Harmonisation and integration: empowering emerging markets
How are emerging markets integrating their capital markets into the global financial system?
To truly grasp the impact of integrating emerging capital markets with the global financial ecosystem we need only look at Vietnam’s recent economic expansion. Over the past two decades, the Southeast Asian nation Vietnam’s growth has been extraordinary: In 2000, its GDP was around USD31 billion in current dollars. By 2023, it had reached nearly USD430 billion.
In the same period, the growth of Vietnam’s capital markets has been no less remarkable. The Ho Chi Minh Stock Exchange, opened in 2000 with just two listed companies, and now hosts more than 400 today. Its debt markets grew from 2% of GDP to nearly 8% between 2020 and 2022. Vietnam’s growth story – which underlines the positive correlation between welcoming financial globalisation and economic development – can be an inspiration to other emerging markets keen to fuel growth by linking their capital markets to global finance.
Capital markets boost economies in crucial ways, including by allowing issuers to raise affordable capital at scale, and ensuring domestic savers can access short and long-term wealth expansion opportunities beyond just physical assets and bank accounts. Although the journey from local origins to global success for emerging capital markets doesn’t follow a one-size-fits-all script, there are useful lessons to be learned from the array of strategies and initiatives underway in various emerging markets.
The quest for harmonisation and best practices
The settlement cycle in Asian markets is a good example of the need for harmonisation in emerging markets. For instance, Taiwan requires firms to pre-match their trades, whereas Singapore operates on a single settlement cycle. India has rolled out T+1, China offers T+0 for A shares while other emerging markets in the region continue to operate on a T+2 basis.
Given such and other regulatory disparities in the developing world, it’s unlikely we’ll see an emerging market version of the EU, with its single currency and its TARGET2-Securities settlement platform. It is, instead, far more realistic they will follow a path characterised by the adoption of international standards and best practices. This will mainly be driven by healthy competition between emerging markets to ease market access and attract investor funds, as well as client demands for greater harmonisation and the rise of digital assets.
Harmonisation will likely cover three areas. The first is vertical harmonisation from exchange to depository, with best practices such as central counterparty (CCP) clearing arrangements, adopted from various countries and regions.
One example is the Abu Dhabi Securities Exchange’s Tabadul Hub. This platform, which was launched in 2022 and is the region’s first digital exchange network, is based on the mutual market access model that allows trading between member exchanges regionally and globally.
Another is the Africa Exchanges Linkage Project (AELP), which seeks the integration of capital markets and exchanges scattered around the continent. The AELP currently connects nine exchanges across Africa – including in South Africa, Nigeria and Egypt – facilitating the cross-border trading of securities. While these regional efforts are in their infancy, the direction of travel is positive.
The second area is to simplify documentation requirements for foreign investors looking to enter a market. This is key because it can create a significant burden for such investors. For example, in the Gulf Cooperation Council (GCC), the documentation needed to open a bank account in Oman differs significantly from Saudi Arabia .
Efforts are underway to address this problem as the region works towards combining these two areas. There’s a policy debate underway between nations about whether to use a single Know Your Customer process or to establish a single national insurance number for GCC nationals (with the former garnering the support of the majority). Both options are strong drivers of harmonisation at the capital markets level.
In Asia; China, India and the Philippines stand out for their initiatives in this regard:
- The China Interbank Bond Market, for instance, has created additional channels for offshore investors to access its bond market.
- The Securities and Exchange Board of India has a dedicated access team and digitalised account-opening documents to ease registration for foreign portfolio investors.
- In the Philippines, the central bank’s registration process was simplified with the issuance of an electronic ID.
Yet another example of harmonisation is Standard Chartered’s efforts in relation to Ghana’s Central Securities Depository (CSD), which has brought the opportunity to share knowledge on market-entry documentation approaches that work well. These efforts, through which we have connected Ghana CSD with our experts in Botswana and Kenya, are helping drive interactions between nations, leading to more aligned approaches across Africa.
The third area is to simplify processes in the value chain for settlements, corporate actions and fundings – an area in which Standard Chartered has seen improvements. Before the pandemic, some markets were issuing dividend and income cheques; today, Standard Chartered is pressing ahead with the implementation of same-day distribution of dividends and income in the region.
Enabling growth in emerging markets
As a provider of services across multiple jurisdictions, institutions like Standard Chartered also play a key role in harmonising the disparate operating environments global clients are likely to find in emerging markets. This can take the form of simplifying market-entry documentation or standardising the nuances in data reporting and funding optimisation.
For instance, solutions like compiling 40 different data sets into one harmonised, easy-to-digest compendium or standardising the classification of traditional and digital asset classes can help smooth client operations in the markets they choose to operate in. As digital assets become more prevalent – demand for overall tokenised assets is expected to reach US$30.1 trillion by 2034 – putting the infrastructure in place to ensure interoperability between traditional and digital asset classes will help solve the current problems of fragmented technology platforms and regulatory frameworks.
Additionally, it’s crucial to address the growing demand from clients – particularly in the buy-side space – for comprehensive and secure strategies, as well as increased operational support including outsourcing, to handle real-time and value-add data. This is another area where providers like Standard Chartered are working to provide value to clients by developing deeper partnerships with fintechs to transform the effectiveness of traditional services like custodians to serve a rapidly evolving space.
Identifying future growth opportunities
Our presence in numerous emerging markets offers us a front-row seat where we have been able to observe and analyse the relative effectiveness of regulatory approaches and practical interventions to develop capital markets. It is these observations and learnings that Standard Chartered brings to our interactions and product solutions and that enables us to identify potential for future growth.
Looking back at Vietnam – where Standard Chartered has played a role in developing the financial services sector – the country is embarking on several policy initiatives that will see the nation grow from a frontier economy to an emerging economy.
Looking ahead and across the broader developing markets landscape, the potential for growth is related to the following trends:
- A shift in investor focus to markets supporting wealth expansion, which will trigger a rebalancing of capital allocations and drive volumes and asset size.
- An increase in the number of sell-side firms setting up operations in emerging markets to capture growing wealth.
- Growing adoption of T+0 or atomic settlements as emerging capital market infrastructures continue to develop.
- Growing adoption of digital assets.
As more emerging markets look to integrate their capital markets into the global financial system, those that succeed will be the nations that apply the lessons that have been shown to work elsewhere. These include harmonising their approaches, working cooperatively with others, applying best practices aimed at satisfying evolving customer demands, and aligning their regulatory frameworks with international standards.
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