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The Asia-Pacific (APAC) region is home to hundreds of financial marketplaces, including some of the world’s largest exchanges as well as headquarters for banking institutions and broker-dealers. While there are myriad opportunities across the region, fragmentation also poses challenges for regulatory compliance and risk management. Nasdaq’s Ulf Carlsson, General Manager, Head of Asia Pacific & Japan, and Adrian Carr, Business Development Manager for Nasdaq’s Risk Platform, look through the risk management lens to discuss key APAC trends. Moreover, they explain how Nasdaq Risk Platform helps clients navigate them.
Ulf, what are the most prevalent trends in APAC today?
Ulf: Three key trends come to mind. Like the rest of the world, the APAC markets have been booming until recently. First, given the high transaction volumes, our clients have been focusing on capacity management and performance to ensure their marketplaces are resilient. Second, they’ve been introducing new products and services to meet investor demand. Notably, there’s more interest in emerging asset classes, such as cryptocurrencies, digital assets and carbon credits. Finally, everybody is focused on data management and analytics with the goal of monetizing their data.
What makes the APAC markets unique in the financial services industry, and what challenges does this present?
Ulf: The APAC region comprises both large marketplaces and an abundance of small and mid-size marketplaces, and that’s what makes it unique. However, fragmentation makes it cumbersome and costly for the global trading community to connect to all these markets and trade on them. We find that participants tend to prioritize which markets they connect to. Nasdaq can help solve this challenge by introducing standardized tools and services that lower the cost of participating in more marketplaces and enabling them to connect via a trading hub without being locally present.
Another point worth noting is that each jurisdiction in the APAC region has its own regulator, so complying with many different rules and regulations is a challenge for clearing brokers.
What is the implication for risk management?
Ulf: From a risk management perspective, several margin calculation models are used throughout the region. In derivatives, for example, the larger markets typically use CME SPAN or CME’s SPAN 2, which is a value-at-risk (VaR)-based calculation. But the margin calculation model for cash equities varies between countries.
Currently, we’re seeing a shift toward implementing VaR models for calculating margin, especially among the larger marketplaces and clearing brokers. For example, in June 2022, the Hong Kong Exchange (HKEx) went live with a new risk modeling system that uses VaR. Nasdaq is involved in similar projects in the region as well.
Adrian, what’s your perspective on that?
Adrian: I agree with Ulf, and I would add that we’re seeing the shift to VaR across the world, not just in APAC. As Ulf mentioned, many exchanges currently use CME SPAN. That said, Eurex uses its own margin calculation method called PRISMA. The MEFF exchange in Spain uses MEFFCOM2. The LME uses London SPAN. It started a VaR project, but unfortunately, it has taken a back seat due to other priorities. But generally, exchanges globally are moving toward a VaR-based methodology because it incorporates portfolio analysis, not just individual instrument analysis. A key benefit is that it could be cheaper for clearing members.
Clearing brokers must do some development work in-house to move to VaR. How does Nasdaq Risk Platform ease that burden?
Ulf: The Nasdaq Risk Platform is a SaaS-based, cloud-native, real-time, post-trade risk platform.
Clearing brokers can connect it to several markets, and within milliseconds of a trade execution, the transaction details are sent to the CCP and the platform. It then provides a consolidated view of clients’ positions, P&L as well as other risk metrics in real time.
Adrian, do you want to drill down on what the Nasdaq Risk Platform has to offer?
Adrian: Sure. Large clearing brokers may have tens of thousands of client accounts, and they need to know which clients are making a profit and which are making a loss. In addition, they need to be able to assign clients a credit limit and determine in real time whether they are close to breaching their limit. During volatile market conditions, the risk team can stress test their House and Client portfolios to assess the worst-case scenario in the event that the markets move against their existing portfolio.
The Nasdaq Risk Platform helps clearing brokers stay in compliance. The system is connected to Nasdaq’s internal market data feeds and external market data gateways. That allows clearing brokers to value trades and positions in real time, and those valuations are then pegged against their clients’ credit limits.
Nasdaq is a registered independent software vendor (ISV) at 37 exchanges worldwide.
The exchanges give Nasdaq their documentation, and then Nasdaq breaks down the margin methodology. The Nasdaq Risk Platform replicates the exchange margin in real time. When a trade comes in, the platform shows clearing brokers the initial margin at a particular CCP for that specific trade. They also know the initial margin across all client accounts. The system also does what-if analysis, which allows their internal traders to assess their margin requirements prior to placing a trade at the CCP. This allows the firm to understand their capital requirements to the dollar, so any excess cash can be invested overnight.
Ulf, you mentioned that the APAC markets are highly fragmented. How is that reflected in their approach to deploying risk management systems?
Ulf: Most clearing brokers in Asia have deployed several batch-based, best-of-breed systems that focus on one aspect of risk management. If you think about it, that architecture results in a higher total cost of ownership. The systems are deployed on-prem, so firms must purchase hardware and employ IT staff to support and maintain both the hardware and software. They need a disaster recovery site as well. We think a SaaS-based, cloud-native solution is cheaper in the long run because firms pay an annual license fee to use it, and it’s backed up in multiple regions. In addition, it’s easier to comply with disparate regional rules and regulations.
Adrian: That’s a great point, and we’ve seen how this works in practice. One of our clients based in Europe used to have five risk systems to calculate their historical VaR and the P&L, deliver alerts and so on. The firm replaced all five systems with the Nasdaq Risk Platform, which is a multi-asset class platform and computes risk calculations in real time.
By the way, that client is a member of 37 exchanges. Prior to implementing the Nasdaq Risk Platform, the firm had to tie up excess capital in each CCP’s preferred payment system (PPS) accounts to cover potential margin calls. Now its finance and treasury team understands where and when the money will be needed, which allows capital to be utilized more efficiently.
The key takeaway for clearing brokers in Asia is that now is an excellent time to re-think their approach to risk management and initial margin calculation. Operating in real time ultimately leads to greater efficiency and improved regulatory compliance.
