Citi details API for HKEX’s Synapse

In November 2020, Hong Kong Exchanges and Clearing announced HKEX Synapse, a settlement acceleration platform that the exchange expected to go live in Q1 2022. The exchange successfully went live with Synapse in October 2023, more than a year later than initially planned. The platform is the latest enhancement to Hong Kong’s Stock Connect program.

One of the challenges of participating in Northbound Stock Connect—which connects Mainland China markets with participants in Hong Kong—is adhering to the Mainland China securities market’s T+0 settlement timeframe. This means that post-trade participants have much less time to deal with any errors that occur in the trade workflow. For some, this entails fixing potential errors within a four-hour time window and allocating two to three times more staff to work on Stock Connect.

HKEX Synapse was introduced to help institutional investors deal with those challenges. The average daily turnover of Northbound Stock Connect totaled RMB109.3 billion ($15.2 billion) in the first half of 2023, up 5% from a year earlier, and a 50% increase from 2020 levels. 

Synapse eliminates sequential processes—using DAML smart contracts—offering real-time visibility and insights into the settlement process for market participants. The platform is linked to the Depository Trust and Clearing Corporation’s Institutional Trade Processing services to allow participants to automate the trade confirmation and settlement notification process. 

Before the launch, HKEX ran a pilot program in June 2021 for asset managers, brokers, custodians, and clearing participants to familiarize themselves with the platform and to understand how their settlement operations infrastructure can integrate with the Synapse environment. 

Citi was among the pilot participants for the Synapse platform. Other participants included BNP Paribas Securities Services, BNY Mellon, HSBC, Northern Trust, State Street, Standard Chartered, Invesco Hong Kong, and CSOP Asset Management.

Citi is the first custodian to successfully settle trades for China Asset Management on the newly launched Synapse platform. The other participants have yet to make similar public announcements. Citi designed and developed an automated API-powered Synapse connectivity solution and in the process also aligned its custody platform. 

From a Citi perspective, we are ready to go

Toby Sunderland, Citi

Toby Sunderland, Asia-Pacific head of securities services technology at Citi, tells WatersTechnology that as the first custodian in the market with the full end-to-end solution in place, Citi put in a lot of work with HKEX to ensure operability. 

“Extensive testing was performed end-to-end to ensure that the additional functionality made available by HKEX through this API connectivity was robust and strong in terms of the depth of functionality. The additional reporting capability that we’ve got there does assist our clients significantly when they move onto this framework,” he says. 

The Synapse platform is optional and is in place to help streamline processes before settlement takes place in HKEX’s central clearing and settlement system (CCass) for equities. According to HKEX’s list of frequently asked questions for the platform, Synapse will not replace CCass but rather interface with it. 

From Citi’s perspective, Sunderland explains that the firm wants to be able to connect to the best platform for the task at hand. “We wanted to ensure we have both options available from Day One.” 

He adds that working with HKEX went well in terms of Citi’s ability to effectively spin up its development team, understand the requirements, build the connectivity, and ensure—through testing with the market—that it delivered the benefits it sought.

Realignment

As part of the API connectivity build, Citi was able to realign its Secore clearing and settlement engine. Sunderland says the platform has been coded and functionally enriched to enable Citi to take advantage of API connectivity. As Citi was already using ISO 20022 data libraries for large-scale, large-volume settlements for Hong Kong and other markets, it didn’t involve a huge amount of change within its underlying applications.

“The Synapse API is ISO 20022 library-based, and as we were already using these data libraries and functions in that area—it worked well for us,” he says.

What required the most labor was testing the API to ensure the move from Swift messages was seamless. This required analysis of each field of the messaging format and how it is transmitted. Sunderland says the process involved analyzing each data element, how it maps to Citi’s internal systems, and whether there will be any changes to those element details. 

Citi undertook a few types of testing: functional testing, interface testing, regression, and positive and negative testing on those fields and the data elements within. That includes testing, for example, whether a message contains an incorrect element within a data field; how the system behaves; how quickly it identifies the issue, element, or error; and how it would present it to an operations analyst to review. 

“From a Citi perspective, we would just need to configure the clients to spin-up and start taking advantage of that. There may be work on their side, but from a Citi perspective, we are ready to go,” he says. 

Only as fast as the slowest

Since using the Synapse platform is optional, users should be aware that the chain will only be as fast as the slowest party. 

“Maximum benefits will be attained if both the buy-side and the sell-side chains are on the platform, but the Synapse workflow will still operate, albeit with fewer benefits, if only one of the chains is onboarded,” HKEX says in its FAQ document.  

Assuming that all parties—the client, the counterparty, and Citi group servicing the client—are on Synapse, Sunderland says it will result in more real-time processing of the settlements, covering the end-to-end trade lifecycle. 

“Using distributed-ledger technology, it enables that process to be more ‘atomic’ in terms of closer to real-time for settlement, and that gives clients a more immediate view of the status of those transactions [and] management of the available cash positions can improve for the clients,” he says. 

Still, some clients might choose not to use Synapse, depending on their technology infrastructure and strategy. Sunderland says perhaps some have a strategy that does not see the benefit in moving to API-based connectivity, or they may prefer to remain with the traditional Swift network and transact through the CCass systems.

But as clients progress and market volumes grow, they may want to move to APIs using Synapse as it’s more real-time in terms of how fast the data is sent, moving away from the traditional batch process. 

“When you’re talking about rebalancing for portfolio managers, that will give you inherent benefits in the volume of processing you can move through the engine and the entire end-to-end environment within that period,” Sunderland says.

In terms of other projects Citi is working on, Sunderland says the bank splits its time between business-as-usual activities and strategic build and growth programs. “They all have to go hand-in-hand to deliver new solutions for our clients,” he says. 

New pieces of technology, like Synapse and HKEX’s Fini—a digital platform that modernizes the IPO process—assist Citi in migrating clients to newer technologies and newer ways to settle and clear more efficiently. That, in turn, buys Citi the time and gives it the opportunity to remove more of the legacy connectivity across the bank.