the world had moved on and now “the Cloud is pivoting to offer an alternative to recovery when on-premises applications or back-ups are compromised. “In the context of our data centre strategy, cloud is now part of the solution we are using”.

Sibos 2024 was held 21-24 October at Beijing’s China National Convention Centre

Title photo ©Deutsche Bank

Sources

¹ See hkma.gov.hk
² See theasset.com
³ See financeasia.com
⁴ See chinadaily.com.cn
⁵ See swift.com
⁶ See issanet.org
⁷ See chainlinktoday.com
⁸ See chain.link
⁹ See swift.com
¹⁰ See asx.com.au
¹¹ See kpmg.com
¹² See esma.europa.eu