The Asean Exchanges Trading Link is one of those projects that could prove a substantial success or a damp squib – it’s impossible to tell which at this stage. But at least it’s finally under way. Last week, the trading link between Malaysia and Singapore went live and Thailand should join in mid-October, linking together around 60-70% of Southeast Asia stocks through a cross-border trading system.
The idea behind an Asean link-up is very obvious and pretty sensible. Southeast Asia has some attractive opportunities, but suffers from most local stockmarkets being relatively small. Making it easier for individual investors to trade stocks in neighbouring countries could boost liquidity, cut costs and ultimately create a semi-unified Asean capital market with a higher international profile to compete with larger emerging markets such as China and India.
At this stage, that ambition is a long way off. The Asean link is by no means a common trading platform – instead it’s a broker-to-broker link, which essentially means that a broker in Singapore that does not have trading facilities in place in Thailand can connect to a Thai broker through the link. Brokers will have to choose to sign up – so a broker that currently offers stocks in Singapore won’t necessarily start offering Malaysian and Thai stocks as well.
Initial benefits will probably be limited. While some brokers that didn’t previously offer regional stocks can now provide that the option, any investor who was genuinely interested in cross-border trading could already have found a firm to meet their needs – there are no shortage of regional brokers in Singapore or Hong Kong.
At first glance, it doesn’t seem as if cost savings will be large. There will be two brokers involved in the chain and hence two sets of trading fees to cover. And clearing and settlement will still be done in the country in which the stock is listed, so there won’t be any efficiencies and costs savings from post-trade operations.
But there is clear potential for the link to develop further. The Philippine Stock Exchange has said that it plans to join, although it may take two years to be ready. Vietnam may participate as well, although it’s not immediately clear how this will square with the country’s current requirements for foreign investors to have a unique trading ID and conduct all trades through a single designated broker.
Indonesia has been also involved in planning the link, but the amount of foreign capital now flooding into the country is apparently making officials think they don’t need to join after all. How smart this decision will look when the inevitable scandals start to build and foreigners begin to reconsider their enthusiasm is an open question.
Perhaps more significantly, exchange officials are talking about working together on improved clearing, settlement and custody procedures, which could ultimately lead to lower costs or even a common clearing platform. This could transform the Asean Exchanges project into something of wider value to institutions and make a much bigger contribution to the development of Southeast Asia’s markets.