Hong Kong Stock Exchange Launches a New Blockchain-Based, Real-Time Settlement Platform

By Jay Lee and Beatrice Wun

Hong Kong Stock Exchange (HKEx) recently launched “HKEx Synapse” (Synapse), a new blockchain-based settlement platform to complement the existing post-trade infrastructure for Northbound Stock Connect. “Stock Connect” in Hong Kong refers to a market access program through which investors in Mainland China and Hong Kong can trade and settle shares listed on the other market via exchanges and clearing houses in the home market. “Northbound Stock Connect” refers to the market access program where investors in Hong Kong can have access to shares in Mainland China.

With blockchain, a distributed ledger technology, the new system hopes to streamline post-trade processes and workflows, maximising connectivity and efficiencies for market participants in a transparent, secure, and reliable manner.

A Multiparty Application Framework Built on Smart Contracts

HKEx Synapse seeks to harness “DAML technology,” a multi-party application built on smart contracts, to simultaneously provide real-time settlement instructions and status updates to all parties. Previously, Northbound Stock Connect provided only limited real-time visibility into settlement, and suffered from scalability issues and barriers to participation.

Blockchain may help remove these pitfalls.

Key Benefits

HKEx says that it expects to bring more efficiencies to trading and settlement systems by adopting DAML technology. The below table summarizes key benefits of Synapse according to HKEx:

Leveraging existing connectivity Existing connectivity through collaboration with The Depositary Trust & Clearing Corporation is utilized
Standardized settlement workflowsStandardized manual settlement processes reduce operational risk and improve scalability
Improved transparencyReal-time settlement instructions and status updates improve transparency
Wider adoption of Stock ConnectStandardized settlement workflows attract new entrants to the Stock Connect
Leveraging new technologyDAML, application programming interface (API) and adherence to ISO standards (ISO20022) in electronic data interchange are leveraged

HKEx primarily intends to optimize two-way flows of capital between HKEx and capital markets in PRC by removing post-trade inefficiencies. A major pain point which Synapse seeks to minimize is the lack of interoperability in settlement requirements across markets. PRC market’s T+0 settlement cycle differs from T+2 settlement cycle in other jurisdictions. Also, with current processes, a delay or data entry mistake by any party could hold up a transaction. Synapse may address this by providing real-time and simultaneous central matching and instruction to all related participants of trades.

Together with automated trade confirmations and settlement notifications, HKEx says that Synapse effectively facilitates more standardized, seamless post-trade settlement workflows.

Participants May Enjoy Real-time Data Synchronization and Improved Market Accessibility

For investors, Synapse may help meet the tight settlement cycle of – and also enhance the attractiveness of – PRC securities market. Parties, including asset managers, brokers, investors, and clearing participants may also benefit from real-time data synchronization and improved market access.

Based on HKEx’s presentations, the launch of Synapse is the product of smart contracts integration, which symbolizes HKEx’s apparent readiness to make major inroads into blockchain applications to bolster post-trading processes. Over time, Synapse may build a more robust stock trading ecosystem warranted by significant trading volumes.

Copyright © 2024, K&L Gates LLP. All Rights Reserved.