Yesterday evening, October 30, Charles Li Xiao-jia, CEO of Hong Kong Exchanges and Clearing, announced a blockchain-based plan to improve Stock Connect, HKEx’s existing link with its counterpart in Shenzhen.
Li positioned the move as a means of boosting HKEx’s revenues from data, and as a way to make its existing Stock Connect program with Shenzhen operate more smoothly.Sources aware of the situation describe this initiative as far more comprehensive than the blockchain program at Australia Stock Exchange, the benchmark for large-scale deployment of distributed-ledger technology.
Implicit in Li’s announcement, which was short on detail, was to signal HKEx’s intention that it will be changing its business model. Relying on mainland China IPOs for revenues will now be augmented by a desire to turn technology into a profit center.
Slow walk to innovation
This is a brassy ambition, given HKEx, in tech terms, is a hoary institution with an I.T. department run by aged mandarins: many trades are still settled on paper, as the clearing house is not fully electronic. HKEx has always spent the minimum on tech, pouring its resources into chasing hot China IPO business.
But that story is no longer so attractive, as the biggest, juiciest IPOs from China have taken place, and as tensions in the global economy and China's trading position loom; meanwhile, other stock exchanges, including ASX, CME and Nasdaq, have been busy innovating.
Li has been trying to push tech initiatives: the exchange floated the idea of a private market run on blockchain in early 2017, as part of its broader agenda of introducing dual-class shares and other means of attracting tech listings.
The biggest jolt was ASX’s 2016 decision to replace its clearing and settlement system with one based on distributed ledgers, to be built by Digital Asset, a vendor. Since last year, Li has opened a dialogue with ASX about this—over the resistance of some of his managers, according to insiders. (Some feared presenting an expensive DLT integration request to the hundreds of small brokers that form a powerful constituency at the exchange.)
But too many factors tipped the scales in favor of the reformers within HKEx. Among them: the operational nightmare of HKEx’s Stock Connect program with bourses in Shenzhen and Shanghai. China’s stock market is completely electronic, and clears and settles close to real time. Hong Kong is T+2. Collapsing traditional post-trade work via DLT means HKEx would be able to match mainland China’s speed, and remove the need for global fund managers wishing to trade A Shares through Stock Connect to pre-fund their trades.
But HKEx is attempting more than just replicating ASX. The Aussies’ solution incorporates brokers and sub-custodians. The HKEx plan is meant to move up the value chain, to include investment managers and their global custodians. Currently reconciling trades is cumbersome because custodians and sub-custodians lack a direct relationship with a buy side’s broker – so any errors in the trade have to be addressed using the fund house as a go-between.
Insiders tell DigFin that HKEx’s solution, also using Digital Asset as its vendor, will put all of these players on its distributed ledger, making it a more complete post-trade solution. Of course, for this to work, HKEx will now have to convince a critical mass of buy sides to invest in the necessary integrations. Just getting brokers and custodians to do so with ASX has proven quite a challenge.
The other big hurdle for HKEX is whether it has the in-house expertise and managerial cohesion to execute on its big plans. It’s got Digital Asset in its corner, but as an institution, HKEx isn’t known for its digital acumen. But it does have a successful record of building Stock Connect, and its CEO has made this a personal priority.
Lastly, Li mentioned HKEx’s broader ambition for harnessing data as an asset class. What does this mean? Insiders tell DigFin that, currently, data makes up a mere sliver of HKEx revenues, below 10%, below peers. Blockchain is not, by itself, going to change this. But it’s seen as a way of moving technology front and center. From there, ideas and opportunities will emerge. But for now, talk of data-driven revenues appear to represent a vision rather than any specific plan.
So when is this all meant to kick off? Li made no commitments, and there is apparently no internal deadline. HKEx now has a massive sales job on its hands: to convince enough seat members, plus buy sides, to sign on.