Magazine Issues » May 2018

SOUTH AFRICA ROUNDTABLE: Airline syndrome

Our panellists tell us that instead of launching competing national projects, African countries should work together for the sake of a bigger capital market. Chaired by George Mitton in Cape Town.

Willem van der Berg (business head for Africa, SGG Group)
Margaret Harwood-Jones (global head, securities services, Standard Chartered)
Rajesh Ramsundhar (Head of investor services, Standard Bank)
Andre le Roux (head of business development – Africa, Maitland)

Funds Europe– Which of the many pieces of regulation affecting the financial markets globally and in South Africa have occupied most of your time lately?

Margaret Harwood-Jones, Standard Chartered – In South Africa, we are occupied with everything around securities financing and transaction reporting, which, post the crisis, aims to increase financial markets’ overall stability. South Africa wants to respond to that, so that’s manifesting itself in changing requirements around reporting and the move of unregulated products and market conventions on to regulated platforms, which is about reducing systemic risk and ensuring better stability for investors.

Rajesh Ramsundhar, Standard Bank – For me, the biggest one has been the AIFMD [Alternative Investment Fund Managers Directive]. Asset safety and investor protection are key, as well as segregation of accounts. The biggest impact, for me, is on the information management side, where our clients enforce a requirement on us to ensure we pick up the right information to give them a view on asset protection.

On the local side, we’ve got some more general laws coming in, such as the Protection of Personal Information Act, which implies technology changes on our end. Then there is the “twin peaks” change that will create a Prudential Authority and Financial Sector Conduct Authority. That’s going to change the way we operate.

Andre Le Roux, Maitland – As a fund administrator, the thing that has kept us busy from a South African perspective is regulation of hedge funds. There’s a product that’s changed fundamentally, and that’s kept us engaged around our systems, our clients and distributors. It’s been a fundamental change. For the rest, it is the reporting obligations which manifest themselves in what I would describe as “data orchestration”. It’s really just making sure you can get your data and reporting completed and distributed to all the various entities and stakeholders as quickly and comprehensively as possible. We service international funds as well, so the AIFMD has affected us. We’ve got international ManCos [management companies] that we service out of here, and again it’s about orchestrating all the data to be able to send to the various entities.

Willem van der Berg, SGG Group – We’re also a fund administrator but we don’t administrate local South African funds, so I’m talking from a global perspective. In terms of the take-on process and execution, things have changed considerably and there’s been a wave of regulatory reforms. I was a lawyer at PwC a couple of years ago in the tax department. I think we had one compliance lady for 100 tax advisers. Now, with regulations such as CRS [the Common Reporting Standard] and Fatca [the Foreign Account Tax Compliance Act], it’s a more burdensome process – fund managers need to do the actual classification, the registration and the reporting. As a fund administrator, we want to take that away from them. We want to be a strategic business partner. It becomes easier if you’ve got technology, experience and automated processes.

Funds Europe – South Africa has issued licences to several new stock exchanges in the past two years. What impact have these new trading venues made so far?

Van der Berg – Two of the actual exchanges have done listings, and the other two are trading, but only a couple of shares. It’s been small.

Harwood-Jones – Volumes seem to be miniscule. Across the four new equity exchanges, if you look at the January 2018 figures, we’re talking about equity trades across the market of just under 600,000 rand (€41,000) in 114 transactions.

Ramsundhar – In fairness, though, if you look at these exchanges, you’ve got some secondary listings that have come up, and a new listing that has come up through ZAR X. They have created a formalisation of trading in restricted shares, so there’s more transparency.

They’ve been going for 18 months, some of them only for six months. We’re not going to see the impact yet. But they have good objectives: one is around secondary listing and encouraging a lower cost and efficient trading platform, the other one is around creating an efficient, lower-cost mechanism to encourage more issuers to come to the market.

The outlook is positive. We will probably only see it in about two or three years’ time, but we would expect an increase in volume, broader participation and more transparency in the market because of the competition that’s introduced.

Le Roux – Yesterday, I walked past my colleague who’s responsible for integrating all of this stuff. We’ve got 75 fund managers who trade with the JSE [Johannesburg Stock Exchange], and I said to him, “How many trades have we had on A2X?” He said, “Zero.”

It’s going to take a few years for them to get to critical mass, and they need deep pockets. Thankfully they’ve got big shareholders behind them, which gives them longevity.

Although these exchanges have had almost zero impact so far, I would make the point that they’ve been really easy to work with in terms of integrating the technology. Our strategy is that we want our fund manager clients to be able to trade with them, and when we worked with them, they were innovative, engaging and easy to integrate with. We’re now sitting here ‘all dressed up with nowhere to go’. But hopefully it will develop over time.

Harwood-Jones – It’s great to hear that you guys are so positive. My observation is, if you look at the set-up, it has been tackled very well – the recalibration of regulation, strong determination around the operating model, a high degree of efficiency. That’s why, personally, I was astonished when I found such a low level of activity. But hearing you now, I’ll join your optimism for the next two to three years.

Funds Europe – Blockchain has become a hot topic globally and in South Africa. How optimistic are you about the potential of this technology?

Le Roux – From our perspective we are not doing anything right now from an implementation or even a proof-of-concept perspective. For me, the whole industry ecosystem needs to collaborate before this thing is really going to be adopted. In our industry, I‘m not convinced that somebody’s going to disrupt us anytime soon.

Within the ecosystem, you’ve got the custodians who have an accounting record, the fund managers who have an accounting record, the trustees that have an accounting record, and the fund administrators who have an accounting record, and they’re all reconciling among each other. Blockchain will usurp all of that, but how that’s going to happen is not clear to me at this stage.

Harwood-Jones – What is the problem we’re trying to solve? And what is the solution to that problem? It’s critical that the industry looks at it in this way. There will be an evolution and a progression within the service environment, and that will be positive for all of us. But, do I worry that Standard Chartered Bank is going to be disintermediated overnight? No, I don’t.

We’ve started to experiment within transaction banking. Our investment and collaboration with Ripple is all about looking at a different way to deal with high-volume/low-value payments that don’t naturally fit within the SWIFT infrastructure. That collaboration also has included an equity participation on behalf of the bank, and based on that experience and other things, we’ve created something called SC Ventures to explore these technologies.

Within any large institution, procedure, policy and discipline is not as agile as it could be to accommodate new ways of working, so there are some things that we need to do to make ourselves more nimble. Finding that different rhythm is critical if we’re going to allow blockchain to take hold more significantly across the bank.

Ramsundhar – My view is that we are nervously excited. Blockchain is an opportunity to transform the business and it could really be progressive for us. The point you guys touched on is very important – collaboration. You can’t do it alone, so I think we need to work as an industry and with the regulators. The key, though, is that we do it in an unrestricted manner, because if you work in a restricted or confined manner, you’re not going to exploit this technology.

Van der Berg – I’m not a blockchain specialist, so I reached out to one of our younger employees who is involved with cryptofunds and the like on a daily basis and he is very optimistic about blockchain. According to him, blockchain is going to change the legal and economic infrastructure completely. Examples of possible-use cases for blockchain would be the following: blockchain can store identity details for identification purposes; it can replace the notarising of documents to ensure trust; smart contracts can be digitally stored on a blockchain; with digital voting, the biggest problem is security – blockchain can make your vote anonymous and provide better security; and, distributed storage on a blockchain minimises a lot of storage cost. It all sounds like something we would like to be part of.

Harwood-Jones – But a cautionary note is with regard to cyber security. As we begin to embrace new technology, are we inadvertently increasing our risk? If we look at the environment around cyber security, regulation is a long way short. We don’t yet have global standardisation, the legislative environment is not very helpful to us, and it feels like an area of risk where we are immature and need to take great care.

Funds Europe – What other kinds of financial technology are of interest to your organisations at the moment?

Le Roux – We’re a fund administrator and so there are still lots of areas that can’t be automated nicely but are repetitive for humans. An example is that we value fund portfolios and we need to source independent instrument prices. Most of those prices we’ll get off Bloomberg and Reuters, but some of them are OTC [over-the-counter] prices or we have to get them from another fund administrator. Somebody’s got to log on every day to get the same price off somebody’s website, and it’s a human being doing a repetitive task. Robots can now do that.

Van der Berg – The same, except not just on a service client but operational level. As Andre said, there is a lot of uncomplicated repetitive work which you need to try to automate.

Harwood-Jones – We’re using robotics around reconciliations, beginning to introduce it into NAV [net asset value] processing. Looking across to Asia, that’s not a unique example. I was talking to a major global asset manager in Singapore two weeks ago and they have completely redesigned their NAV productions using robotics. They had a team of data scientists come in to help them reinvent the process, and as part of it are re-skilling former fund accountants to run production lines that include robots. I was quite surprised to find that level of progression sitting on my doorstep in Marina Bay Financial Centre in Singapore.

At Standard Chartered, we’re using artificial intelligence to anticipate client performance. We have a dedicated unit monitoring the systems performance of all of the bank’s infrastructure globally. Using AI, we can redirect surplus capacity elsewhere, to where it’s needed, and that helps to drive efficiencies.

The other thing we’re looking at is around chatbots. We’ve analysed the types of queries we get from clients and not unsurprisingly, more than 70% of our inquiries are around imminently settling transactions or transactions that are likely to fail, so we are looking to deploy robots to answer those things online.

Ramsundhar – We also have a big focus on robotics and process automation, particularly in the asset servicing side. Chatbots and machine learning to help more around the client services are things we are exploring at the moment. On the risk management side, we want to use big data/artificial intelligence to foresee issues that are coming up and to manage risk more effectively.

Harwood-Jones – One other point that I would make, one that’s certainly applicable to other countries across sub-Saharan Africa, is that your ability to deploy some of this new technology is still constrained by the market environment. Clients regularly remind me that processes are still too manual. That’s not always the fault of the service provider. The reality is the level of automation that sits in the market infrastructure or in some of the processes around owning securities in many countries is still terribly manual.

Funds Europe – How is South Africa’s hedge fund industry adapting to its increased regulatory burden under the Collective Investment Schemes Control Act?

Le Roux – The hedge fund industry is going through an existential crisis, for want of a better term. Their traditional target market was high-net-worth individuals, and all of a sudden they can access the man in the street, but the distribution channels are not ready. Also, performance has been poor lately.

It will take a while before the hedge funds can position themselves so that they appeal to the man in the street. My sense is that the pendulum will swing back to ‘actually, this is for specialist investors, high-net-worth investors and some institutional investors’.

Van der Berg – The new regulated status has made hedge funds marketable to retail investors, which is a good thing, but I think before being able to comment on the regulatory changes and the impact it has had, we need to keep in mind that actual hedge fund performance has not been great and if you look at the pension fund allocation, only about 1% of the allowed 10% has been allocated to hedge funds. It’s early days but the hedge fund industry is struggling at the moment.

Ramsundhar – The question we need to ask is, “Why is the market stagnant? Is it because of performance or is it because of the regulations and the impact that it has had?” My gut feel is that it’s more performance. Over time we need to get through this, get through the regulatory side, and the market will evolve.

Harwood-Jones – For me it is a basic risk/reward equation. The reality is that the investor is exposed to a greater degree of risk through a hedge fund, and when you look at the performance statistics over the last two or three years, you would say, “Well, where is my incentive to take that risk? It’s not there in the performance.”

Funds Europe – Across Africa, which developments would be most helpful to enlarge and stabilise the financial markets?

Van der Berg – There was a SuperReturn conference at the end of last year, and a statistic was given that only 3% of all private equity employment of funds went into Africa. This is concerning for the continent as it means investors are not finding suitable opportunities.

Even going to visit local South African private equity fund managers, guys can raise the money, but they can’t find opportunities. We need more private companies in Africa for people to invest in. A good example is South Africa. What South Africa has done well is Regulation 28 of the Pension Funds Act, which allows 10% of pension assets to be invested in private equity, up from a previous 2.5% allocation. According to a recent survey carried out by the Southern African Venture Capital and Private Equity Association (Savca), pension and endowment funds’ contribution to total private equity funds raised in South Africa grew by 5% between 2015 and 2016. These kinds of regulatory policy reforms in Africa are needed to increase investor capacity.

More broadly, I would like to see an increase in national savings and pension fund contributions.

Ramsundhar – In South Africa, we’ve got a well-established capital market, lots of assets, lots of investors, but we need broader participation. As far as the rest of the Africa region is concerned, there’s too much money chasing too few assets. It’s a sore subject that we’ve been trying to address for the last ten or 15 years.

For me, we need to create the right environment in countries where issuers or entities that require capital can raise capital, either in debt or equity markets locally. The African markets are not developing. People need money to develop the economies. How do they get to the market and attract that money? Exchanges must create the right environment. My question is, why do we have exchanges in each country if we’re not efficient and not effective? Why can’t we consolidate them, creating one exchange where it becomes efficient and you can get these entities that go in there and raise capital? That creates assets and liquidity.

Le Roux – It’s what I call the ‘airline syndrome’. Every country wants to have their own airline and no one creates a pan-regional one.

Every year we talk about what is going to be the catalyst for the growth of the capital markets in Africa, and we never know what the answer is. But I think you’re on to something. If every country wants to have its own capital market, they’re all going to be miniscule. None of us are going to want to invest in putting up a big operation in, say, Rwanda or Botswana, but a consolidated exchange could be the catalyst.

Harwood-Jones – I’m going to say, “Good luck with that.” Let’s cast our eyes around the world and see if there is a model to replicate here in the region. The answer is no. I think your national airline syndrome is absolutely the right one. National pride and national politics play a big part in this. Even if you look at collaborations in ASEAN [the Association of Southeast Asian Nations], a small group of allegedly like-minded countries operating in the same part of the world, there has been a series of failed initiatives for cross-border collaboration around exchanges and trading activity. If I look in Europe, where you have the EU and 70 years of co-operation, it’s taken an awfully long time to get to the launch of something like Target2-Securities and has been hugely expensive for everybody. Fantastic ambition to have, immensely hard to bring it to bear.

Funds Europe – What objectives would you most like to achieve in the coming 12 months, either within your organisation or at an industry level?

Ramsundhar – We’re on a big drive to restructure our business and organise ourselves in a manner that will enable us to deliver more effectively to our clients. You have to reinvent yourself or create new revenue streams to sustain your business, so we are also looking at product developments in our space that will sustain our business and growth in the next three to five years.

Externally, I’d like to see some stability in the post-trade market after the DIS [Debt Instruments Solution] implementation last year. We need to bed down the new bond settlement process and restore confidence from a client and investor point of view. I would also like to see the discussion on the development of the CCP [central counterparty clearing house] for equities move forward in 2018.

Harwood-Jones – The strategies we have in place are around automation and robotics. At the same time, we are working hard to support our clients across the end-to-end service chain.

Externally, we aim to drive market evolution. We have been invested heavily in our advocacy team to engage with local actors to ensure that market practice is moving towards best-in-class standards on a worldwide basis. On the ground that means use of SWIFT, for example, as a standardised messaging format.

Van der Berg – At an organisation perspective, we don’t have a presence in South Africa, it’s pretty much a representative office. We are looking at an onshore South Africa offering.

From a technology perspective, our aim is to keep up with all the changes so that we can streamline our onboarding process. I had a meeting with a client that we assist in Mauritius, but they don’t use fund administrators in South Africa, and they were doing the Fatca/CRS onboarding themselves. They took on one investor and they had classification for 140 people behind their investor. That’s something you don’t want fund managers to be doing. They should be fundraising and looking at opportunities. This is where we see ourselves as a business partner to our clients, taking this unnecessary burden off their shoulders.

Le Roux – We went through an interesting experience last year and faced a lot of scrutiny. What we’re focusing on at the moment is helping our clients have oversight over us. There’s a lot of talk about due diligence at the conference, but at administrator level it is still in its infancy. So we’ve built a framework to help our clients perform due diligence on us.

We want to help Africa with things like independent fund administration. When going elsewhere in the continent, we want to respect their sovereignty, which means setting up offices in country, and performing ‘knowledge worker’ roles in-country. If they have specific ‘indigenisation’ laws, we need to make sure we get the right stakeholders within their business. Africa is a big focus, and we want to help them grow their capital markets.

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