Turning fragmentation into flow: Hong Kong and the evolution of APAC market infrastructure

Front-to-back integration, distributed ledger technology (DLT) and securities finance are reshaping Asia Pacific’s capital markets

Asia Pacific’s capital markets are at an inflection point. Rising trading volumes, compressed commissions, shortening settlement cycles and the emergence of distributed ledger technology (DLT) are converging to demand a rethinking of market infrastructure from front to back.

Dan Barnes spoke with Wout Kalis, senior country officer, Hong Kong of Broadridge about what is driving this transformation, where DLT is delivering real results, and what it will take for Hong Kong to cement its position as the region’s pre-eminent financial centre.

Dan Barnes: What is driving the evolution of market infrastructure in Asia Pacific today — is it primarily competitive pressure to grow, or is it more about managing costs and reducing operational friction?

Wout Kalis: I think it’s both, because it’s often not one-sided. Firms really want to drive efficiency. We’ve seen a rise in volume, so the straight-through-processing (STP) ratio is very important. The cost of a trade is really high when you don’t execute on STP. At the same time commissions on trading have come down, so there’s less margin. That’s forcing firms to be more efficient.

In Asia, you also have the cross-border component, as well as multiple different instruments, which increase the need to create efficiencies across front-to-back. Higher trading volumes and the growth of low-touch trading are driving a significant need to have the different components working together — otherwise you don’t create those operational efficiencies.

Front-to-back doesn’t take away flexibility. Firms would still want a mobile app for the retail client, a portal for their wealth managers, an institutional workflow that operates differently — but all of that could feed into an omnibus account straight through to position allocation when needed. STP doesn’t mean just one type of requirement. It’s really about the trade process. And if you then layer AI on top of that, having a centralised database becomes even more important — you need it to run AI models effectively.

Can you give examples of where that evolution is really delivering value from the front-to-back model?

The clearest example is the shift from high-touch to low-touch trading. As volumes have increased significantly, the importance of having back office and middle office operating on a straight-through basis becomes much more critical. Our clients don’t want to increase headcount as volumes grow, so that means reducing operational breaks and settlement issues, improving client service by resolving queries faster, and having the ability to trade different products on one platform rather than multiple systems. There is a continuous demand that costs and fees be reduced on the buy side. That push to create efficiencies is, I think, exactly where the front-to-back model is making its mark.

Do you see any impact from the shortening of settlement cycles in certain markets?

I would go one step further: 24-hour trading is really what people are now looking at. The shortened cycle is seen as a phased approach, but ultimately what everyone is moving towards is 24-by-5 trading. People who have had exposure to crypto are thinking: this is much more straightforward – I can trade any time, instantly, without worrying about margin calculations. That has become the benchmark for what an efficient market could look like. From a pure technology perspective, it is already possible, even if regulation means the journey will take time.

That benchmark is already influencing regulatory thinking. Tokenisation of US equities, including trading them outside the US on private markets, is now being put to US regulators as a direct challenge, with implications that could accelerate change across traditional markets over time.

Where do you see distributed ledger technology having the most impact on market infrastructure today?

Where you can create real operational efficiencies. Tokenisation of US equities may make it possible to trade them more frequently, but that doesn’t mean there is automatically a market; why would you not just trade them directly on US markets at no cost? But if you look at collateral liquidity and the movement of assets, that is where practical benefits exist today. With our DLT solution, we see real problems being solved around collateral management, collateral mobility and optimisation. These are areas where firms can generate value now, because they address real constraints in how collateral is sourced, moved and deployed across organisations. It typically starts with intra-company workflows — moving liquidity between branches in Singapore and Hong Kong for example, making more efficient use of the same collateral across different entities.

The next level is bilateral use. In the US we are seeing significant success with intraday repo. It becomes possible to use repo during the day, reusing the same liquidity two or three times. That can change liquidity management completely. The key question for any tokenised asset is always: does it carry genuine benefit? If it does, it will succeed.

Does improved collateral liquidity effectively reduce the cost of associated instruments — swaps, for example?

Yes, and it also adds a revenue component. In the past, firms would put a repo on overnight. Now you can put it on for two hours, retrieve it, lend it out again to another party, and then put it overnight, so there is a revenue dimension to this, not just cost reduction.

Think also about capital requirements: if a bank needs to hold liquidity to satisfy regulations in Singapore, it can use that same liquidity again at Hong Kong’s cut-off, and then again into the US overnight. You start to optimise your capital requirements in a way that was not previously possible.

What has been the level of support from regulators in developing these DLT applications?

A key benefit of our DLT solution is that it fits within the current regulatory framework. It does not require a new regime. It resolves pain points that already exist in the repo workflow without requiring regulatory change. Where digital assets are concerned, tokenised equities are one example: European rules permit this but the US Securities and Exchange Commission (SEC) does not yet. In our solution, the collateral is tokenised but the cash remains cash, though over time using stablecoins or digital cash would make the process faster and more certain. The design allows firms to start small and build confidence, then move to digital cash when they are ready.

More broadly, both Hong Kong and Singapore are significantly more accommodating of digital assets than many Western jurisdictions. There are active working groups and a real focus on enabling digital asset infrastructure.

How would you describe the curve of adoption in the US, and do you expect Asia Pacific to follow a similar trajectory?

In the US, once people became comfortable with the technology and trusted it, and once genuine liquidity built up on the platform, adoption accelerated very quickly. You start to see banks rethinking their liquidity management entirely — rather than holding a large daily balance transferred from the US for Hong Kong trading, they reduce that balance and use the DLT platform to meet capital requirements intraday. We are also pushing hard to bring the buy side on board to add more liquidity. You need adoption on both sides — borrower and lender — and in the US that happened fast.

The US has a structural advantage: it is a single dominant capital market with guaranteed size and the participant base to drive rapid onboarding. In APAC it is more fragmented. But once a couple of key regional players come on board, I expect the acceleration to follow. There is a core group of regionally significant banks that already see the competitive advantage clearly. Competition between offices within the same bank is actually a catalyst — we’ve seen Hong Kong branches taking the lead on digital initiatives ahead of headquarters, because satellite offices are often better placed to spot emerging trends.

How do you see the securities borrowing and lending market supporting market efficiency across Asia Pacific at the moment?

There are two dimensions. One is prime brokers servicing hedge funds that need inventory to facilitate trading across multi-asset, multi-market strategies in Korea, Hong Kong, Indonesia and Japan, each with their own nuances. The other dimension is that the decline in commission revenue is pushing firms to explore other sources of revenue. Many have sizeable retail client bases with niche inventory that could be useful to active hedge funds. Where they may once have handed that inventory to a single custodian, they are now looking more closely at how to manage and monetise it themselves.

The exchange landscape is changing too. Singapore Exchange, which used to hold inventory on behalf of all Singaporean banks, is now pushing that responsibility back to the banks themselves. Firms that previously had access on the same level must now understand and manage the business. That is driving an overall sophistication across APAC that we have not seen before.

In Hong Kong last year, on-loan balances on a daily basis exceeded US$60 billion, up more than 10-15% year-on-year. Securities lending revenues on equities exceeded US$250 million. That by itself signals another meaningful avenue for revenue generation in Asian markets. As capital flows diversify away from the US, markets need the infrastructure to handle that. A more liquid, efficiently operating securities finance market means smoother settlements, tighter bid-ask spreads, and a more attractive proposition overall.

What are the barriers firms need to overcome to increase participation in securities finance?

At the market level, there are clearly barriers. Short-selling rules, disclosure requirements, tax treatment and cross-border participation rules all vary significantly. Singapore is very straightforward, while other markets become considerably more complex. That said, we are seeing institutional progress in Malaysia and real momentum in Indonesia, where markets are actively competing to attract flow, particularly given the success of US markets, which has had a direct impact on volumes in the existing regional exchanges.

Beyond that, scale also matters. You need to be of a certain size, and APAC does have a long tail of smaller players who won’t participate at this level. But many traditional brokers have been complacent, focused purely on execution and missing the client in a fuller sense. Digital brokers have challenged them on that, and now they have to respond. If you go to a digital broker, the capabilities are already there, and being purely an execution broker is no longer sufficient.

How do these threads connect to potentially change Hong Kong’s profile as a financial centre?

All of this, trade lifecycle modernisation, DLT-enabled infrastructure and securities finance — points towards Hong Kong maintaining and reinforcing its position as the leading financial centre it wants to be in Asia. Its advantages in cross-border investment and market connectivity are highly valuable, and the infrastructure being built now is what will underpin them.

Hong Kong remains the number one IPO market worldwide, and that says a great deal about the innovation and entrepreneurship it continues to attract. The heart of the Hong Kong Exchange – the continuing expansion in ETFs that connect activity across asset classes, dual-currency counters for market-making, the range of connectivity initiatives – shows a market that is continuing to evolve. Repo Connect is a useful recent example: it is primarily about channelling outbound flows from China through Hong Kong, and it adds another dimension to the city’s role as the bridge between Chinese capital and global markets.