Today Hong Kong Exchanges and Clearing (HKEX) announced plans to launch a new post-trade settlement platform, HKEX Synapse, that will leverage Digital Asset’s DAML smart contract language. The system will also be integrated with DTCC’s ITP platform. Synapse will be piloted in 2021 and go into production in Q1 2022.
No mention was made about the solution using blockchain or distributed ledger technology (DLT), and DAML can work with databases as well as numerous DLTs. “After a thorough evaluation, we believe that DAML smart contracts on centralised infrastructure provide the optimum solution,” an HKEX spokesperson told Ledger Insights via email. “We continue to think blockchain technology has exciting applications in Fintech and we would consider its use in the future.”
HKEX Synapse will be used for its Northbound Stock Connect system, which acts as a gateway for international investors to trade in mainland Chinese shares. Average daily turnover in the first three quarters of 2020 has been RMB90 billion ($13.7 billion), more than double the same period in 2019. The new solution is expected to enable even further growth.
However, mainland settlement times are four hours compared to HKEX settlement of two days. For international investors, settlement invariably happens in the middle of the night and need automation. To date, individual firms have developed bespoke solutions often with manual steps to address these issues.
But given that most current platforms rely on APIs, each step in the process is sequential, moving from party to party. We’re talking about brokers, local custodians, global custodians, asset managers and settlement providers. HKEX Synapse provides a single source of truth, which means the processes can instead happen in parallel. Settlement instructions are provided simultaneously, as are status updates for all parties, enhancing transparency.
As well as using DAML for automation, the solution will also integrate the DTCC’s Institutional Trade Processing (ITP) services. A key advantage is the more than 6,000 clients who use ITP, making it easier for a wider array of participants to access Northbound Stock Connect.
“Synapse is our latest Stock Connect innovation and will be of major benefit to global investors when they trade through Northbound Stock Connect,” said Charles Li, HKEX CEO. “Embracing new technology to further develop our markets is a cornerstone of our strategy.”
Digital Asset (DA) is also a partner with the Australian Securities Exchange (ASX) on its CHESS settlement system, which has had some pushback from some market participants complaining about antitrust issues. Notably, HKEX says the adoption of the Synapse platform is optional for participants.
For it to work, the entire buy-side or entire sell-side of the settlement chain needs to use Synapse. And ideally both sides.