Simplicity, scale and the single network The ASEAN Trading Link explained

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1 Simplicity, scale and the single network The ASEAN Trading Link explained The ASEAN Trading Link is a new platform designed to link the various national exchanges in South East Asia. The project was officially launched in April 2011 and represents an important first step in the plan to develop a single market access for the South East Asian capital markets. The recent SunGard City Day in Singapore gave local brokers an opportunity to hear more about the project. Representatives from the exchanges were able to explain the reasons for the ASEAN market initiative and its objectives while members of SunGard were able to provide more detail on the mechanics of the ASEAN Trading Link and exactly what brokers would be required to do in order to benefit from the new platform. With the trend towards global investment portfolios intensifying, traders are increasingly looking beyond their own domestic markets for trading opportunities and to the Asian markets especially. Trading volume in the Asian markets is expected to grow at an annual rate between 20 and 30% in the next five years but for the national exchanges of South East Asia there are a number of structural challenges they need to overcome to take advantage of investors interest. The strong economic fundamentals and potential for growth in the region are tempered by the complex market structure and lack of integration between neighbouring exchanges. The exchanges of Singapore, Philippines, Thailand, Malaysia, Vietnam and Indonesia face competition not only from more powerful nearby markets such as India and China but also global brokers that are looking to offer off-exchange liquidity by internalising their own order flow. The idea of a harmonised exchanges marketplace was first raised five years ago by the ASEAN governments. The aim was to develop a consolidated and close-knit capital market that could stand alongside the larger likes of China and India. The only way to compete with these markets is to create a bigger block so that when we stand up to talk our voice is heard, explained William Wong, director, Sales and Clients, of the Singapore Exchange (SGX). Cross-border capital flows There were a number of issues to consider in the creation of the ASEAN exchange regulatory and operational mostly centring on how project could enable cross-border capital flows between the numerous ASEAN markets. Aside from the differences in language, culture and currency and the absence of a super-regulator, previous efforts to establish a common market infrastructure have been hampered by complicated clearing mechanisms and inefficient exchange matching systems.

2 The project s blueprint consequently set out the following objectives greater standardisation, mutual recognition arrangements, flexibility in the language and legal requirements for securities issuance, reform of tax structures and established exchange and debt market linkages. It was in April 2011, during the ASEAN finance ministers meeting in Indonesia that the ASEAN exchanges market was officially declared open for business and a project timeline was announced. The initiative would include seven exchanges from six countries (Thailand, Vietnam, Indonesia, Malaysia, Vietnam and Philippines) with a combined GDP of $1.8trillion, 3,600 companies with a collective market cap of $1.98 trillion. We can now stand should to shoulder with India and China, declared Wong. In addition to the benefits of scale, the ASEAN Exchange is also hoping to create a passport to exploit the investment opportunities that exist across the region but have been difficult to access due to the fragmented market structure and lack of cross-border integration. To date trading in the ASEAN market has meant using a series of brokers in different regions that connect unilaterally via that ends up resembling a spaghetti network, said Wong. We want to unify this through the ASEAN Trading Link. ASEAN as an asset class Once a consolidated and integrated ASEAN market has been developed, Wong hopes that it will then be possible to develop ASEAN-specific investment products such as an index of the top 180 ASEAN stocks, exchange traded funds, real estate funds and natural resourcesbased funds. Such products will not only appeal to ASEAN-based investors but will also help to garner interest from international investors, said Wong, thus increasing the liquidity in the ASEAN market. A brand for the ASEAN exchanges has been created, a website has been set up and various stakeholders have been engaged. Also a distribution channel for brokers has been built. Attention has now turned to the creation of the ASEAN Trading Link. On June 15th the project moved forwards with SunGard contracted as the technology provider. The current arrangement for cross-border trading in the ASEAN market relies on regional brokers and members of their national exchanges connecting unilaterally to their counterparts in other national markets. The ASEAN Trading Link will change this by providing a common access point for the ASEAN exchanges in the network via an inter-connected exchange hub. In the initial phase Bursa, Philippines Stock Exchange, Stock Exchange of Thailand & SGX-ST (the equities branch of SGX) will join this ASEAN Link. There are still some regulatory issues to overcome. The ASEAN market operates on a sponsored broker model. For a foreign broker, who is not a member of the exchange where the trade is executed, a bilateral agreement with at least one local broker is required to ensure regulatory compliance and conduct post-trade settlement. It is a much more streamlined network and it also levels the playing field by turning a series of one-to-one connections into a single one-to-many connection, said Wong.

3 After Mr Wong laid out the project s objectives, a technical overview of the ASEAN Trading Link was presented by Mathias Bellancourt, sales director (India and South East Asia) for SunGard's global trading, a business providing multi-asset and multi-market front-end trading services as well as risk, order and compliance management systems. The division also contains the SunGard Global Network (SGN), an order routing network that links more than 2,000 asset managers and 500 brokers on 110 global markets. The experience of creating and operating the SGN was a primary reason for SunGard s selection as the technology provider for the ASEAN Trading Link. We will build a similar network for the ASEAN exchanges, said Bellancourt. It will be done in two stages the first will involve the PSE, SET, SGX and Malaysian Bursa and the second will involve the IDX and the two Vietnamese exchanges the HNX and HOSE. The main components There are three main components in the ASEAN Trading link. The most important of these is the Intra ASEAN network (IAN), which is the infrastructure connecting the various national exchanges. There is also the ASEAN Common Exchange (ACE) gateways, a series of hubs located at each exchange which provide the connecting point between the exchanges. The final component is the neutral access point which is designed to provide access for parties from outside the ASEAN market such as non-asean brokers, outside vendors or international institutional investors. ASEAN Link components: ACE, NAP, IAN NAP = Neutral Access Point IAN = Intra ASEAN Network ACE = ASEAN Common Exchange gateway

4 routing across all of the ASEAN exchanges will be one of the features enabled by the ASEAN Trading Link. The originating broker will place its order at its local exchange via the ACE gateway. The order can then be sent to another ASEAN exchange via the IAN to be executed by a sponsoring broker on that exchange. The same process also applies to originating clients from outside of the ASEAN Exchanges that will be connecting via the NAP. All executions can take place under the supervision of the originating broker. Meanwhile, the sponsoring brokers can receive real-time execution feeds in a FIX format or else in a text file at the end-of-day. ASEAN Link: routing broker clients Sponsoring brokers can receive real-time drop-copy feeds in FIX or end-of-day in text files Drop copy Sponsoring broker There is a similar aggregated approach to the distribution of market data for the ASEAN exchanges. Each exchange will send their market data to the ACE gateway of the other exchanges, meaning that there is a single point of access for the market data of all exchanges. Interestingly there is no third party application used to provide the aggregated market data, instead it is provided directly at source. The same principle applies for any trading participant outside of the ASEAN network in that all exchanges will make their market data available to the NAP.

5 Simplified network So while the order flow goes from the client to the originating broker to the exchange, the market data travels in the opposite direction but via the same network. This order flow places a particular emphasis on the local ACE gateways, explained Bellancourt. A key point of the Trading Link solution is that we will provide all of the ACE gateways with a standard FIX interface meaning that none of the originating brokers will have to alter their own existing infrastructure in order to connect to all of the other exchanges. ASEAN Link: Overall Flow Client Broker (OB) Prices & book Deal Exchange Connect via ASEAN FIX/FAST or SunGard API confirm Uses the Valdi Trader screens or own FIXbased OMS to send ACE Manage Risk Filter & Control Flow (via Selector Connect Prices & book Manager screen) IAN ACE routes order to the Executing Exchange via the Intra- ASEAN Network (IAN) NAP Handles credit limit View and cancel sponsored orders Connect via ASEAN FIX Prices & book ACE Clearing & Settlement Sponsoring Broker (SB) Dr op Co py Executing Exchange Executing ACE Performs risk screening Converts ASEAN FIX messages to the Exchange s proprietary message for transaction processing Submits orders directly to the Executing Exchange Minimum disruption and the utmost simplicity are vital for the project s success believes Bellancourt. We have tried to simplify the network of ASEAN exchanges in order to provide access to a common trading network to achieve the ASEAN Trading Link vision. For the assembled brokers in the audience, these assurances were sufficient to answer any queries about potential increases in latency or cost that may arise from connecting to the ASEAN Trading Link, as Bellancourt explained. The ASEAN Trading Link is not there to replace the process that brokers already use to connect to their local exchanges that will remain exactly as it is. And any connections the broker has with their own clients, remains exactly the same. In the case of new clients not yet connected to the brokers, it is possible to connect them to the FIX-enabled NAP so that they can send their orders to and receive market data from the ASEAN Trading Link. And in these instances, we will happily help brokers with the on boarding of these clients. The ASEAN Trading Link should start to operate in Q