Networks

Carrier Pigeon or Twitter Bird: The Evolution of Corporate Actions Messaging Efficiency

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A version of this blog post was originally published by Wall Street & Technology.

Virtually every industry in every corner of the world has undergone technological or process evolution in recent times. There are countless examples of innovations that have addressed a challenge – the process takes too long, the process costs too much, the process is too risky – and changed the game by helping organizations or individuals operate smarter through efficiency, automation, or simplification.

Let’s consider communication, or the transmission of messages, as just one area where evolution has occurred. There are ways to communicate that involve quite a bit of manual work, such as the use of a carrier pigeon. Not the quickest way to transmit a message, and not too efficient, as apparently a carrier pigeon typically only flew in one direction – home – and would need to be manually taken to a message’s original location to begin the process. Given the level of difficulty and manual intervention required, it’s no surprise we don’t see the skies full of email or text message pigeons today.

On the flip side, if we look at a more modern messaging bird, it is evident that technology has changed the game for how individuals, organizations, and governmental entities can communicate and discover information. Twitter offers its users a simplified and efficient way to communicate specific messages to an audience across the room or across the world – pointing to why the social network has amassed millions of users in just a few years.

A similar, albeit less feathery, evolution is taking place within the corporate actions space today.

Traditionally, when firms need to process a corporate action, they are faced with manual work along the way. While some firms have adopted automated corporate actions solutions to increase efficiency and reduce risk, there are still too many communication points within the corporate actions process that require manual intervention. In particular, when a firm is sending instructions for optional or voluntary events to The Depository Trust and Clearing Corporation (DTCC), those messages are still entered manually. Of course, this ups the risk and the cost of corporate actions processing for DTCC participants.

The industry is recognizing these challenges and the next evolution of corporate actions processing is now underway. The DTCC has begun a long-term, large-scale project called the DTCC Reengineering Initiative, a phased approach to automating the entire lifecycle of corporate actions for U.S, securities. In fact, successful testing of automated ISO 20022 message feeds between DTCC, SunGard’s XSP, and a select group of U.S. financial firms is already in progress.

The end goal? Evolve the corporate actions process to provide straight-through processing (STP) for industry participants, reducing the risks and costs associated with manual processes, while increasing efficiency through messaging automation. Industry utilities and vendors are hard at work to ensure their customers and participants don’t need to shoulder the burden of building bespoke solutions to keep up.

While the industry still has much work to do to get systems ramped up, new ISO 20022 message interfaces developed and testing completed, we are well on our way in this evolution of efficiency. Hopefully it won’t be too long before manual U.S. corporate action processing will also go the way of the birds.

global head of connectivity, SunGard’s global trading business

Come Trade with Me

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A version of this blog post was originally published by the Financial Times.

Recently, I traveled to Madrid. I booked a flight on British Airways and found myself flying… Iberia. Of course these days these two “national carriers” are part of the same company, listed primarily on the London Stock Exchange and Bolsa y Mercados Espanoles, the Madrid exchange.

The Madrid and London stock exchanges are both over 150 years old and fiercely independent. They used to be among scores of independent stock exchanges around the world, all existing to serve their local markets with listings of companies from their country or local area. But increasingly independence is the exception, not the norm, for stock markets.

Like airlines, when countries from Austria to Zimbabwe took pride in having “national carriers,” having your own stock market was a calling card for a nation, even a region. Just as the economics of airlines have prompted alliances no-one could have conceived of – Air France KLM, for example – the economics of stock markets are increasingly leading to a shake-out of the industry.

And just like with airlines, the traditional players are being challenged by low cost entrants who are shaking up the perceived business model by stripping it back to the basics of what traders want from a market. For every Easyjet or SouthWest Airlines, there are multilateral trading facilities (MTFs) such as BATS-Chi X or hungry new entrants, like the Intercontinental Exchange (ICE).

Hardly a week goes by without another deal or alliance being struck among exchanges. The partnerships change all the time creating the most unlikely bedfellows. But in reality all they are doing is following the money.

We are often told that we live in a global world. What happens in Sao Paulo can move markets in Shanghai. This means that traders can be in any location they choose – and these choices are dictated by the availability of skilled labor, the nature of the tax regime, regulations and probably where hedge fund managers want to send their kids to school. From that location they want to trade in any security anywhere in the world. Their choice of market is not predicated on any national loyalty – they will go where there is the best opportunity, the most liquidity, the lowest costs and the least hassle.

As a result you have seen an increasing flow of companies listing on stock markets outside their home territory – from Israeli technology companies on NASDAQ to Kazakh miners on the LSE and Manchester United, an English football club with a Scottish manager, listing in New York where “soccer” is at best a minority sport. Even when a company has its primary listing in its home country, you will often find that the investor community and the majority of trading happen in other places.

Like airlines, national exchanges have had to adapt from being near monopolies in their home markets to being relatively small players in an increasingly global marketplace. They have had to invest in systems and infrastructure to compete and yet still see a large amount of their business being taken by rivals. Against this background it is not surprising that they want to huddle together or face being picked off by global consolidators, worse- altogether forgotten and obsolete.

Over the last few years we have seen multiple alliances in other parts of the world come to fruition. Euronext in Western Europe should regain some autonomy following from the very likely takeover of its parent company by ICE, while NASDAQ OMX in the Nordics, ASEAN in South East Asia, CEESEG in Central & Eastern Europe, and MILA in Latin America have all emerged as important trading blocks, each operating with a subtly different market model.

A fresh crop of new entrants are emerging who reflect the financial strength of markets previously not considered to be worthy of consideration. Moscow shows how, with government backing and strong momentum, a fragmented market can be consolidated to create a credible emerging financial center, fighting for Russian stocks listings that previously would have gone to London or New York. Both the Warsaw and Istanbul exchanges are emerging with similar ambitions.

Where will it end? I can see a few major groupings of markets emerging over time. It is hard to see more than two or three exchange groups in Europe.  The lessons from the airline industry are there to see.

global head of connectivity, SunGard’s global trading business

2 + 2 = 5: The Value of Exchange Alliances

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A version of this article originally appeared in The National.

Last month, the Stock Exchange of Thailand joined the ASEAN Trading Link, an alliance comprising three exchanges from across southeast Asia. Russian exchanges Micex and RTS completed their tie-up in December 2011 to form the Moscow Exchange. More recently, the Tokyo Stock Exchange and Osaka Securities Exchange announced their imminent merger, expected to complete on 1 January 2013. These events have brought the debate regarding consolidating the Middle East’s own exchanges into sharper focus. Trading across multiple markets is commonplace across the globe, but this practice is yet to become a reality here. Why?

Although there have been major steps forward in terms of the technology used by Middle Eastern exchanges and the participant financial institutions, a perception of complexity remains around cross-border trading, deterring many people from even trying . The exchanges themselves remain relatively small, difficult to access, and subject to regulation at the national level. As a result, capital markets in the Middle East still remain largely underdeveloped relative to other regions.

Over the last few years we have seen multiple alliances in other parts of the world come to fruition. As well as ASEAN, there is Euronext in western Europe, CEESEG in central and eastern Europe, and MILA in Latin America. Furthermore, we’ve also witnessed various new MOUs and partnerships between exchanges worldwide.

The advantages of interconnectivity are clear: as well as creating more competition and greater foreign participation in these markets, consolidation offers a deeper pool of liquidity and greater appeal for companies looking at exchange listings as an alternative source of funding to bank credit lines or bond financing. In the case of MILA, it became obvious very quickly that 1 + 1 + 1 = 4. Linking the Chilean, Colombian and Peruvian exchanges created a large amount of goodwill because the sum of the constituents is greater than its parts. Investors, who previously might have shied away from spending the resources required to look at investing in one small market, will now make that investment if they can access multiple markets at once and with greater ease. That reality and ease of access also brings new sources of funds as well as growth opportunities to businesses and institutions within each member country.

Four conditions need to be met to get an exchange alliance to work effectively. The first is a political superstructure, which can develop in different ways. In the case of MILA and ASEAN, there was an existing structure created to facilitate and promote the interaction of the different countries. The ASEAN Stock Exchange linkage initiative, for example, leverages the ASEAN political alliance superstructure, whilst the Euronext and CEESEG alliances operate under the Single Market promoted by the European Union.

The Middle East already has such a superstructure with the Gulf Cooperation Council (GCC), connecting the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait. This structure could bring exchanges closer together and promote the formal link-up of the different regional capital markets.

Even with a political structure, the second required element is a strong and persistent political will. In Europe, the European Union provided the structure and initial momentum, so when the Amsterdam, Brussels and Paris exchanges announced their plans to create Euronext, the idea resonated with both the political will and desire at that time. In any alliance, a larger player often takes the helm and may have to cajole the others past the finishing line, which works as long as these other participants can clearly see the benefits. As with a political alliance such as the GCC, each country may be in a different stage of development but must realize the combined interests in working together.

The next hurdle – and probably the biggest – is the different regulatory environments amongst Middle Eastern markets. This point was highlighted as one of the biggest concerns at SunGard’s Dubai City Day event earlier this year. But if you don’t start somewhere, the issues will never be addressed. A regional exchange alliance can create the momentum needed to kickstart that process, as was proved in the MILA and Euronext countries.

The final condition is use of the right technology. Although the Middle East region is large and therefore not without its infrastructure challenges, ASEAN provides some clues for overcoming them. It shows how to link these markets, demonstrating that you can build a network among exchanges without losing each player’s national identity, trading platform or connection to their individual investor communities, whilst at the same time leveraging each participant’s own strengths and creating a new, regional synergy.

Each country in the Middle East is trying to develop national industries and national psyches beyond oil extraction or mineral exploitation. A properly functioning capital market is a key piece of that development. I am certain we will see initiatives that will eventually create links between these markets. It is primarily a matter of developing the political will and then creating the momentum – the rest may just fall into place.

While you’re here…

vice president, risk solutions, SunGard's capital markets business

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Risk Management: Conferences, Convergence and Catastrophe

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This blog post was originally published on TabbFORUM.

Late October 2012 saw an RMA conference on risk management in Dallas, the annual FIA conference in Chicago, and a catastrophic natural disaster in and around New York. While these were separate events with very different impact levels, all three were connected by the complexity of modern risk management, what it means, and how its outputs can be understood and used.

Dallas

Conversation at the Risk Management Association event in Dallas was focused largely on developing, implementing and managing a risk appetite within a financial institution. This tackled from multiple angles, including liquidity risk, market risk and credit risk. The recurring theme of the discussions was the difficulty in developing a framework that works both top-down from an enterprise-wide risk tolerance perspective, and bottom-up from an individual risk contributor’s perspective.

Risk appetite definitions ranged across benchmarked “active” risk budgeting (VaR against benchmarks), economic capital, collateral and funding costs, VaR and VaR shortfall. As has been noted before, it is interesting that in the aftermath of a financial crisis which saw VaR receive critical attention, its use is expanding into bilateral calculation of collateral and central clearing margins.

Chicago

It was those same central clearing margins that took center stage at Chicago’s Futures Industry Association conference. As a business more used to exact calculations built on lot sizes and observable prices, the relative complexity, convexity and simulation-based margining of interest rate swaps are causing many to strengthen their technical architecture and approach. As the single largest OTC derivative class heads to the margin model, FCMs and their clients are becoming familiar with historic simulation, decay factors and look-back periods. At the same time, the margin posted is looking more and more like an alternative for economic capital, even using the same techniques to generate the number.

The VaR number itself, of course, is essentially predicting the minimum loss that would be expected to happen at the specified percentile. For example, a 99th percent VaR predicts the minimum loss that should be expected to happen once in every hundred days.

New York, New Jersey, and Neighboring Areas

As the conferences in Dallas and Chicago were happening, the tri-state area of New York, New Jersey and Connecticut were actually experiencing a devastating weather event.

The parallels between a VaR calculation and this “perfect storm” are as inescapable as they are shocking. Defined variously as a tail event or a 2.33 standard deviation event, the VaR cases are typically characterized by multiple loss-causing events occurring within the same simulation. This is a low percentile by definition, but has an extremely large impact. In terms of what faced the northeast U.S., a high tide and a hurricane create the worst possible outcome for the shoreline areas. Here, risk management hits closer to home.

Risk management is a control function that mitigates, to a degree, the impact of the extremes. It is also a fact that events deep in the tail are often uncontrollable.  It was with shock that reports of Hurricane Sandy’s effects were viewed, and with a sense of humility that the aftermath restorations are being tackled.

Risk can often be seen as a dry academic subject, as more theory than reality, and the discussions in Dallas and Chicago could lend weight to that opinion. However, the events in the tri-state area graphically and violently demonstrated that tail events do happen, and enormous damage can be caused when extremes collide.

While you’re here…

director, business development, Asia-Pacific, SunGard’s capital markets business

Why DMA Makes Sense for Southeast Asia

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Direct Market Access (DMA) trading has become increasingly prevalent worldwide as more buy-side traders take advantage of available technology to execute their own orders. As many markets in Asia-Pacific are currently outpacing developed markets in terms of volumes, investment and overall growth, they are primed to take advantage of this new mode of international trading.

DMA is gaining ground because it offers a superhighway for algorithmic trading and facilitates transactions that are executed in milliseconds. DMA also brings down error rates and offers greater transparency in how orders are handled. This transparency allows better control of the final execution and the ability to exploit liquidity and price opportunities quickly.

DMA is well established in mature markets such as the U.S.; in its 2011 report “US Hedge Fund Equity Trading 2011: The Challenge is The Opportunity” market research firm Tabb Group found that 53 percent of participants route their DMA order flow to broker-dealers for algorithmic trading and potential use of crossing networks. European firms are also increasing their usage of DMA and algorithmic strategies.

While the adoption of DMA trading strategies grows, investors in U.S. and European markets are looking for opportunities in other parts of the world, with the Asia-Pacific region high on their list. In fact, Tabb Group found that one-third of U.S. hedge funds are looking to Asia-Pacific and 24 percent of European hedge funds see promise in the region.

DMA is paving the way for U.S. and European firms to access Asian trading venues cost-effectively, and all indications are that investors and firms in the Asia-Pacific region are following suit. The strong investment returns seen from Thailand, Indonesia and Malaysia over the last few years reflect the evolution of the Asian market structure. These three countries have outperformed major U.S. and European markets in recent years, and this continues to attract new attention.

In response, trading venues in Thailand, Indonesia and Malaysia have taken steps to build on their success via DMA.

  • In 2006, the Stock Exchange of Thailand (SET) gave the green light to DMA, and has followed it up with a succession of derivative contract launches. In 2011, SET officials reported a significant rise in electronic trading flow and that algorithmic trading had more than doubled over 2010.
  • Bursa Malaysia introduced DMA for derivatives in April 2008 and for equities in 2009. In 2011, there were more new local brokers offering DMA access in a variety of forms—a trend that has continued in 2012.
  • Indonesia took a major step forward in 2007 when the Surabaya Stock Exchange was merged into the Jakarta Stock Exchange, which then changed its name to the Indonesia Stock Exchange (IDX). By 2010, according to the World Federation of Exchanges, IDX was the fifth best performing stock exchange in the world, and by 2011 60 percent of all tradable shares via IDX were owned by international investors. In 2008, Credit Suisse became the first firm to offer DMA trading in Indonesia, and this year the Indonesian investment bank Mandiri Sekuritas has endorsed DMA.

Despite these strides, the Asian markets do have some hurdles ahead of them. Today, the region still suffers from a concentration on national exchanges; high frequency trading is limited by inadequate matching and latency; crossing systems are highly manual; algorithmic trading is still in its infancy and often hamstrung by market structure; and market entry is often hampered by incumbent brokerage members.

These conditions are expected to improve as more local brokers use DMA and other trading technologies to attract international clients. Over the next five years, some of the steps that will likely pave the way for greater use of DMA in the region are:

  • Exchanges with faster and greater capacity trading engines
  • Longer trading hours without lunch breaks
  • Faster execution times
  • Alternative execution platforms and smart order routing

Many broker-dealers in the region already think that DMA makes sense and that it’s likely to be a major contributor to their revenue streams. They see cross-border trading growing and more buy-side constituencies showing interest in international markets. The leading players are already developing strategies and taking action, so DMA access and flow is increasing at ever-faster rates. With so much growth in the Asia-Pacific region in the past few years, this is certainly an interesting area to watch.

While you’re here…

global head of connectivity, SunGard’s global trading business

Trading in the Middle East: Turning a Corner?

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At SunGard’s Dubai City Day, a panel looked at trading opportunities and challenges in the Middle East. Panel members started with the bad news first: due to regulatory constraints, the region’s exchanges remain largely domestic monopolies, with very little competition for listings, no high-frequency trading and no CCP. Add to this the constraint of settlement caps, the large retail focus of most exchanges, different working weeks and settlement models – all deterrents to the generation of regional liquidity abound, probably explaining the minimal foreign participation in the markets until very recently.

Trading in the region will eventually become more attractive and accessible to overseas investors, but the panelists in Dubai implied that regulators were understandably quite cautious at present. Of more concern was the diversity of regulatory regimes throughout the region.

It was suggested that the lack of drive to unify some of the basic rules could in part be due to a desire to preserve each exchange’s local dominance, but a lack of competition for flow and listings constrains liquidity movement and foreign participation throughout the region. As case in point, Saudi Arabia for example simply bars foreign ownership; currently, foreigners can only trade Saudi stocks through funds or swap structures.

Panelists indicated that in Saudi Arabia, the market has experienced a doubling of volumes over the first half of 2012, driven by local investors with a strong domestic focus in an economy growing at more than 5 percent per year.* The domesticity and retail-oriented focus of the Saudi market – an amazing 93 percent of trading volumes are said to be retail-generated – gives it a different character from international markets, where retail volumes can be more erratic. Conversely, the Egyptian market was said to be dominated by institutional volumes. In Qatar, the focus is on attracting both domestic flows – particularly from the expat client base that may not have been aware that participation was possible – and increased participation from GCC institutions rather than directly reaching international investors.

The difference in settlement structures and models is also naturally becoming a point of concern, especially for investors looking across different regional exchanges. For example, while Saudi is at T+0, other GCC countries operate in a T+2 environment.

Turning to connectivity, the panel looked at the GCC exchanges’ capacity to absorb a sudden influx of high-frequency external order flow. The panel’s answer was a qualified yes for the future, but not anytime soon. The implementation of new trading engines and the adoption of industry-standard trading protocols probably explain that enthusiasm. Attention was also given to the technical connectivity methods themselves: with more fiber-optic cables being laid and a greater belief in Internet security, panelists proposed that direct market access over VPN (virtual private network) could become a viable method in the region.

On the panel, there was a clear view that the Middle East needs new products to drive liquidity to its capital markets, besides the requirement to improve infrastructure and the need to provide market participants an experience similar to “Western” standards, through changes to the markets’ structure, such as market-making, full delivery vs. payment, etc.

There is no doubt that the region’s regulators and market operators are, in a carefully considered way, adopting policies conducive to market expansion, the narrowing of spreads, and the provision of liquidity. We may be getting closer to the day when Middle East equity markets become venues for international investment.

*Sources AMF & WFE

senior vice president, Stream, SunGard's capital markets business

ASEAN: New Trading Opportunities, New Post-Trade Demands

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The ASEAN trading link announced its launch in September 2012. The link will firmly establish the ASEAN nations as an investment and trading bloc, and is also expected to attract new foreign investment to the region, as well as provide better opportunities for local capital.

Local Asian brokerage firms will probably benefit most from the link. They are now in a better position to compete with major international brokerage houses to manage the inflow business coming from neighboring countries, and they will also now have outbound access to local exchanges. While international brokerages have already established their own networks and unilateral relationships at the individual exchanges, the ASEAN trading link will bring the local brokers up to speed.

The ASEAN trading link project is only one step towards harmonization, but it is a major step. When Bursa Malaysia and Singapore’s SGX become fully interconnected, with the Stock Exchange of Thailand to follow, the link will already have connected 70 percent of the total market capitalization of ASEAN. But with the rise in cross-border trading, many participants still need help to establish an infrastructure that can meet the new post-trade demands of international business.

The seven exchanges that will ultimately comprise the ASEAN trading link support securities denominated in all six national currencies. Additionally, the SGX is also soon to list, clear and settle (in CNH) those quoted in Chinese Renminbi as well as those denominated in Singapore, U.S., Australian and Hong Kong Dollars. Although the clearing of trades will be conducted in local currency by the exchange through which they are transacted, brokers will require platforms to manage multi-currency settlement, reporting and accounting.

Local Asian brokers will need platforms to be designed to automate workflow throughout the trade lifecycle including trade matching, account funding, margin and fee calculation, confirmations and allocations. They will also need to be sensitive to differing trade settlement periods across the exchanges, tax treatment, and regulatory obligations such as segregation, ring fencing of client funds and stocks, and legal reporting.

Brokers also require scale. They will need to efficiently handle increased volumes and a broader scope of client profiles. Perhaps most challenging in a subsequent phase, they will also be required to expand asset class coverage. While today it is equities only, bonds, funds and derivatives may also be a part of the link’s future roadmap, and post-trade platforms will need to be extremely flexible and modular to provide support for these products when needed.

All in all, the launch of ASEAN link is a key part of the process of bringing the region’s markets to the center of the international trading stage. The link has the potential to deliver a tremendous range of new business opportunities to brokers and their clients. However, the resulting operational and technology demands for post-trade processing cannot be overlooked and will need careful consideration by brokerage firms to realize this emerging business potential.

While you’re here…

global head of connectivity, SunGard’s global trading business

ASEAN Today, Africa Tomorrow?

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This blog post originally appeared on TabbFORUM.

The ASEAN link went live this week, linking Singapore Exchange and Bursa Malaysia members and traders, completing a project started five years ago. Perhaps it was only natural that Asia should pick up on one of the latest developments in capital markets: interconnectedness.

While full-blown mergers and acquisitions between stock exchanges, especially cross-border, are probably off the table for now – the last year has seen quite a few memorable failed attempts, NYSE Euronext/Deutsche Boerse, LSE/TMX, ASX Group/Singapore Exchange – there are repeated examples of ambitious capital market linkages across the globe since the turn of the century. Euronext, before “merging” with NYSE, unified the stock exchanges of Amsterdam, Brussels, Lisbon and Paris; CEESEG, the Central and Eastern Europe Stock Exchange Group, today brings together under Vienna’s leadership the Austrian, Czech, Hungarian and Slovenian financial markets, with an eye for further expansion in South East Europe; NASDAQ OMX, bringing Nordic and Baltic stocks trading under a common uniform. The movement is not confined to Europe, as the recent launch of MILA – Mercado Integrado Latino-Americano showed, which links the financial marketplaces of Bogotá, Lima and Santiago.

So is the ASEAN Trading Link, the symbol of deepening economic and political integration in South East Asia, realizing the aspirations of millions of people to live in a more peaceful, integrated bloc? Or is it simply that each of the underlying venues was reaching its local potential and needed to find new avenues to attract new sources of capital and new investors? Most probably both, with the added interest that it is hard to exist when living in the shadow of the Chinese cloak.

The advantages of capital markets linkages are clear, and relatively well known: linking trading venues without any losing their identity, opens new opportunities for business, the possibility for ambitious local players to access new sources of wealth creation and the means to fight off larger financial powerhouses – or at least compete with them. Such links also give stock exchanges the occasion to take a short breath before the next step, which could either involve departing sensationally from that first route (cue the acquisition of Euronext by NYSE) or instead facilitating further integration.

It will be intriguing to see what the next steps for the ASEAN Trading Link turn to be, beyond the integration of Thailand and the probable acquisition of new participants (Indonesia, Philippines, etc.) already members of the ASEAN political grouping. An initial success could lead its members to become bolder and target other services, thereby further reducing inefficiencies in the trading chain in Asia: common rule book, foreign ownership, remote membership, clearing and settlement, single trading system, pooling of IT resources and spend, etc. Conversely, this could also give the possibility for the ASEAN Trading Link participants to engage in (more or less) collaborative approaches to other regional participants – the new Japan Exchange Group could be an early target for cooperation, as it seeks to revive the economic fortunes of Japan and the competitiveness of the Nippon financial markets, but Australia or even India could also be brought into the fabric of the trading link.

What the ASEAN Trading Link ultimately does, is heap further pressure on those regions where the lack of any such successful collaboration is becoming glaringly obvious. The very different cases of Africa and the Middle East come to mind – regions where the current status quo state of affairs with regard to trading and cross-border initiatives might attract the grade “can do better.” ASEAN success could well trigger changes well beyond its original borders and immediate surroundings.

While you’re here…