Asset servicers are impacted by the regulation imposed on asset managers, say the particpants of our roundtable held in Singapore. The discuss challenges and opportunities that have emerged as a result. Chaired by Stefanie Eschenbacher.
Stewart Aldcroft, managing director and senior advisor, securities services, Citi, Asia Pacific
Tony Lewis, head of asset servicing, HSBC, Singapore
William Mak, country manager and head South East Asia, Northern Trust
John Mason, vice president, business development, State Street, Asia
Funds Global: How is global regulation affecting the businesses of asset servicers and how does this tie in with the requirements set by the Singapore regulator?
Tony Lewis, head of asset servicing, HSBC, Singapore: Increasing global regulation is adding cost and risk to what we do as asset servicers, requiring us to constantly engage with regulators and our clients. We are not divorced from regulation in Europe and need to be mindful of changes in liabilities to our business, in areas such as custody. We support the objective of providing greater protection for investors. Singapore’s Code for Collective Investment Schemes was updated last October, a move that brought it more in line with Ucits regulation. Costs associated with increased regulation would be reduced if developed consistently across jurisdictions. In Singapore, there are still challenges associated with the responsibilities and capability around derivatives pricing, which are well established in Europe but new here.
Stewart Aldcroft, managing director and senior advisor, securities services, Citi, Asia Pacific: Singapore and other fund domiciles in Asia tend to have lighter regulation, at least compared with those in the United States and Europe. Globally, it is predominantly the asset managers who are being regulated. Asset servicers, however, are affected by regulation imposed on asset managers – the Foreign Account Tax Compliance Act (Fatca), Dodd Frank, Markets in Financial Instruments Directive Review, the Alternative Investment Fund Managers Directive and the Retail Distribution Review. A lot of smaller asset managers, who do not have the resources to deal with this regulatory burden, are struggling to keep up.
Global asset servicers do have some responsibility to support smaller ones.
William Mak, country manager and head South East Asia, Northern Trust: Rather than taking a country-specific approach, we look at all the regulation on a global basis. The objective of this approach is to then bring those to have impact and the repercussions back to our clients, be they asset managers or asset owners.
John Mason, vice president, business development, State Street, Asia: Regulation creates opportunities for us in terms of the type of services that we can offer to institutions. For example, concerning enhanced regulatory reporting, changes that are made to the way derivatives are serviced and aspects of Solvency II. Some asset managers will refocus on the core of their business and consult asset servicers for solutions in the back-office space.
Funds Global: Have regulatory changes caused you to focus on different regions to avoid bill that covered specific markets, such as the United States or Europe?
Lewis: It is not possible to be non-compliant with global regulation. Some asset managers, however, will certainly take a look at their investor base and their investments as a result of the restrictions imposed by Fatca, for instance.
Mason: Fatca has certainly given us reason to think about our business model. When it comes to regulation we need to understand the implications for our own business models and, most importantly, communicate them to our clients. Regulation is incredibly fluid; there are some 250 changes or recommendations that came out of Dodd Frank and will affect our business in the next two years. Our clients do ask how we are dealing with regulation and what changes we are making to our business model as a result of Fatca or Solvency II.
Mak: Those who look beyond the Asian markets to Europe and the US, have no choice but to comply with Fatca. However, those who are more focussed on Asia can probably be a bit more lax about it. Some may not see the need to look at Fatca for now, although at some point they probably will have to, at least if their long-term strategy is to build a global business.
Mason: Besides, regulators in Asia have their own agenda to further the development of their capital markets.
Aldcroft: Perhaps regulation would be less fragmented if the four big fund markets in Asia – Hong Kong, Singapore, Japan and Taiwan – consolidated their thoughts and communicated them with regulators elsewhere in the world.
Funds Global: As you spend more of your resources on trying to comply with regulation, do you feel like you compromise other parts of the business, such as expansion, new product or service development?
Mak: On the contrary, we have been developing products that allow better or new types of reporting on new regulations. We, like every other global custodian, have had to look beyond your basic custody and accounting services. We had to look into risk, performance and regulation that emerged as a result of the global financial crisis.
Mason: A lot of the regulation is about data management. Some of the questions we have asked ourselves are: How can we get data to our clients? In what form do they need it? How can we achieve more granularity, more transparency and speed-to-market services?
Added value services, such as risk analytics, performance measurement and compliance are some of the services. The prime example is over-the-counter (OTC) derivatives and collateral management. We act as clearing agents in the OTC derivatives space and provide independent valuation, so these are all the types of services we have all been working on for the last three or four years as an evolutionary process of the whole business model really.
Lewis: We are responding to client needs and regulation has changed their needs.
Funds Global: How established are best practices in the operational space in Singapore?
Mason: Singapore is a mature market with both regional and global asset managers so best practices have been adopted and are well established. Following the financial crisis, however, the entire industry has reviewed both front and back office operations. Amid a sustained low-yield environment, and tightening regulations around asset manager activities, their operating models are increasingly being tested, triggering a significant upsurge in outsourcing.
Lewis: Best practices have been widely adopted in the operations space, although levels will vary somewhat from asset manager to asset manager. When it comes to onshore, regulated funds, we do see a diversion of best practice around operating model and degree of proficiency. The degree of diversity provides an opportunity for the sharing of best practices and partnering with customers to ratchet up the levels of automation, for instance – whether that is in trade processing, valuations, corporate actions or transfer agency.
Funds Global: As competition from other fund domiciles steps up, what does Singapore have to do to retain its position as a fund domicile?
Lewis: Singapore is positioning itself as a trade hub, as a wealth management hub and as a financial service centre. It clearly has scale and gravitas. This status is a result of deliberate and purposeful development of regulations as well as encouragement by the government for the financial services industry. Increasingly, we are seeing our clients set up regional offices here. It is also an attractive place to live.
Mak: One of the many advantages Singapore has over other fund domiciles is the good co-ordination between different ministries, which allows them to create a system where expats want to come and live here.
Aldcroft: Singapore has developed very much as a booking centre for the private banks of the region. Private banks may place deals elsewhere in the region but they come through Singapore for administration and transfer. It has established itself as an administration hub as well. Singapore is trying hard, but there is no way we can deny that Hong Kong dominates Asia at the moment. Hong Kong has also the advantage of being close to China and the opening up of the market has definitely put Hong Kong in the spotlight.
Mason: Singapore has everything it needs from an asset servicing point of view: auditors, lawyers and sophisticated capital markets. Besides, Singapore is trying to position itself as a hub for derivative clearing. The challenge is a small pool of labour and it is not clear how providers, such as ourselves, can position themselves onshore or offshore.
It becomes expensive for us to do it from an onshore perspective. Just like all asset providers, we look at potential regional hubs and where best to establish them. First of all, we consider how we can attract a deep pool of experience from a regional perspective. To support our business model, we have established centres of excellence throughout the region that bring capacity, scale and efficiency.
Funds Global: Is Singapore struggling to attract or to retain talent?
Mason: There is no drain on talent in the way we have seen in other countries, though Singapore is a small country and has a small labour force.
Lewis: It would be difficult for Singapore to have developed its own work force of experienced industry professionals in a short period, without importing talent. There is no doubt that there is a growing pool of skilled professionals here and Singapore will continue to produce local talent in tandem with this.
Aldcroft: A lot of the low-level manufacturing jobs have been moved across the border to Malaysia, away from Singapore.
Mason: China has a huge, qualified labour force that can do some of the work for 20% the salary they would get in Singapore. They are highly motivated and well qualified. Many of them aspire to work for international companies.
Aldcroft: The biggest challenge is retaining talent because people move around and there are never enough good people at the senior management level. One of the problems we face are language qualifications, for example. Many companies have tried to move staff from Singapore to China, but their Mandarin was not good enough. In the end, they chose people from Taiwan. Over two million out of 20 million people living in Taiwan have already gone to China. In Singapore the quality of English is better, even than Hong Kong, which is a key factor.
Funds Global: How do you expect the asset servicing landscape to change over the next couple of years?
Mak: We will see a lot of new regulations, some of which yet to be implemented. Demand for subject matter experts from service providers, such as ourselves, will rise as a result.
Lewis: Outsourcing – and asset managers’ increased desires to do so – will bring major opportunities. We have already seen more demand for outsourcing, mainly in the middle office functions. This is evident in the hedge fund space, where there continues to be high degrees of outsourcing. No doubt, other asset managers will follow suit. Distribution is another interesting, and potentially rewarding, field.
Operationally, transfer agency and sub-transfer agency business can still be a challenge, particularly when it comes to creating scalability, given the lack of automation in that space from the end investor through a distributor, to a transfer agent.
Additionally, most asset servicers will have plans to build a global distribution model. We are on a global platform for our transfer agency business, but the missing link is still ensuring the distributors are hooked up to that from a technology perspective.
There are a lot of solutions out there and we see the industry attempting to get that automated.
Mason: Asset servicers are more technology companies that just happen to be banks, to be blunt. We just provide almost IT solutions for our end clients. Historically, they have looked at the data and how we can manage the data for them. First it was hard copy, then we moved to platforms.
Today, our business is all about what solutions we can provide to our clients, whether they are looking at direct reporting, regulatory reporting or investment analytics. We ask ourselves how we can support them in terms of electronic trade transfer or corporate action processing, for example. There will be a bigger focus on aspects like performance measurement and risk analytics, including from the derivatives side and the management of collateral.
Mak: We expect a lot of investment in new technology, to be able to cope with all the new regulations and stay competitive.
Aldcroft: Most of the products and services for asset servicing are already out there; it is now a question of how they are connected. One of the challenges that has become more apparent centres on currency and currency dealing by asset managers. There will probably be more to come in the exchange-traded funds (ETFs) space. The difference between servicing traditional funds and ETFs is significant. However, it is not understood well.
Lewis: Changes in the foreign exchange space, for example, continue. As local currency markets are opening up, regulators are making changes to encourage further development. Asset managers want to better manage risk and value of trades, for example, placing fixed income purchases with an institution and simultaneously executing the associated foreign exchange, closing out any foreign exchange risk.
Mason: Broader than that, asset managers are also looking for foreign exchange platforms. Speed to market and the opportunity to go across counterparties to get best execution are key. The same will happen in the OTC derivatives space, which will move towards electronic platforms eventually. There will also be some consolidation.
Aldcroft: The question is do we need consolidation in the asset servicing business? It is evident that there are too many doing the asset servicing business.
In the Asia region, particularly related to European bank ownership, asset servicers may decide they can no longer afford to be in a market where they are not up to scale.
Funds Global: How does demand for local regulated products compare with international Ucits products? How do you rate efforts to create an Asian equivalent?
Aldcroft: In Singapore and in Hong Kong, between 70% and 80% of all the funds being sold in the market are either Ucits or Ucits-related products. The market is dominated by bank distributors, which demand quality products, such as Ucits. In Hong Kong 80% of the funds are sold by banks and for Singapore the number is 85% or even higher. Ucits funds dominate the market. The question is whether there will be an alternative? While this is desirable, I cannot see this being realised any time soon. The market in Asia is so tightly controlled that, unless the distribution model undergoes fundamental changes, such a scheme will not be successful.
However, there is still the prospect of some form of Asian regional passport. Key is to get the big players – Hong Kong, Singapore and Taiwan – together. The problem is that there would be a very low common denominator. Other markets – Indonesia, Thailand, Cambodia, Vietnam, maybe the Philippines – are not the prime markets for funds distribution within the region. We could end up with a scheme that has one regional passport that most international fund firms would simply ignore. Other countries – Japan, Korea and China – have massive fund markets that are almost entirely domestic.
Mak: Singapore and Hong Kong are really the main markets for Ucits funds in the region, but the idea of an Asian regional passport is obviously also politically driven. The challenge, though, is that smaller countries like Thailand have regulations surrounding tax that prevent international funds from being distributed locally.
Aldcroft: The real danger for Ucits regulation is that Ucits IV is already quite a step beyond where Ucits III was, allowing derivatives in a way that Hong Kong, Singapore and Taiwan oppose.
Funds Global: Even Ucits VI is now being discussed.
Aldcroft: Representations are being made to the European regulators, asking them to slow down. It is already too much for Europe. If Europe does not want to lose its dominance in Asia, it needs to slow down.
Funds Global: Ucits VI is rumoured to be the first Ucits directive where the European Commission will consult Asian regulators, asset managers and associations. What do you expect?
Lewis: Asking Europe to create a framework that encompasses all the differences we have in the different jurisdictions in Asia is a tough ask and unlikely to happen in the short term.
The question is whether we should concentrate our efforts on trying to reinvent something that has already global recognition, buy-in and engagement? I do agree, however, that Europe needs to engage more with Asian regulators. There is a desire here to ensure that funds sold to investors are well managed, transparent and liquid.
Mason: Regulators have accepted Ucits, broadly, in their current form. Ucits IV and Ucits V might change that because they allow derivatives. As a consequence, the regulator in Hong Kong, for example, has rejected some products.
The Association of Southeast Asian Nations and Asia-Pacific Economic Co-operation are both currently embarking on two different initiatives for Asian fund passports, which demonstrates that there is political will to move this forward.
However, it took Ucits 25 years to get to the stage it is now so Asia is unlikely to form something in a short time. Asia already discussed such an initiative in 2000 and needed nine years to come forward and push the initiative ahead. They are talking about mutual fund recognition and fund passport frameworks being in place by as early as the end of this year which, in itself, will not be easy to achieve.
©2012 fund global