Amid the long-term rise in demand for Asian stocks and as the first saplings of competition emerge in Asia, many of the continent's exchanges are attempting to modernise their infrastructures in order to catch up with their Western counterparts. The Singapore Exchange (SGX) is one such Asian marketplace.
Formed in 1999 following the merger of the Stock Exchange of Singapore and the Singapore International Monetary Exchange, the SGX is a vertically integrated securities exchange comprising trading, clearing and settlement, depository services in cash equities, commodity futures and over-the-counter derivatives products. During the past six months the SGX has seen volumes soar as Western investors flood back into the rebounding Asian economies.
Until October 2008, however, the SGX post-trade environment remained highly manual with pre-settlement trade matching performed bilaterally over the telephone between counterparties and manually entered into the central depository system for settlement. This process was not only inefficient, staff-intensive and costly for SGX's brokers, depository agents and agent banks, but it also carried with it greater operational risk due to the capacity for manual errors. "There was a need to improve that and to move to a more automated central matching utility that met the needs of the brokers and banking community which interact in the settlement process," says Terry Gibson, senior vice-president and head of product management at SGX, who oversaw the entire project.
But meeting the needs of its member brokers and banks was no simple task. The SGX had to pull together a profile of the entire industry's requirements, from small retail brokers and custodian banks to global trading powerhouses, says Mr Gibson. "While this was not a large [problem] in terms of the number of participants in the settlement process, there is a diverse community and trying to understand all their nuances is difficult." In some cases, for example, smaller retail brokers wanted to remain on the manual system as it suited their internal processes, while larger firms were pushing for full automation.
Furthermore, on one side the final matching utility would have to be integrated into the SGX's broker-facing client accounting system, and on the other side it would have to be integrated into the depository agents acting on behalf of the brokers, of which there is a broad range in terms of technological capability. "When you say you're just creating a matching utility it sounds quite simple, but in reality the whole business practice change and business re-engineering was quite a major exercise for us and our customers," says Mr Gibson. "What was important was not so much changing everyone's behaviour to 'one size fits all', but to have a degree of flexibility and create interoperability so [agents] could migrate to the level of automation that suits their business needs irrespective of what their counterpart wants," says Mr Gibson.
Partnering up
The exchange sought out a technology partner for the project with whom it could develop a trade processing and matching platform flexible enough to meet the complex market requirements. Equally important, however, any technology partner would have to demonstrate the readiness and expertise to support a 'big bang' implementation. This latter element was particularly crucial because as a central market hub the SGX could not implement a phased roll-out, meaning extensive testing was also crucial.
"If it failed, no one could settle a trade. It was big bang, there was no other option: we had to be certain that we had tested everything on day one," says Mr Gibson. Working with the US-headquartered financial services specialist Fiserv, the exchange developed SGX Prime, a matching system that automates the once-manual post-trade pre-settlement processing gap. Using Fiserv's multi-asset, post-trade processing solution TradeFlow as its backbone, one year on SGX Prime enables 85% of the exchange's institutional trades to be automatically matched and settled, with matching rates of 99% on settlement date.
The exchange brought the entire Singapore market live on the new platform during the weekend of October 13, 2008 - just as market turmoil globally reached its peak. In this regard, says Mr Gibson, there was a question mark hanging over the timing of the implementation. But the pressures wrought by the crisis on back offices globally served only to the highlight the importance of the project. "A lot of businesses have been under pressure to reduce costs, so greater automation has improved efficiency and allowed firms to be more flexible in their approach to staffing," says Mr Gibson. The new scalable system has also enabled member firms to accommodate unprecedented volatility and volume spikes seen during the past year, without overstretching staff or increasing risk in the marketplace.
As regulators worldwide turn their eyes toward the post-trade space, the improved post-trade management and transparency that is brought about by such projects will become increasingly important for all market participants.
Career history
Terry Gibson
2006 - senior vice-president and head of product management, Singapore Exchange
2003 - director, DerivSERV
2001 - executive-director, strategic business development, Omgeo Ltd
1995 - director, OTCC
