Insights from the BNP Paribas Securities Services Round‑table.
In an environment of heightened uncertainty, tightening regulation and rising post trade costs, broker dealers are forced to rethink how they use capital. At a roundtable convened by Markets Media and BNP Paribas Securities Services, senior market operators, exchange representatives, and broker dealers share how volatility is reshaping capital management, what the hidden costs of post trade are, and the strategies they are adopting to turn capital constraints into a competitive advantage.
Market perspectives from NZX and HKEX
The discussion opened with representatives from New Zealand Exchange (NZX) and Hong Kong Exchanges & Clearing (HKEX) groups framing the conversation, where each feels the pull of global capital rules. Larger global brokers in these markets are often well-capitalised based upon their multi-jurisdictional capital rules. However, there are also plenty of local and regional members whose capital requirements are lighter and potentially face a more challenging capital environment if risks increase. Consequently, both exchanges converge on one point: post‑trade services now sit at the heart of capital‑optimisation strategies.
Capital and risk controls in trading and clearing
Across the table, participants highlighted a wave of consolidation driven by commercial pressure and heightened sensitivity to capital utilisation.
Sell-side firms are revisiting their technology footprints, pruning legacy platforms that no longer deliver value, and redesigning capital arrangements to free up resources.
Kathy Ong, Director of Product Management Asia Pacific, Securities Services at BNP Paribas, said, “If you look at different types of costs, firms historically focussed on trading cost. But when you build in post-trade costs such as clearing, market fees, and regulatory capital (which is significant in Hong Kong), net costs per trade will rise dramatically.”
“Companies are taking more notice of those when assessing strategy and feasibility. In Hong Kong SAR, we have the added challenge of T+0 in Stock Connect. When you map out regulatory and operational risks on smaller scale operations, how do they grow their margins? Unless they can achieve a particular size, it becomes a challenge.”
The hidden cost of fixed‑income and OTC trading
Fixed income markets, which remain largely over the counter (OTC), were singled out for their heightened risk profile. Failed trades are more common in that space, with some clients being very sensitive to this, often a sovereign or central bank.
“They don’t want their trades to fail, but if they are buying and an intermediary is selling to them, while buying from another counterparty simultaneously, and that counterparty doesn’t deliver, how can the intermediary deliver it to the other?” one attendee said. “Exchange fails are less common as trading is centrally managed.”
The roundtable also examined the impact of regional trading holidays on settlement. When an investor trades an instrument that settles in a jurisdiction observing a holiday, the settlement window can stretch dramatically. This brings with it accounting implications and credit risk concerns.
“They may not necessarily like that either, so there’s an internal rthisw process around that and cost is very important because for that extended period, you may have to do a repo to fund the inventory, because the other side of the trade may have a normal settlement period. There are implications.”
As a result, firms now need to build these “holiday gap” costs into their pricing models, further highlighting the need for a holistic view of front, middle and back-office processes.
Operational resiliency under stress
For the major banks represented, managing growth both locally and internationally was a key consideration for C-suite decision-makers. That made operational constraints a priority, due to the impact of volatile market conditions.
One firm described its reliance on manual processing as a massive barrier to rapid growth when scaling. For example, the recent volatile market conditions have created operational pressure and capital constraints.
In addition to OTC markets, equity markets are also seeing increased automation following electronification. Automated e-trading has produced very low margin and high-volume business units that must operate at peak efficiency to streamline operations and reduce costs.
While regulation creates the framework for capital rules, some participants suggested that the current framework created challenges, as well as potentially increasing systemic stability.
“The Global Financial Crisis really drove two big market initiatives from a regulatory standpoint” noted one participant. “Firstly, capital and operational risk or counterparty credit risk measures were applied. Then bankruptcy procedures were set up. While the former evolved through mutually recognised global regulators, the latter regimes did not. From Hong Kong we see a lot of market participants trying to deal with that asymmetric model. Defaulting on one central counterparty (CCP) has an established procedure, but then how do you deal with the liquidation of those, and porting? In addition to that, how do they deal with different bankruptcy procedures in different jurisdictions?”
This is also a challenge globally. However, this issue is in a much greater magnitude in Asia due to jurisdictional fragmentation.
“Trading and clearing can go global, but settlement is a whole different conversation, and there’s a lot of repeated exercise in terms of processes and operation,” said another participant. “Capital has to be double-funded in many cases. So, this raises capital cost.”
Consolidation arises in the clearing space as there are fewer firms who are capable of clearing trades and back guarantees as an intermediary.
“We do have to take into consideration what that means if a default situation happens in another jurisdiction as it relates to the Hong Kong entities,” noted one attendee. “Regulation in Asia is becoming a lot more conservative. Regulators are taking a more rigorous approach, including anti-money laundering and sanction practices. These add costs and this is aggregating in the region.”
Market specific pressures
HKEX has seen 800 cash market members ten years ago reduce to just above 600 today, while its derivatives clearing members has fallen from nearly 200 to 153. Yet the market remains robust.
“Hong Kong’s cash market ADT exceeded HK$240bn (US$31bn) in the first half of the year, up over 118% year-on-year, and investor interest is still growing,” said Tae Yoo, managing director of global client development for HKEX. “However, the market needs to deal with the risks associated with a more concentrated broker community operating in different jurisdictions in Asia that also have different risk profiles, bankruptcy procedures and counterparty clearing risk management procedures. That’s why we are seeing brokers trying to enhance their settlement and post-trade operation to manage these risks.”
For a smaller market like New Zealand, it is crucial to right size the size and scale of its market, while not overlaying excessive additional regulatory and cost. .
“We must make it easy to trade and clear, we can’t have barriers to access,” says NZX’s head of secondary markets development, Brandon Tai. “Then looking at post trade in New Zealand, the market has two CSDs which creates operational inefficiencies, but there was no discussion at an industry level at the time about that development.
“Now, 15 years later, we’re operating in an environment where on-market execution trading is happening through the exchange and the CCP, with institutional flow also going across the other CSD,” he continued. “BNP Paribas’ Securities Services business is bridging the gap, though membership of both CSDs but we think there needs to be a conversation because all of those transactions just layer on cost inefficiencies. We are agnostic as to what change looks like.”
Larger brokers that have built in‑house risk‑management and capital‑optimisation platforms handle volatility better; those that don’t often struggle.
Partnering for success
“In terms of capital efficiency, I would say our business is very efficient in running our balance sheet in a very inefficient manner,” said one participant. “We obviously want to be efficient and squeeze the most out of it. In times of volatility that becomes hard because the way that we do it is still very manual. Our team’s challenge is trying to make that process more efficient. You’ve got so many systems and processes and people that you need to get involved when you’re trying to be capital efficient, so that’s our biggest challenge.”
Another noted that from a volume perspective, volatility was great, but it creates its own challenges operationally.
“Specifically, to do with capital, we’ve been engaged in coming up with ways of how we can reduce costs,” said another participant. “Looking at our target operating model and then removing some of those cost pressures related to the services that we avail externally, BNP Paribas’ Securities Services business has been helping us with one of those big projects. We are looking at the target operating model and seeing what we can move to a bigger balance sheet within the wider group, so that we reduce some of those regulatory capital impact we have here.”
Looking ahead
Third-party clearing was cited as a clear winner for better efficiency, for all of the dealers in discussion.
A major broker dealer observed, “The easiest way to be more capital efficient, and at least to reduce the capital once, is to utilise a bank entity to become a clearer. That’s where the Securities Services at BNP Paribas service came into play and not just in Hong Kong, that can be applied to any markets. TPC is quite an easy choice for me.”
This article is a revised and condensed version of a version that was published by Markets Media. We hold the rights to republish the content on our own website; the current text has been edited for length while preserving the original intent and key insights. The full, unabridged version remains available on Markets Media website.