Last week, the Hong Kong Stock Exchange (HKEX) announced an exciting initiative to upgrade a key part of its settlement system using blockchain technology. The solution went live on Monday with Citi reported as the first counterparty to settle trades on the platform.
HKEX will use blockchain and smart contracts to upgrade Stock Connect, the landmark mutual market access program linking the Hong Kong and Mainland China equity markets. Stock Connect is the main channel for offshore investors to invest in stocks and ETFs listed on the Shanghai and Shenzhen stock exchanges (called Northbound investments), and vice versa for mainland Chinese investors who wish to invest in stocks listed on HKEX (Southbound investments). Turnover of Northbound investments reached RMB 2.5 trillion (AUD 540 billion) in August 2023 alone.
Stock Connect, especially the Northbound program, is a key part of HKEX's offering, which
underlines Hong Kong's role as a superconnector facilitating the vital flow of capital between East and West and represents a significant step in HKEX's mission to connect China and the World
HKEX said the new blockchain-based settlement platform, called Synapse, will provide a vital solution to address long-existing problems with post-trade infrastructure for the Northbound Stock Connect.
The source of these problems is that Stock Connect is a T+0 market, but is integrated into the established settlement flow designed for a T+2 market in Hong Kong. Various solutions have been developed by market participants, including asset managers, global custodians, and clearing participants, to improve post-trade efficiencies. However, HKEX said
The lack of interoperability amongst these solutions, however, has in turn created additional operating, processing and counterparty risks.
Adopting Distributed Ledger Technology, Synapse provides a standardized and centralized platform that generates a single source of truth for settlement instruction workflow. It simultaneously creates settlement instructions for all parties along the settlement chain, facilitating concurrent processing. It also provides near-instantaneous status updates to HKEX Synapse participants, thereby greatly improving transparency for all market participants via multiple connectivity options.
HKEX's embrace of blockchain follows several other trailblazing blockchain initiatives adopted by Hong Kong in recent months. It also stands in stark contrast with the Australian Stock Exchange (ASX)'s botched attempts to replace its existing CHESS settlement system with blockchain technology. The Australian Financial Review reported last year that the ASX was urged to keep faith in blockchain and look at offshore markets for blockchain lessons. Perhaps HKEX's new settlement system will provide just the example for the ASX to follow.
Written by J Huang, S Pettigrove and M Bacina