September 2017

INDUSTRY PANEL: Servicing a changing market

Funds Global Asia consulted a panel of experts from asset servicing firms and industry groups to understand the impact of fund passporting, A-share inclusion, ETF Connect and other issues. IAN MARTIN
HEAD OF GLOBAL SERVICES AND GLOBAL EXCHANGE, ASIA-PACIFIC, STATE STREET How significant is the forthcoming ETF Connect initiative?
Like the development of many of the channels into and from China, ETF Connect has great potential. There are some technical challenges that have yet to be overcome, including the different settlement regimes between the jurisdictions and clarity around the application of constraints that exist on other channels such as Mutual Recognition of Funds (MRF). But the opportunity for ETFs beyond the access products that have to date defined success in Hong Kong, and for ETFs manufactured onshore, should be greatly beneficial for a wide range of investors in the region. What progress has been made in terms of automating fund processing in Asia, and what must still be done?
There’s still a great deal to be done across the industry in Asia in this respect. Digitising data and processes are critical to fund processing in order to reduce operational risk and improve efficiency. At State Street, we have initiated a multi-year programme to transform our operating model. We are onboarding large deals in the region with 100% straight-through processing for electronic trades, continuing to deploy and enhance global platforms, and have developed new platforms in the region to automate previously manual processes. This helps clients manage more complex data and enhance risk management through delivery of services on a near-real-
time basis. What are the main operational challenges facing asset managers and asset servicing firms in Asia at the moment?
Regulation, scale and cultural nuances continue to define the region, though clearly what is a challenge for some is an opportunity for others. Weighing the benefits of global system infrastructure and operating models with the need to be pragmatic and effective is an ongoing process for asset managers and asset servicing firms alike. At State Street, we’re focused on developing effective local solutions that fit within the global architecture, and tools such as DataGX provide a means of ensuring transparency and efficiency across the various jurisdictions in the region.   QIUMEI YANG
CHIEF EXECUTIVE, ICI GLOBAL ASIA PACIFIC Bond Connect began operating on July 3. How important is this scheme?
Bond Connect represents a major milestone towards the opening of China’s capital market. It allows international investors to access China’s bond market directly, easing the ability to invest in what is now the third-largest bond market in the world, worth about $9.4 trillion. Before Bond Connect, international investors accessed China’s bond market via different channels such as the qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII) schemes. Since February 2016, international investors that have registered with the People’s Bank of China can trade in China’s bond market without the need for pre-approval. However, they are required to appoint an onshore bond settlement agent bank to process the trade and to assist with filing and reporting. With Bond Connect, international investors can access China’s bond market directly without the need to work with onshore bond settlement agent banks. Is it correct to say that the mutual recognition of funds (MRF) scheme has stalled? What does the future hold for this initiative?
In May and June 2017, the China Securities Regulatory Commission (CSRC) approved two MRF fund applications, from Schroder Investment Management and Amundi Asset Management. We hope to see more northbound MRF funds (i.e. Hong Kong-domiciled funds applying for distribution in mainland China) being approved by the CSRC this year. Increased participation from international institutional investors will help diversify China’s investor base and strengthen the financial markets. The MRF scheme is an effective channel for funds to access the fast-growing Chinese economy and Chinese retail investors, but so far MRF fund sales represent a small proportion of the market. As the sentiment toward global financial markets continues to improve this year, we believe MRF funds will be more important for both international and Chinese investors. How significant is MSCI’s decision to include A-shares in its Emerging Markets Index in June 2018?
With a population of 1.3 billion and a gross domestic product of $11.2 trillion, China is the largest emerging market economy in the world and its capital market is becoming increasingly internationalised. Including China A-shares in the MSCI Emerging Markets index will allow the index to more accurately benchmark emerging market growth mutual funds. In terms of capital inflow, the initial weight of China A-shares in the index will be very small. As China further opens its capital market to international investors, we should see a gradual increase in the weighting of China A-shares to reflect China’s increasing role in the global economy.   SCOTT MCLAREN
HEAD OF HONG KONG OFFICE AND CO-HEAD OF GREATER CHINA BUSINESS, BROWN BROTHERS HARRIMAN Is it correct to say that the mutual recognition of funds (MRF) scheme has stalled? What does the future hold for this initiative?
MRF approvals for distribution northbound did ‘pause’ but have resumed with the recent Schroders fund approval. Clearly we would like to see more fund approvals forthcoming. MRF has expanded past the initial launch with China to now include Switzerland and France, which supports Hong Kong’s objective of being a leading cross-border jurisdiction within Asia. This aligns to a BBH-commissioned survey, ‘Cross-border 2025: The Rise of Hong Kong’, where 80% of respondents believed there was a medium to high probability that Hong Kong would become a leading Asian cross-border fund domicile by 2025. Going forward, we expect further expansion of MRF to new markets. What are the prospects for pan-Asian fund passporting in light of various challenges such as lack of harmonised tax regimes?
Other regional passporting schemes are likely to be slow to get off the ground as collaboration and harmonisation are challenging between the fragmented funds markets within Asia. The important question is, will there be bi-directional demand from investors for the passported funds, given these markets already have established funds industries? Also, what will fund sponsors be able to provide that doesn’t exist in the local market today?” Supporting this is the early MRF experience; the assets raised to date highlight a difference in demand for the southbound and northbound funds. How significant is the forthcoming ETF Connect initiative? (Answered by Chris Pigott, head of Hong Kong ETF services, Brown Brothers Harriman)
ETF Connect is an important strategic opportunity for the Hong Kong ETF industry. As investors in China continue to diversify their investments, there are limited channels to obtain global allocations given the lack of QDII quota and the small number of funds approved for northbound MRF. ETFs can provide global exposure in a low-cost wrapper. There is still work to be done on the operational, distribution and regulatory frameworks to support this initiative. However, the potential for additional capital from Chinese investors is attractive for Hong Kong issuers as they look to continue to create scale in their ETF platforms.   MARGARET HARWOOD-JONES
GLOBAL HEAD, SECURITIES SERVICES, TRANSACTION BANKING, STANDARD CHARTERED What progress has been made in terms of automating fund processing in Asia, and what must still be done?
In a matter of few years, supported by exchanges and clearing houses, automated funds market places have come up in Indonesia, Thailand, India and now a fledgling one in Vietnam. Though there is still work to be done, this automation and streamlining, coupled with usage of digital mobile technology by asset managers with retail customers, is bringing amazing results. In a number of markets, the turnaround time of the entire life-cycle of investment, subscription and allotment of units has come down by 25%-30%. Great progress is being made in automating fund processing in Asia. The Indonesian S-Invest programme is worth a special mention. By tying the whole funds marketplace together with a unique investor ID, the Indonesian Central Securities Depository (KSEI) has taken a great step in streamlining the industry and that is reflected in the double-digit growth that we are witnessing in the market. There is still a lot to be done around defining middle-office functions. Investor confidence is enhanced when roles are clearly defined in the market, including between asset managers and service providers. More must be done to define a segregation in roles and responsibilities that will propel market growth. Today, there are still a number of markets in Asia where an asset manager cannot outsource operations. How significant is MSCI’s decision to include A-shares in its Emerging Markets index in June 2018?
On June 20, 2017, investing in China went from an ‘if’ to a ‘when’ for global investors following MSCI’s decision to allocate approximately 0.7% of its Emerging Markets index to China A-shares. Although the initial decision is relatively small, triggering a move of $14-$18 billion in May 2018 during the initial rebalancing weekend, the weighting of A-shares in the index will grow organically over the coming years to make up a more meaningful share of the total (probably 1.5%-2% within the next two years). As this weighting grows, any fund managers who track MSCI’s index will need to begin buying A-shares to avoid unnecessary tracking error, which means that they must act now to educate their investors and to set up the necessary infrastructure to begin investing. What are the prospects for pan-Asian fund passporting in light of various challenges such as lack of harmonised tax regimes?
Pan-Asian fund passporting will bring renewed vigour and additional flows into the region and will give infrastructure financing, needed in a number of Asian markets, a big fillip. However, progress to date has been relatively slow. Today we have three passporting schemes in Asia: the Association of Southeast Asian Nations collective investment schemes (ASEAN CIS), Mutual Recognition of Funds (MRF) and the Asian Regional Funds Passport (ARFP). Although not progressing at the rate some observers would like, we should recognise that the oldest of the passporting schemes in Asia, ASEAN CIS, is just three years old. These are early days.   ANDREW GORDON
MANAGING DIRECTOR, ASIA, RBC INVESTOR & TREASURY SERVICES Is it correct to say that the mutual recognition of funds (MRF) scheme has stalled? What does the future hold for this initiative?
A slow start, but not stalled. Early expectations were high, but with only a few northbound funds approved at the beginning, flows for all but the JP Morgan funds have disappointed. During this period, there has been an uptick in the number of new Hong Kong-domiciled funds launched – part of which is definitely driven by MRF. Managers are still looking for ways to get products into China given the continued attractiveness of the market and MRF still has a place in many global managers’ China strategy. However, Hong Kong funds now have other distribution options beyond the mainland. Hong Kong recently announced MRF arrangements with both France and Switzerland, for example, and some managers have shown interest in these. That said, it remains to be seen if there is a real market need and whether these alternatives are being prioritised at the expense of the MRF with China. The speed of approvals in the early days of the Hong Kong/China MRF perhaps left some disappointed but China has a track record in taking a measured approach over new regulations. Recent approvals for managers such as Schoders and Amundi may mean that we’re moving into a growth phase for MRF. This comes at a time when pressure on China’s overall foreign reserve position seems to be easing. What progress has been made in terms of automating fund processing in Asia, and what must still be done?
We all agree on the benefits of automation – increased efficiency, lower operating costs, reduced risk. We’ve seen significant progress in Asia, but the scale of implementation across the region remains fragmented and lags behind North American and European markets. There have been some stand-out markets and others where more progress is expected. Taiwan has seen massive progress, and is now almost at 80% straight-through processing. For its part, Hong Kong remains an underperformer, behind Singapore, but automation here has improved and with a large distributor automating just this year, hopefully this will prove a catalyst for others to follow. What are the main operational challenges facing asset managers and asset servicing firms in Asia at the moment?
Fragmentation is a key operational issue facing both managers and their service providers. Many overseas asset management firms choose to distribute their Ucits funds either directly or through a feeder. This requires their transfer agent to be here in the region to support them on the ground, but operationally this is a straightforward process. Not all markets, however, are easily accessible by Ucits, requiring managers to increase investment and launch and run funds domiciled in multiple Asian markets. While this provides optionality and diversification, it can also prevent building the right scale and increases operational complexity and with it operational risk.   PATRICK WONG
HEAD OF CHINA SALES AND BUSINESS DEVELOPMENT, HSBC SECURITIES SERVICES Bond Connect began operating on July 3. How important is this scheme?
Bond Connect is a landmark event for international investors with an interest in Chinese debt. The new scheme brings sufficient efficiency and operational ease to trade onshore fixed income securities via a streamlined registration process, introducing an offshore international access platform to the onshore bond markets, settling trades with offshore custodians in Hong Kong as well as keeping cash balances offshore. These help to enhance the foreign investor experience in trading China’s interbank bond market like trading other international bonds. It is a step closer to global fixed income index inclusion, which will drive hundreds of billion dollars flow to China’s bond market. How significant is the forthcoming ETF Connect initiative?
The initiative is critical to ETF development in Asia given the trend for investing in ETFs as a low-cost product as well as the rise of robo-advisers. Overseas investment has been attractive to Chinese investors thanks to the need for diversification, which we would expect to contribute to the demand for southbound flows. QDII products in China, a channel for investing onshore money offshore, could be a good proxy as it has been heavily welcomed by Chinese investors. ETF Connect should help foreign ETF players build up their brand names in China, which is important for their long-term development onshore. There is also demand from foreign investors for China A-share ETFs that are available through the northbound channel. In Hong Kong, two of the top five ETFs, in terms of asset size, are China A-share-related. How significant is MSCI’s decision to include A-shares in its Emerging Markets index in June 2018?
MSCI has decided to include A-shares in its Emerging Markets index, with an initial weighting of 0.73%. Although the initial weighting is low, we believe this will increase in the long term with infrastructure enhancements such as the relaxing or abolishing of daily quotas. The symbolic meaning is more important as it gives a strong signal that China is an important market investors cannot miss. Not only investors that track the index, but those benchmarking the index as well as active investors that have no exposure to China A-shares have to look into this market now. HSBC has predicted the index inclusion to attract over $500 billion of flows in five to ten years. With more foreign investor participation, this helps to bring in international best practice on corporate governance as well as investment behaviour.   LAWRENCE AU
EXECUTIVE ADVISER, ASIA PACIFIC, BNP PARIBAS SECURITIES SERVICES Bond Connect began operating on July 3. How important is it?
Bond Connect is a significant step for reinforcing Hong Kong’s role as the inter-market trading link for China, following the Stock Connect links with Shanghai and Shenzhen. Some may see it as spilling the beans on the onshore China interbank bond market direct access scheme, implemented last year; we see it as an additional access route to Chinese interbank bonds by offering investors the international infrastructure of Hong Kong as well as global providers and trading platforms that they are familiar with. The two access schemes are complementary. Hence, with the diverse market opportunities in China for investors to leverage on, partnering with a provider that offers solutions to access both directly onshore and through Hong Kong is essential. Is it correct to say that the mutual recognition of funds (MRF) scheme has stalled?
The MRF programme is alive and kicking. The Hong Kong-China MRF has been a successful endeavour by the Securities and Futures Commission (SFC) to promote Hong Kong as an international fund distribution centre. The programme has gone through its run-in process and is picking up good momentum this year. Southbound net inflows had the highest monthly record in July and northbound products from Schroders and Amundi have received approval recently. The success has encouraged the SFC to sign a memorandum with Swiss and French regulators to permit fund distribution with the respective jurisdiction based on the same model. Two of our clients in Hong Kong, BEA Union and Harvest, are up and running in Switzerland. We hope we will soon have our clients distributing their funds in France. What are the prospects for pan-Asian fund passporting in light of various challenges such as lack of harmonized tax regimes?
Commercial viability is the top challenge for the ARFP scheme based on a roundtable discussion with the Australian Treasury and industry leaders we organised in Sydney. The lack of a harmonised tax regime will affect the attractiveness of foreign ARFP funds passporting among the participating jurisdictions. Other local requirements such as disclosures, capital controls and distributor engagement differ significantly across markets. These issues have muted the effectiveness of the ASEAN CIS framework since its launch in 2014. Unless the ARFP can harmonise rules as much as possible, we would expect fund managers to adopt a wait-and-see approach.   DAVID LI
MANAGING DIRECTOR, CACEIS Bond Connect began operating on July 3. How important is it?
In the month since the launch of Bond Connect, foreign investment in China’s bond market increased to $6 billion, a record high, which accounted for 1.38% of the market, an increased from 1.35%. Shanghai Clearing posted settlement figures of $865 million. Bond Connect is key to achieving China’s goals of increasing foreign investment and internationalising the renminbi. Investors not only benefit from yet another access point to a primary Chinese market, but also a more efficient ‘single link’ with Hong Kong’s efficient multi-custody infrastructure that follows international market practices and carries fewer constraints on accounts and registration. For Hong Kong, it boosts development of the fixed income, currency and currency pricing sectors, while improving bond futures and currency futures trading. How significant is the forthcoming ETF Connect initiative?
The Connect initiatives are positive news. The goal of attracting a wider range of market participants to the Chinese market through various investment channels will help create an open and stable market. For Hong Kong, the scheme provides the opportunity to become one of the region’s major ETF centres. Is it correct to say that the MRF scheme has stalled?
In July this year, northbound flows accounted for $1.5 billion and southbound flows for $35 million. However, for the last six months, southbound activity has increased and is closing the gap. MRF complements the Bond and Stock Connect schemes despite not meeting its perhaps unrealistic expectations. Such passporting initiatives help regional markets strengthen their leading position in the fund industry. MRF has a promising global future.   OLIVIER PORTENSEIGNE
MANAGING DIRECTOR AND CHIEF COMMERCIAL OFFICER, FUNDSQUARE What are the main operational challenges facing asset managers and asset servicing firms in Europe?
Costs must fall as margins are under pressure and the customer experience must improve if asset managers are to thrive. There is still too much complexity in fund distribution. Financial advisers, distributors, platforms, central securities depositaries and transfer agents are all intermediaries between the asset manager and their clients. On top of that, there are the costs of serving the different regulatory and market needs of numerous jurisdictions. The result is a spaghetti plate of bilateral and redundant connections for orders, settlement, know-your-client, transfers, corporate actions, reporting and more. What progress has been made in terms of automating fund processing in Europe?
Distributors and investors have diverse needs. Transfer agents and platforms are doing their best to meet these efficiently, but the market is too fragmented, resulting in insufficient standardisation and innovation. Using blockchain would enable all the actors to interoperate in a more efficient manner. This would open up a new way to innovation and the creation of new products. ‘Smart contracts’ could eliminate much human intervention. A Luxembourg consortium, FundsDLT, is working in that direction. What other regulatory developments have been occupying your time?
European regulators are pushing the financial industry toward more transparency and investor protection. It is getting more difficult for asset managers and asset servicers to digest these changes while keeping service levels high and costs down. Fundsquare is helping by mutualising the connectivity between the actors when it comes to filing regulatory reporting, disseminating fund information and processing transactions.   STANLEY POON
HEAD OF SALES AND RELATIONSHIP MANAGEMENT, INVESTMENT FUND SERVICES, ASIA PACIFIC, AFRICA, MIDDLE EAST, CLEARSTREAM What progress has been made in terms of automating fund processing in Asia?
Progress has come a long way over the last ten years. With the solid growth of fund assets, there is little justification in maintaining manual legacy processes when volumes are increasing exponentially. In the current environment, where risk and asset safety are top considerations, fund distributors are analysing ways to reduce operational inefficiencies, reduce manual costs and manage or control risks more effectively. Automation rates are not as high as most people would like to see in Asia, but the openness to discuss the solutions in the market is there. How significant is the forthcoming ETF Connect initiative?
For Hong Kong, this is a chance to be the ETF trading hub in Asia. Clearstream has been promoting the internationalisation of the renminbi since 2010, and we have been integral in many significant steps as this currency evolves. Is it correct to say that the MRF scheme has stalled?
MRFwas an important milestone. It has extended an additional avenue for retail investment into Hong Kong-domiciled funds in China and Chinese-domiciled funds in Hong Kong. MRF also created a lot of discussions about various fund passporting schemes in Asia-Pacific, which bodes well for cross-border fund distribution in the long term. ©2017 funds global asia

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