For Ucits funds to remain successful in Asia it may be necessary to consider the needs of the Asian-based investor more.
Andrew Law (HSBC Security Services), Siu Chan Kwan (Citi),
Sam Lam (JP Morgan Security Services), Michael Chan (BNY Mellon Asset Servicing)
Part 1: Chinese regulators' long term-plan, Ucits and passporting
Funds Global: As providers of services to asset managers, and with a thought leadership role in the industry, what do you think the Chinese regulators’ long-term plan is for the asset management industry?
Siu Chan Kwan, Citi: I think the Chinese authorities would like to move the economy’s financing away from the banks. A lot of loans and financing in China are still coming from banks and the Chinese authorities would like to see the capital markets play a bigger role in this field. The asset management industry is a key component to make this happen; therefore, I think we will see the authorities put more effort into helping the asset management industry grow and play a bigger role in this development.
We have seen a lot of volatility in the Chinese stock market, and one reason for that is because there is a lot of retail participation. In fact this is fairly normal across Asia. That market mechanism is partly what drove the volatility. Therefore, a growing asset management industry and a development of the institutional side of the business may, over time, reduce the retail participation within the stock market. The result of that would help bring down volatility, which would be good for the industry and the market in China.
The authorities also wish to grow the asset management industry on an international level and we have seen a lot of development on this in the last few years. For example, Chinese fund managers started moving out of China and setting up in Hong Kong. In fact some of them have already gone as far as Luxembourg and Dublin. This movement will continue.
Sam Lam, JP Morgan: I agree with Siu Chan, the long-term goal is to promote the healthy development of the fund management industry. China has made great steps in the past decade in terms of promoting the well being of the fund management industry. China will soon introduce a revised version of the Fund law for Securities Investment, therefore further showing that they are taking all the right steps to promote a well-developed and well-governed fund management industry.
The law is at draft stage and it is being circulated among the senior managers in the local fund management industry. There is some speculation about the content but there is not a lot of insight in terms of what the revisions are at this stage.
Kwan: Another thing that relates particularly to the asset management industry is the desire to have more oversight and supervision of private funds [funds operating on a private-placement basis]. In China there are a number of private arrangements, which fall outside the remit of the CSRC [China Securities Regulatory Commission]. In the latest draft of the regulation, there was an attempt to bring those arrangements under CSRC. If this is approved, those fund managers who are very active in private funds can expand their services to retail investors.
Michael Chan, BNY Mellon: I certainly concur with what my peers around the table said. In China everything is done in a very deliberate and very controlled manner. There’s no question that [regulators] want to improve their professionalism and their understanding of the industry. The Qualified Domestic Institutional Investor [QDII] sector, which began around 2006-2007, is a good example of how they encourage their local asset management industry. When that development began, many of the local managers hired foreign managers as sub advisers. Since then, they’ve moved on and learned from them [the foreign managers]. Now, not only are the local managers moving out of their own boundaries in China, but they are moving to Hong Kong, and as Siu Chan said, even to Europe. So what regulators are doing to help their local industry develop is quite apparent.
Andrew Law, HSBC: The fund industry in China is very young. The open-ended funds business is only about ten years old. When you first bring a product to market, people trade it like it is a security and this is evident in the volatility. You had funds that people jumped into and that were suddenly billions of dollars in size, then people pulled their money out of these products when the price increased. This led to a situation that was not particularly beneficial to the funds industry because managers had funds that could be pumped with money one day and decimated the next.
I think the regulators would like to see a more stable development of the industry and they’ve been doing a number of different things to ensure this happens.
For example, there is the draft regulation, the revised fund law, that is in circulation within local fund houses, and this covers how private funds should be regulated, the relaxation of the criteria for the launch of public mutual funds, and also the setting up of a funds industry association amongst other things.
Although young, China is quite advanced in the way that practices are implemented as they have learned a lot from the rest of the world and have many products and a sophisticated infrastructure. The regulator is taking stock of all this and trying to see what the next step is. As Siu Chan said, recently there has been quite a bit of talk about private placements. These private funds target a few wealthy individuals and are obviously different from the public funds that are distributed by the banks. Hopefully, this new regulation will clarify the roles of different regulators, and how they interact in the fund industry.
Kwan: I believe there are plans for Chinese regulators to form a fund management association in China, which we haven’t seen yet and therefore we don’t know exactly what its role will be. But one possibility is for the industry to regulate itself on certain areas, which shows that the Chinese regulator is taking steps to move the industry forward.
Law: A further good example of how the Chinese are taking lessons learned from elsewhere can be seen with reference to the GSTPA [Global Straight Through Processing Association] which was trying to shorten the settlement cycle in the US and other parts of the world. In China, the settlement cycle is already very short and efficient, having assessed what the success has been in other markets. Furthermore, unlike other countries China does not have legacy problems so they can just set the target of what they would like to achieve and move forward with that.
Funds Global: Does Asia have equivalents of the European Alternative Investment Fund Managers [Aifm] Directive and America’s Dodd-Frank Act? In Europe and America respectively, these pieces of legislation are causing fund managers, custodian banks and other market participants a great deal of issues in trying to work out how to implement them. They both are a result of the financial crisis which we’re told time and again that Asia was largely unaffected by. Nevertheless, how is the regulatory environment here changing?
Lam: The short answer is no, as there are no pan-regional regulations similar to these two pieces of legislation. Furthermore we currently do not have a pan-regional regulatory framework to promote similar regulations.
Kwan: In Hong Kong, the piece of regulation that has had a major impact is Ucits IV. We already have our own version of the Key Investor Information Document [Kiid] in Hong Kong called Key Facts Statement (KFS); in fact I would say we are actually slightly ahead of Europe. We don’t have the regulation you mentioned but it may affect global service providers in Asia, like ourselves.
For example, last year we spoke to a number of hedge fund managers in Asia about the new directive, because in the run up to its introduction, there was a lot of speculation about how bad it would be. In the end, it wasn’t as bad as people thought. Over the course of last year many hedge fund managers here were wondering what they had to do to make sure they capture the alternatives business in Europe. Bearing in mind that quite a lot of them had money coming from European investors, they questioned whether they needed to convert their funds into Ucits products. Having said that, we now face a very long implementation period of the Aifm directive and that does take away some urgency for people to do something immediately.
The main implication of the Dodd-Frank Act is likely on the hedge fund rather than the longonly side of the business. Certain parts of it may require fund managers with US investors to register fully with the SEC [Securities and Exchange Commission]. That would change the whole game for those managers because it would be very expensive to comply with the SEC regulations. We have to wait and see because that particular piece of regulation has not been finalised yet. Once we have more details, I am sure we will be able to tell how players in Asia will be affected and as a result, what impact that may have on service providers like ourselves.
Chan: The quest ion is, how does it affect the people that are covered by the directive and are doing business out here? As you just said, Asia wasn’t impacted by the global financial crisis in the way the US and Europe were. I think that all the countries in Asia Pacific are at a different stage of development. The Aifm directive and the Dodd-Frank Act are probably more relevant in countries like Singapore and Hong Kong where a lot of the foreign investment managers are based. They’re not a concern for some of the more emerging markets like Thailand, Korea or Malaysia. These countries’ concern now is how to slow down the hot money coming in as a result of QE2 [quantitative easing].
Law: Asia is not like Europe or the US. The US is a large single market and in Europe there is the EU, which has led standardisation across the continent. In Asia you have different countries, which are all at different stages of development. You have China which is developing, Hong Kong which is fairly robust and advanced, Singapore which is similar, and also Malaysia and South Korea. We have regulation, particularly when it comes to alternative products for retail investors. Both Hong Kong and Singapore have their own version of authorised alternative fund products, and permissible product range. In Asia, different countries have their own regulations and registration process for fund managers. So there isn’t a direct Aifm equivalent as such, but since 2008 there has been a focus on investor protection. DoddFrank is an attempt to reduce systemic risk. The implication is that non-US fund managers may have to register with the SEC in the US.
Both pieces of regulation you mentioned will have implications for Asia but it is early days and we still don’t know how those will play out. Also, everything should be considered fairly and I think we will probably benefit from them as well in the long run. There will be implications for activities in Asia and as a service provider, we can look at it with a positive attitude and see how we can benefit from the changes as well.
Kwan: While we don’t have a pan-Asia arrangement, we did see different regulatory reactions from different markets. Most of the markets are fairly relaxed because Asia was not badly burnt or affected by the credit crisis. In Hong Kong it’s slightly different because the regulator has become very conservative when approving retail products with derivatives in them, even when those derivatives are for hedging purposes. The major reason for this apprehension around derivatives is that they’re still not entirely comfortable with these instruments following the issues with Lehman minibonds. You don’t have these issues in other markets, like Taiwan, so the regulators there have a more relaxed approach.
Lam: Asia is obviously still very fragmented; every country has its local laws and regulations when it comes to fund distribution, according to their local fiscal policy. However, there is coordination among the regional central banks and regulatory bodies to discuss and share best practices but not to the extent of promoting pan-regional regulations for the time being.
Chan: Aifm and Dodd-Frank were both very reactive regulations following the crisis. There is a bit of a pendulum effect as some people argue things have now gone too much the other way.
In Asia, people see these regulations being issued in Europe and the US and they have the time and the luxury to learn from them. In my opinion, they will pick the best outcome of these changes and implement them over time. So, is it going to affect the region? Absolutely. How is it going to affect the service providers? A lot of our clients are global names, so they have to comply with those US or European regulations when they do business out here. It goes back to the service that we provide, and I think we can cover these developments very well.
Funds Global: Do you envisage the continued success of Ucits funds in the region? And what is the Ucits industry’s scope for development? For example, is pan-Asian passporting a possibility?
Kwan: The development of Ucits will continue. It is a very good brand and one that is recognised very much in Asia. In the past, it was primarily been driven by inflow business. North American and European fund managers would manufacture products in Luxembourg or Dublin and then export them to Asia. Whilst this will continue, we’ll start to see some local players using Ucits too. In the past they focused on the domestic market and did not want to look beyond their home boundaries. But now some of the more successful ones want to expand and cross-sell their products into other markets across Asia. The more ambitious ones are looking beyond Asia already. Once you have that sort of focus or strategy I don’t think any solution available is better than Ucits at the moment. From that perspective we see a lot of scope for development from Asia going forward.
Law: I agree with Siu Chan. Ucits has been a very successful product in Singapore, Taiwan and Hong Kong, and it will continue to be successful because these three countries have many well-recognised international fund management institutions. If they already have those products, and they’re permissible and authorised in the domestic country, why not use them? Although in Asia we have fund managers with good brands, they are still relatively young and not yet global. Although efforts are being made to set up Ucits from South Korean and Chinese fund managers, the existing Ucits funds are going to do well unless there are some dramatic changes in the regulatory landscape.
Chan: Statistics over the last three years or so claim that 40% of the Ucits asset gathering has been from the Asia Pacific region. As you all have said, everybody recognises the brand. But I’ll take it from a different angle. Before the global financial crisis, we saw each of the local countries in the region wanting to raise the barriers to entry into their home market because each country wanted to be the regional financial hub of Asia, whether it’s Singapore, Hong Kong, Shanghai, you name it! After the crisis people began asking questions, even though we weren’t as impacted by the Madoff crisis. Local industry players and some of the local regulatory folk asked us about Ucits and what the crisis meant for citizens holding Ucits funds in their pension plans. Another question they asked was, ‘What does it mean if Ireland went under [bankrupt] and all these funds are domiciled there?’
Being global custodians, we understand that the assets are segregated and that everything is safe. But a lot more people are asking, ‘Should we continue to let our citizens and retail market buy Ucits funds and allow monies to go overseas? Or do we start looking at something more pan-Asian?’ The Australian Financial Services Council, in conjunction with PwC, wrote a paper about a year ago on the possibilities and challenges of Asian fund passportability. Everybody is aware that they’re most likely going to leverage off the Ucits structure that’s in place and, hopefully, in the next five to ten years, put something together locally.
©2011 funds europe