The process began in earnest when couriers stopped the physical delivery of money and stocks in the world’s financial centres, but there’s no telling how far the trend towards electronic transactions and communication will go. The financial services industry is criss-crossed with networks provided by industry-owned bodies, technology vendors and governments. Some are regional in scope, others global, but all have as their goal an increase in efficiency in the industry they serve.
But hampering this goal, in many cases, is the sheer number of networks a financial institution must deal with, not to mention differing protocols and standards. In Hong Kong, however, two major projects are working together to help simplify things.
FinNet is the Securities and Futures Commission’s (SFC) vision for a world-class financial infrastructure in Hong Kong. The concept was first proposed by a steering committee in 1998, and since then the SFC has been making slow and steady progress towards automating its own processes using a TCP/IP network, and encouraging others to join. As part of this process, a request for proposals (RFP) went out last year to find a suitable network operator to take responsibility for FinNet.
Hong Kong Exchanges and Clearing (HKeX) introduced the Central Clearing And Settlement System (CCASS) in 1992 to speed up the settlement process in the face of rising volumes. The system is now undergoing a complete re-engineering of processes, software and hardware, with one of the major changes being a shift to a TCP/IP-based network from the existing X.25 / private leased-circuit network. TCP/IP is the network protocol that drives the public internet.
Proposals for the supply, implementation and operation of the new upgraded network, known as CCASS/3, were submitted to HKeX in March, and discussions with service providers are continuing.
According to Gerald Greiner, the SFC’s senior director of Supervision of Markets, the SFC has deferred any decisions on its FinNet network operations in an effort to coordinate with HKeX.
“We’ve been in close discussions with them recently to try to make sure that our visions for FinNet and their vision for CCASS/3 coincide sufficiently that we can pick the same network operator under these two RFPs,” he says. “We’ve more or less agreed in principle to do everything we can to get there, but there are lots of little technical issues that need to be aligned.”
Because of these technical issues he says an exact date for conclusion of discussions is hard to pin down, but that it is only a matter of “weeks or months”.
“We’re particularly interested in CCASS/3 because they will have almost a thousand connections to institutions in Hong Kong and require members to have a dedicated connection,” he adds.
Peer-to-peer
The first real application for the SFC’s FinNet was launched last August when it became possible for brokers to electronically submit returns on Financial Resources Rules (FRR). Since then, 176 brokers have begun using FinNet, but because the returns need only be filed monthly, most are just using dial-up access for now.
FinNet has a more permanent connection to the Hong Kong Monetary Authority’s (HKMA) STET network for regulatory report filing. This connection was established a few months ago. Greiner says the SFC is now routinely sending email messages over this dedicated connection, and through this, FinNet is also now connected to 350 banks in Hong Kong.
The SFC’s network is also playing a part in the eIPO process. “The main use so far is brokers and banks collecting subscriptions from clients using FinNet to send the files,” says Greiner. “What we’re working on most recently is for registrars to send back those allocations using this channel.”
Once a permanent network connection linking the various financial institutions is established, and third party developers begin taking advantage of access to the network, there is also the potential for a range of new peer-to-peer applications. “We hope that people will realize there are lots of things they can do with this as they become more experienced with it,” says Greiner.
Compatibility issues
Besides the extra connections that CCASS/3 will bring, should it become part of the FinNet infrastructure, Greiner is also excited about possible linkages to HKeX’s electronic trading systems – AMS/3 for securities and HKATS for futures.
HKATS already runs over a TCP/IP network so it would be likely to be the first trading system to be integrated with the central clearing system. However, the stock exchange's much heralded system for automatic order matching of securities, AMS/3, isn’t totally compatible with either CCASS/3 or FinNet at this stage and would require some modifications before it is integrated.
But even when this happens, Greiner warns that we won’t necessarily be much closer to achieving straight-though processing (STP) – the ultimate goal of most technology initiatives in the finance sector.
“This network facilitates communications among the relevant parties, but that’s all,” he says. “The real big piece of it [STP] is in every broker’s, every fund manager’s, every bank’s office … and this shift is bigger than Y2K in terms of likely cost.”
