Asian Exchanges Face Hurdles in Rush to Faster Trade Settlements

Global banks and funds have urged caution for Asian exchanges seeking to switch over to shorter settlement cycles, citing the need for significant investments to mitigate risks such as failed trades. According to a report from the Asia Securities Industry Financial Markets Association, complexities in Asia include a wide range of currencies and operational differences across markets, which could hinder the adoption of faster settlement cycles. The report highlighted that seven markets, including Hong Kong, Japan, Korea, and countries across Southeast Asia, would require substantial investments to upgrade their infrastructure and systems to support shorter settlement cycles. The report estimated that the costs of implementing faster settlement cycles could range from $100 million to $500 million per market, depending on the complexity of the upgrade. The push for faster settlement cycles is driven by the growing demand for cross-border transactions in Asia, which is expected to reach $10 trillion by 2027, up from $6 trillion in 2022. However, the report noted that the region's diverse currencies and operational differences would require tailored solutions to ensure the smooth implementation of faster settlement cycles. The Asia Securities Industry Financial Markets Association's report comes as several Asian exchanges, including the Hong Kong Stock Exchange and the Tokyo Stock Exchange, are exploring the possibility of adopting shorter settlement cycles. The Hong Kong Stock Exchange, for example, is considering reducing its settlement cycle from three days to one day, while the Tokyo Stock Exchange is exploring the possibility of adopting a same-day settlement cycle. The industry body's report noted that the costs of implementing faster settlement cycles would be a significant burden for many Asian exchanges, particularly smaller ones. The report estimated that the costs of implementing faster settlement cycles could account for up to 20% of the total operating expenses of some exchanges. The push for faster settlement cycles is also driven by the need to reduce counterparty risk and improve liquidity in the region's financial markets. Faster settlement cycles would enable investors to access their funds more quickly, reducing the risk of failed trades and improving market efficiency. The report's findings have significant implications for the region's financial markets, particularly for exchanges and financial institutions that are considering adopting faster settlement cycles. The industry body's report serves as a warning to exchanges and financial institutions to carefully consider the costs and risks associated with implementing faster settlement cycles. As the region's financial markets continue to evolve, the push for faster settlement cycles is likely to gain momentum. However, the industry body's report highlights the need for careful planning and investment to ensure the smooth implementation of faster settlement cycles in Asia.