Asiaclear, the clearance and settlement system that will supposedly revolutionize the region’s bond markets, is an idea that refuses to die. It has been debated at Asian Development Bank (ADB) meetings since the early 1990s and cropped up again at last month’s gathering in Fukuoka.
However, there have been new developments. HongkongBank has registered Asiaclear as a trademark, according to Tomoo Hayakawa, a former treasurer of the Asian Development Bank, now president of the Asia Finance and Investment Corp.
Will this mean a large, well-capitalized bank will do for Asiaclear what JP Morgan did for Euroclear in 1968? Not exactly. Hayakawa – who sometimes credits himself with founding Asiaclear – was not happy with HongkongBank. He accused HSBC chairman, Sir William Purves, of registering the trademark “quietly and secretly” in November 1992.
Hayakawa says Purves heard about Asiaclear after lunching with him – and nearly jumped out of his chair with excitement. Purves then registered the name with the intellectual property department in Hong Kong. This, Hayakawa adds, was never his intention; the name was supposed to be “commonly held” for all of Asia and not registered by one bank.
Hayakawa also says he tried to get Purves to give up ownership of “Asiaclear” on several occasions – most recently at a reception in the Congress Library in Washington during the IMF meeting in 1996.
Such accusations receive short shrift from Purves, who tells Euromoney Hayakawa has “strongly-held personal views on all this”. He adds: “I keep telling him what the position is. Several years ago the bank registered Asiaclear to protect the name for Hong Kong. Hayakawa thinks it is something that should be available to him personally and should be released.
“I met him in October in Washington and I simply repeated what I’ve said to him in my office about five times. I’ve made it clear that if a group of corporations and the HKMA [Hong Kong Monetary Authority] want to set up Asiaclear it will be made available free of charge. I wrote to the HKMA last month to make this position clear.”
It is one of the stranger incidents in Asiaclear’s five-year history. But it may prove a fitting final chapter if, as some hope, the Asiaclear debate is finally killed by the groundswell of common sense that is forming.
The Asia-wide settlement system has never been known as anything else than Asiaclear. “I’m not sure who originated the term Asiaclear,” says Charles Coe, manager of the financial sector and industry division at the ADB. “But I suspect there will be a strong desire by governments to use that term.”
Its attraction is that it mirrors the most successful clearing system, Euroclear. While it may be a matter of historical fact that the “Euro” prefix of Euroclear denotes the 1960s’ coinage for offshore dollars, there are many regionalists in Asia who prefer to draw more geopolitical conclusions. And if Europe has a system called Euroclear, surely Asia needs one too?
It is no surprise that Purves acted to secure the name for Hong Kong. Hong Kong has always been Asiaclear’s most active promoter. At the Apec meeting of Asian finance ministers this year it was agreed that serious examination of Asiaclear was again required. As is common at Apec meetings, a sponsoring member agreed to take the lead. Hong Kong stepped forward. The HKMA’s chief executive, Joseph Yam, is a keen advocate of Asiaclear.
At the 1996 ADB meeting in Manila he told his fellow delegates: “An Asiaclear system to clear Asian and international bonds in the Asian time zone with greatly reduced settlement risk is now a distinct possibility. Asian financial markets would then become a lot more attractive to investors within and outside this region. The ADB, as the premier financial institution and bond issuer in the region, should explore and support the development of Asiaclear.”
Coming of age
One year on, not much had happened. Yam’s tack at the 1997 meeting in Fukuoka again emphasized Asiaclear’s coming of age – this time in numbers. “The share of bonds in financing the needs of [Asian infrastructure] will grow from 9%-26% by 2004,” he told an audience of ADB delegates.
“The share of bank borrowing [in Asia] is expected to decline from 40% to 30% over the same period.”
Since both statistics point to a bigger Asian bond market, it followed that financial infrastructure like Asiaclear must follow. Yam encouraged ADB president Mitsuo Sato to focus more attention on financial sector projects. It is suspected that Yam’s motives are not simply those of a good pan-Asian. The Asiaclear system would be good for Hong Kong, as Asia’s leading financial centre. Some bits of it may even be housed there.
But will anything come of all this lobbying? “Every time you go to a conference people talk about the need to develop Asiaclear,” says one Hong Kong-based banker. “And then nothing comes of it.”
The scepticism is warranted. Five years of chat and no action does not bode well. The original idea was a by-product of the Dragon bond market. These were bonds issued in Asian hours, listed in Asia and (supposedly) traded in Asia. By 1995 a total of $8.5 billion had been issued. Then the Dragon market died – and not without a few chuckles in some quarters. But the concept of Asiaclear, designed to settle trades in the hours when Euroclear and Cedel were asleep, did not.
Asiaclear was to be a commercial mirror of Euroclear – which had been set up by JP Morgan as a profit-making venture in 1968, and has been lucrative ever since. IBJ and HongkongBank examined Asiaclear’s commercial viability. Neither house thought it had any.
“Euroclear had obviously been very successful and the idea of having a similar body in the Asia region was a natural follow-on,” says HongkongBank’s Guy Priestley, the senior planning manager who helped conduct an internal study three years ago. “But our main concern was: is there enough business to justify it? We felt not.”
The ADB recently completed another review of Asiaclear. “We engaged some consultants to look at the issue,” says Coe. “In the immediate short term there doesn’t appear to be a financial gain. There may be some political impetus to move this forward, but there is not an immediate financial return.”
The ADB review notes: “Of debt issued in emerging markets, 75% emanates from Latin America, compared to only 18.8% from Asia. The Latin American debt is mainly cleared by either Cedel or Euroclear – there is no local clearing service….Europe is fortunate in being the middle time zone and accordingly the logical place from where such global operations should take place.”
Uniformly dismissive
Bankers are uniformly dismissive of Asiaclear although, given the sensitivities, most don’t want to be quoted. “We have very good settlement now and people don’t trade bonds,” says one syndicate head, referring to the nature of the Asian market which, because of the comparative lack of pension funds and insurance companies, is less investor-driven than bank-driven. “If you improved settlement is that going to change anything? People still wouldn’t trade.”
“I don’t see the need for it,” adds another US banker. “It’s not a subject our issuers dwell on,” says another. On the final point, Euromoney discovered a different consensus among most Asian borrowers. A sample of issuers was asked whether they had problems with existing settlements systems and whether they thought Asiaclear was a good idea.
The answers to the first question were typified by the response of Asia’s biggest borrower, DS Kim, treasurer of the Korea Development Bank. “At this moment we don’t have any inconvenience,” says Kim. None of the borrowers appeared to have a problem.
Nevertheless, Kim’s enthusiasm for Asiaclear was strong. “Asian capital markets will grow and it will be helpful for smooth and efficient clearing between Asian countries,” he comments.
Quinn Law, chief financial officer of Hong Kong-based conglomerate Wharf, shares the same sentiments. “Asia must have its own clearing system. I think it would be beneficial to Asia. You have Euroclear and Cedel, and the DTC in the US. It might work well to set up a similar system to enhance clearing and settlement in Asia.”
F Kalavathy, the senior funding manager of Malaysian energy utility Tenaga, thinks it would be good for the future. “Looking ahead to the time at which there are more Asian investors, it would lend a boost to the Asian market,” she says.
Premod Thomas, chief financial officer of Indonesian cement company Semen Cibinong, says he’s heard of the Asiaclear initiative, but hasn’t heard the specifics of how it would work. However, he suspects there would be “perceptual advantages and time-zone benefits”.
Much the same position is taken by European funding head of Indian oil company, Reliance, Mathew Panikar. “There’s a psychological advantage,” he says. “Euroclear has Euro in its name, so why not Asia and Asiaclear? I also think that as the number of Asian borrowers increases there may be added value, because there will be more intra-Asian borrowing.”
The only borrower who appears unconcerned by Asiaclear is Michael Bell, chief financial officer of Swires, the Hong Kong trading conglomerate.
These interviews highlight why Asiaclear has been talked about for so long without getting anywhere. Everyone appears satisfied with the status quo, but all like the idea of Asiaclear.
What will Asiaclear add? There are two common assumptions associated with how Asiaclear will add value. First, it will be open during Asian hours, giving it a unique advantage over the Brussels-based Euroclear and Luxembourg-based Cedel. This means, if a trade fails, the counterparts do not have to wait till Europe opens (in the Asian afternoon) to correct it. Second, it will give greater access to Asian domestic bond markets, producing greater cross-border Asian trading.
However, neither of these statements is entirely true. The five years of discussions that have surrounded Asiaclear have not been lost on the competition. The market leader, Euroclear, has spent them improving its regional shortcomings.
Euroclear is the pre-eminent clearance and settlement body in the world and dwarfs its rival, Cedel. It clears and settles around 70% of all primary issues in the Euromarkets. It has links with 29 domestic securities markets and accepts 37 currencies, processing securities of 85,000 different types. It has coped with a rapidly growing turnover. In 1992 it cleared $9.8 trillion of securities. By 1996 this number had leapt to $34.6 trillion. In 1997 its settlement efficiency was 97%.
Weak Asian coverage
More important, the weaknesses in its Asian coverage – so obvious when Asiaclear hit the agenda in 1992 – get fewer by the day. It can already settle international and domestic debt traded in Thailand, Indonesia, Malaysia, Japan, Hong Kong, Australia and New Zealand. It can also settle international debt in Singapore and will have full coverage of the Philippines by the end of the year. These link agreements mean, for example, that a broker in Hong Kong can clear and settle Indonesian rupiah paper through Euroclear.
Wasn’t this what Asiaclear was supposed to be for? Euroclear has 2,400 clients around the world. Its users include brokers, banks, central banks, and fund managers, of which 700 are in Asia, and 200 Japanese.
“We value this region,” says Martine Dinne, a Euroclear managing director. “In Europe there is consolidation among our clients. But in Asia there are growing numbers of clients. In some Asian countries we have opened more than 100 accounts last year.”
Recognizing the time-zone problem, it also opened representative offices in Tokyo and Hong Kong. The 11 professionals in Hong Kong now deal with settlement problems during Asian daylight hours.
A window of five hours exists for failed trades to be corrected. This is a temporary solution. A bolder initiative is ahead. Euroclear is to launch a 24-hour real-time settlement service. “This will mean we are time-zone independent,” says Dinne. “Which means Asian products will be cleared during Asian hours.”
Delivery of the security versus receipt of payment will be simultaneous. It is difficult to get excited about settlement. But the impact of this will be huge. Euroclear will become the world’s clearing system. It will settle trades every minute of the day (wherever the day is). And rather than doing so in batches as at present – with the problematic time delays and trade fails that accompany them – everything will be instantaneous.
The first phase (partial real time) will be introduced next year. Euroclear real time will be fully operational by the millennium. If pent-up demand exists to trade in Asian hours, then these new developments ought to satisfy it. “Personally I’m convinced that with real time settlement the need for an Asiaclear diminishes,” says Dinne.
However, the HKMA has not given up and is approaching Asiaclear in a new way. No longer is Asiaclear designed to be a separate, profit-making company along the lines of Euroclear. It is now viewed as a federation.
Andrew Sheng, the deputy chief executive of the HKMA, admits the original vision of Asiaclear was to duplicate Euroclear in Asia. The new dream is to link up the individual Asian centres in bilateral agreements.
Hong Kong has just concluded such an agreement with Australia and New Zealand. The practicalities of how it will work remain to be seen. But in principle a Hong Kong-based broker can now clear Australian debt paper through his terminal in Hong Kong and his link to Hong Kong’s central securities depository, the CMMU.
Location puzzle
The new model is a reaction to the politically-charged problem of having a central clearing system – where do you put it? If it’s in Hong Kong, Singapore complains. If it’s in Taipei, Singapore and Hong Kong complain. There is no satisfactory location.
Sheng says the HKMA’s vision is of “a flat network of equals, and not a centralized clearing system”. The idea is to link up Asia’s individual clearing centres – known as central securities depositories. But they are all at different levels of development.
Hence Yam’s speech at the ADB meeting, calling for increased spending on financial infrastructure. Sheng says: “If you finance airports, why not finance bringing central securities depositories up to international standards.”
The HKMA is not ready to talk about the details, but the idea would be to have real-time links and common standards.
Sheng cites the example of GSM mobile phones where users can roam between networks – in this case the user of one central securities depository can use that of another. But will it compete with Euroclear? Sheng is cagey. “The dream is of a robust system capable of trading in Asian hours,” he says. “It is not for central banks to take business from A or B, but to ensure a robust infrastructure.”
Dinne of Euroclear is no less convinced by the new model than she was by the old. She refers to it as a “spaghetti model” and notes each bilateral link will require huge systems developments, legal fees, and the development of the means for absorbing risk, because in every trade there will be cash exposure between the two central securities depositories.
Currency crosses
And there will be currency crosses to be dealt with too. “Setting up a small single link in Euroclear costs $250,000 so we are probably talking millions to set up links for the whole of Asia. And then you have to maintain it,” says Dinne.
She refers to Euroclear’s research and development budget which was more than $30 million in 1996. “These investments are very expensive,” she explains. “And is there enough bilateral trading to warrant this investment?” she asks. “In Europe the central securities depositories talked about similar links 20 years ago and have not succeeded. Why is Asia so different?”
Getting central securities depositories to work together is notoriously tough. In Europe there are doubts as to whether the central securities depositories can work together even on European monetary union in time for the turn-of-the-century deadline. Networking Asia is a more complex task. Nor will it bring liquidity, she says. “For liquidity you need critical mass and lots of international players. Asiaclear will start from scratch. By the time it is established we will have 24-hour real-time settlement and probably 3,000 users of which many will be in Asia. So we are better placed to bring liquidity.”
The goal is a seamless global system in which settlement is as simple and straightforward as possible. And by 2000 any criticism of Euroclear’s ability to settle trades in Asia will be academic, thanks to its investment in 24-hour real-ime settlement systems.
As a result it will be every bit as effective in Asia as it is in Europe. And, just as a user would not bother to ask where an Internet server is located, the fact that Euroclear’s central computer is in Brussels, ought to be just as irrelevant. However, it’s not.
“If Euroclear had shown a bit more foresight it would have called itself Globalclear,” says one key observer, “and then it would not have this image problem.”
The “Euro” is the gnawing problem. Dinne of Euroclear is well aware of the issue. “We will have more people in Asia to reinforce our commitment to the region,” she says.
Perhaps its success will be gauged by whether Asiaclear turns up on the agenda again at next year’s ADB meeting in Geneva. If the past is any guide, it will.
