Hong Kong Exchanges and Clearing is using Daml to build the next-generation securities settlement platform connecting Hong Kong to mainland China.

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Background

Investor demand for Northbound trades into China continues to surge, with average daily turnover up more than 870% in the last four years. However, the rapid growth has started to strain operational workflows for international market participants, who must overcome difficult time zone challenges to complete same-day settlement.

Time zone challenges mean that, for European and US-based investors, operations teams work through the night to support settlement with the Hong Kong Stock Exchange. Current industry processes are organized sequentially, limiting visibility of settlement issues for players downstream, compounding costs from trade breaks and creating time pressure. Counterparties cannot see what is happening in previous process steps and must therefore wait to see if a problem occurs in the transaction chain. Asset managers, brokers, global custodians, local custodians and clearing brokers all struggle to process trades in time, and sequential communication lines add additional complexities for exception management.

 Charles Li, Chief Executive (2010 - 2020)

“Synapse will be of major benefit to global investors when they trade through Northbound Stock Connect. Embracing new technology to further develop our markets is a cornerstone of our strategy.”

Challenge

The disparity between Hong Kong’s T+2 settlement cycle and mainland China’s T+0 cycle gives investors only four hours to complete settlement. For European- and US-based investors, time zone challenges mean that operations teams are working through the night to support settlement.

A complicated, multi-party workflow between buy- and sell-side firms, each using different internal data models and technology stacks, creates an immense challenge for operational teams managing the surge in settlements. Identifying and troubleshooting breaks is difficult, manual, and time-consuming – adding cost and risk for all participants.

The core issue is that today, all information is processed sequentially, with each party only gaining visibility once they are instructed by the party before them in the chain. This inevitably creates a crunch for clearing members and local custodians who are responsible for submitting and matching final settlement instructions in the market.

Today, each participant in a transaction must enter, communicate, check, and enrich data about the trade to match and reconcile it with counterparties before sending it to the next participant in the chain. With multiple entities — asset managers, brokers, custodians, clearinghouses, exchanges, and other intermediaries — this sequential process is cumbersome and ripe for errors.

Strategy

HKEX Synapse delivers a solution: an integrated settlement-acceleration platform designed to improve post-trade efficiencies for Northbound Stock Connect participants. Leveraging Daml, Digital Asset’s smart contract development framework, and through links to DTCC’s Institutional Trade Processing services, international investors will access an automated, expedited process that lays the foundation for the future.

The new integrated platform, powered by Daml smart contracts, eliminates sequential processes and offers a single source of truth for the settlement of securities. It produces accurate and timely status updates.

With Synapse, once a broker executes the asset manager’s order and the block trade allocation is completed, the matched allocation will be passed to Synapse, where cross-border trades are centrally matched. Direct, simultaneous instruction to all participants speeds settlement and limits exception management, as questions or disputes can be identified and resolved more quickly.

HKEX Synapse will use Daml smart contracts to automate, update, and synchronize information for all participants in real time:

• Settlement instructions and status updates are created simultaneously and shared with all parties along the settlement chain. Individual participants no longer need to send instructions bilaterally.

• Concurrent processing significantly reduces settlement time.

• Greater transparency and current-state data allow errors to be identified and exceptions managed more quickly.

• Simplified integration with APIs, databases, networks, and ledgers facilitates broad adoption.

Outcome

For managers and investors, improved market access via Synapse not only opens investment options, but also allows them to scale by delivering more efficient operations.

With Daml, HKEX Synapse will be able to simultaneously create settlement instructions and provide status updates to all parties along the settlement chain, facilitating concurrent processing and greatly improving transparency for market participants.

HKEX Synapse will extend Northbound Stock Connect’s global reach via DTCC’s ITP services, currently used by more than 6,000 clients across 52 markets globally, further realising the potential of Stock Connect for China’s A-share market.

CTM centrally matches cross-border and domestic transactions, allowing for:

• Automation of the trade confirmation process.

• Standardization, to streamline transaction flows.

• Seamless connectivity from trade execution to settlement.

• Direct connectivity via FIX and SWIFT to front and middle offices and custodian banks.