Asian Markets Developments

One reason that the global custody business in Asia is profitable is the fragmentation of its financial markets. Southeast Asia alone consists of 11 distinct countries. Add Hong Kong, China, Taiwan, Australia, and the Indian sub-continent to the mix, and you face an incredibly eclectic collection of markets, standards, regulators, currencies, not to mention languages. This diversity creates friction—and as any market participant will tell you, friction is often where the money is made.

Following the advent of the Euro and the lessons of the Asian financial crisis, there was periodic talk of “harmonizing” the Asian markets. Yet, while the theme featured in many of our powerpoint presentations, nothing transformative really materialized - except perhaps for the gradual opening up of Chinese markets. Initiatives like the Qualified Domestic Institutional Investors (QDII) and Qualified Foreign Investors (QFII) programs and, more recently, the Stock Connect project have steadily bridged gaps by enabling Hong Kong and Foreign investors to participate in Chinese markets and vice versa.

A New Force in the Region

Those developments set the stage for the latest development: HKEX and the Hong Kong Monetary Authority (HKMA) are now poised to create an international settlement house intended to rival established giants like Clearstream and Euroclear. As reported in the recent press release, HKEX has signed a memorandum of understanding with CMU OmniClear Limited—established to operate on behalf of the HKMA—to explore the creation of an international central securities depository (ICSD) in Asia . According to HKEX CEO Bonnie Y Chan, this move is expected to play a significant role in internationalizing the renminbi, thereby enhancing Hong Kong’s stature as a global financial hub.

Global Politics and Market Infrastructure

The timing of this announcement is especially intriguing in light of broader geopolitical dynamics. The Financial Times recently noted that since June 2022, China has been actively working to reduce its reliance on Western systems. And, this development of a new ICSD comes on the heels of Europe’s decision to freeze 200 billion euros of Russian assets—a move aimed at strengthening its negotiating position regarding the ceasefire in Ukraine. The creation of a regional depository could well be seen as part of this global recalibration of financial power, offering foreign investors a new way to manage renminbi-denominated bond liquidity and to hold global assets under Hong Kong’s jurisdiction.

Lessons from Experience

In one of my past roles at Standard Chartered Bank, my team and I were responsible for implementing Clearstream’s book of business in Thailand and the Philippines. I remember the painstaking legal negotiations that spanned months, driven primarily by Clearstream’s rigorous insistence on securing any clause related to a “lien on assets.” In politically charged situations—like when assets might be frozen for geopolitical reasons—such clauses can become critical. This experience underscores the delicate balance between establishing contractual safeguards in view of the dynamic, sometimes unpredictable nature of global finance.

Conclusion

This is an interesting development and may only be one of many more to come as the geopolitical landscape shifts. It will be fascinating to watch how new players and traditional systems adapt. Oddly enough we may just get that ‘harmonization’ after all.