How better financial infrastructure can drive bond market development in Hong Kong and the region
- Currently, there is no international central securities depository covering Asia. With its links to mainland China and the world, Hong Kong is best equipped to establish a regional settlement intermediary for securities transactions
More Chinese companies that have listed overseas are turning to Hong Kong for secondary listings, giving new impetus to the local stock market. Meanwhile, Hong Kong’s local bond market is limited in size, falling behind other Asian markets like Japan, mainland China and South Korea on volume of issuance.
Every securities transaction requires a post-trade financial infrastructure, namely a central securities depository (CSD), to efficiently register, settle and manage a transfer of ownership. The Central Moneymarkets Unit established by the Hong Kong Monetary Authority is a CSD for the local bond market.
An international central securities depository (ICSD), on the other hand, is designed for cross-border transactions.
By connecting CSDs in different jurisdictions, ICSDs significantly reduce cross-border transaction and settlement costs, attract more investors and increase overall market liquidity. Currently, there are two major ICSDs in Europe: Euroclear Bank in Belgium and Clearstream Banking in Luxembourg. Each connects more than 50 regional CSDs and provides services for over 1,000 institutional investors globally.
In contrast, Asian CSDs mainly target local markets, and there is no ICSD covering the region. Asian markets are therefore unable to capitalise on the opportunities of cross-border trading or create economies of scale; they are also more vulnerable when systemic risks arise in the regional financial market.