Has harmonisation between Asian markets improved over the last few years? What challenges still remain?
Gordon Russell: Harmonisation has been an industry buzzword for a number of years. However, the Asian financial markets that cover multiple time zones, many different languages and complex regulatory and governmental frameworks have struggled to harmonise.
Each market, in conjunction with local regulators and government bodies, has a different view on what is needed to be competitive in order to attract multinational corporations, financial institutions—both sell- and buy-side—as well as service companies that cater for these sectors. Quite often these stances create a barrier for harmonisation, which creates a paradox due to the necessity to have a framework in place to be able to comply with global standards.
This constant balancing act between being competitive in the Asian market and being a good global citizen drives the speed of harmonisation in Asia.
Kelly Ashe: Harmonisation between Asian markets has undoubtedly improved in recent years thanks to various fund passport cooperation initiatives, and momentum towards automation continues to accelerate, with participants stepping up their efforts to motivate and incentivise service partners to embrace automation.
Alongside the improving infrastructure available with the various clearing, settlement and order routing organisations, these efforts have resulted in increased straight-through processing (STP) rates across the region. The predicted trade automation revolution is certainly well underway, but it does still have a fair way still to go.
We also see opportunities continuing to emerge from the opening up of the Chinese market and renminbi (RMB) internationalisation, alongside the continued efforts on the various cross–border fund passporting initiatives, each happening simultaneously.
These changes, however, still have significant challenges to overcome. The main challenge as we see it is the lack of real unity in a diverse region. Obviously Europe is very different because it is driven by the EU, which harmonises a lot of these things. But with no Asian equivalent union, it appears that persuading participating countries to open up to each other remains a challenge in itself.
Even with programmes expanding and continually evolving, we can identify other main areas of focus—tax and distribution rules and restrictions on foreign investment, for example. The issue of tax, specifically producing an outcome which is accepted as fair and reasonable for all concerned, will have to be addressed for the bigger, more regional Asia Region Fund Passport (ARFP) initiative.
Alex Kech: There are many initiatives aiming at harmonising Asian capital markets practices and processes, such as the Association of Southeast Asian Nations (ASEAN) +3 Bond Market Forum, the Asian Funds Standardisation Forum, and the Asia Pacific Financial Forum.
SWIFT itself has been facilitating the creation of national market practice groups aiming at getting domestic practices closer to the international standards established by the Securities Market Practice Group (SMPG).
We can also highlight, in the funds space, the establishment of three UCITS-like passporting schemes. Though there has been progress, we are far from the level of harmonisation expected from a region looking at becoming the next global growth engine.
However, the public and private sectors realise this and are working on it. One area where a lot has been achieved is in the adoption of international standards such as ISO 20022 by post-trade securities infrastructures, such as the Singapore Exchange, the Japan Securities Depository Center and the Australian Securities Exchange.
This has also been adopted by some central banks for their real-time gross settlement systems, for example in India, China, Japan and Brunei, which de facto implements a harmonised layer of processes and data infrastructure that will contribute to regional harmonisation initiatives.
The adoption of the legal entity identifiers for regulatory reporting by various Asia Pacific markets is another example of harmonisation initiatives that will bear fruit in the future and improve life for everybody.
What has been the main driver of this harmonisation? Regulation? Improving cost efficiency? Or something else?
Ashe: All of the above. Obviously, cost is a driver but this is not the only one. Risk and speed are also considered a priority by market players.
Essentially, these countries know that they need to do something to make it easier for foreign investment, in order to take advantage of the interest and investment opportunities in the region. Opening up local markets to foreign investment is a popular ideology and has proved incredibly successful in other markets, but it presents practical difficulties for a region that is as politically and culturally diverse as Asia.
That said, service providers, asset managers, distributors, regulators and all industry participants, including software providers, are trying to overcome this.
The mutual recognition and fund passporting initiatives evolving throughout the Asian region pose challenges regarding the fund administrator and transfer agent’s capability to operate in multiple jurisdictions, to support both local and global regulatory reporting, and to communicate with clients using local languages, all in the local time zone.
The more traditional systems that have been historically available are expensive to maintain, can be limited to one market or fund type and quickly become obsolete in such an environment of constant regulatory change and emerging new complex fund distribution strategies. Global fund administration systems and distribution platforms are a key factor in the likelihood of success, and are proving instrumental across the region.
Kech: One of the main drivers is regulation from regional groups such as ASEAN or China to further integrate their economies, banking sectors and capital markets. Efficiency gains and cost reduction are also important. The region wants to increase intra-region trade, banking and finance.
The realisation that it cannot work with the current, very domestically-focused infrastructure pushes the public and private sector to collaborate to improve the situation.
Russell: With harmonisation of regulation and accounting standards in the North American and European markets looking to drive efficiency, Asia has strived to adopt these where possible to help reduce operational risk and enable cost savings.
It is important to note that each Asian market is looking at the topic of harmonisation as it relates to the needs of local market participants compared to global market participants. Every jurisdiction needs to balance the need to remain competitive with protecting its own market participants by not reducing the barrier of entry.
Each Asian market has functioned in isolation for many years and, as a result, has already set up links with the outside markets. As such, the need for harmonisation is driven by external factors, such as the growing market competition for capital and the ability to offer local customers trade and investment opportunities in external markets.
A cost-benefit analysis is crucial for many firms looking to harmonise processes. They need to assess whether the investment is justified and would lead to increased revenue, better client offerings or reduced operational risk. However, in some cases having to deal with two or more different regulatory bodies may lead to increased cost of doing business.
How have tech developments improved harmonisation?
Kech: Richer XML-based standards such as ISO 20022, new modular technology offerings and financial technology companies coming in with innovative technology are all enabling the modernisation of payment and securities infrastructures. Instant payment infrastructures are implemented in Singapore, Australia and Hong Kong.
Post-trade securities infrastructures such as central securities depositories are renewing 20- to 25-year-old mainframe technologies, and cross-border linkages are being established, all evolutions that would not have been imaginable 10 years ago. In the funds space, robo-adviser tech is reaching Asia and alternate distribution channels are booming.
Russell: Investment in technology has been a crucial foundation that has helped financial institutions to harmonise post-trade processes. Flexible technology that can be deployed in different countries and support different post-trade processes and regulations helps firms to standardise around one common IT infrastructure, instead of managing and supporting multiple systems. It also reduces operational risk by providing a common platform with the same permissioning and data structures for internal and external reporting.
As each market decides to embrace global and regional harmonisation, a technological solution that can handle changes without the need for whole-scale upgrades or rewrites gives market participants the flexibility to implement their business strategy while being confident that the infrastructure and processes they have in place can easily scale.
What kind of innovations do you see making a difference to Asian securities services in the future? Could they lead the way to a more harmonised market?
Ashe: The introduction of standardised transactions processing systems and application of new technologies for funds distribution would undoubtedly improve and enhance transaction efficiency within the Asian market. As the funds market grows and expands across domestic borders and cultural divides, so does the need for greater standardisation of systems and automation of processes.
We talk a lot about the advantages of automation and harmonisation for the funds industry and although this might seem obvious, we have to recognise that European asset managers and distributors are in an advantageous position when it comes to embracing new technologies as they generally have the benefit of operating in a well-established cross-border environment governed by regional legislation. This is quite opposite to the situation for asset managers servicing the Asian market and their providers by default.
The most basic requirement for the successful processing of transactions across borders, whatever form those borders take—geographical, cultural or otherwise—is the adoption of a clearly understood method and language of communication. The industry is fortunate to already have a number of standardised systems to choose from that are already widely accepted.
The use of standardised messages and reference data ensures that the data exchanged between institutions is unambiguous, quickly processed and less prone to error than manual transmissions, which reduces costs and mitigates risks. Exception processing then becomes the norm.
We know that standardisation and greater automation in the Asian funds industry will come, and as a software provider we are currently focused on assisting our clients to resolve the known problems and disparities.
This can include integrating legacy single market/product platforms onto modern global applications such as our PFS-PAXUS product, keeping track of changing distribution models, the opening of new routes for payments and investments, ensuring know-your-client due diligence, and simply accommodating diverse languages and cultural practices within a global regulatory environment.
Kech: The adoption of ISO 20022 by most, if not all, domestic markets for the automation of securities post-trade, in parallel to the implementation of modular and agile technological platforms, including distributed ledger technology in Australia, will make a difference.
This will allow an enhanced domestic offering in terms of products, speed, liquidity, more cross-border linkages leading to more regional trading and settlement activities, and the creation of a virtual regional market. But it will take some more years.
Though the will for change and harmonisation is clearly present, the speed of regulatory and legal framework adaptation to enable it remains slow, with things like conflicting objectives between countries, different levels of development and protectionism issues remaining.
Russell: There have been a number of cross-border initiatives in Central and Southeast Asia but these have struggled to gain traction, as the promised common benefits to all were not well-aligned. The pressure stemming from two main areas will affect the speed of harmonisation.
The first is global standards that have been fully adopted by western markets. Implementation of these standards in Asia, however, will take some time due to market fragmentation and the varying speeds at which each country and region implements them.
Various cases of misconduct resulting from the lack of oversight, regulations or infrastructure, such as the Bangladesh Bank cyber heist, form the second compelling reason to harmonise in Asia. That said, according to some firms, with harmonisation comes a common place for people to exploit systems and thus increase systemic risk. So it may well be that in fragmented markets such as Asia, with a lack of cross-border efficiency, those risks are actually reduced.
Nevertheless, investing in a flexible, regional infrastructure remains key as it provides firms and regulators the required comfort to conduct, manage and oversee the whole of a financial institution’s activities.