What will Asia’s much-mooted fund passports mean for transfer agents? Experts discuss the possibilities
How is Asia shaping up for transfer agents?
Etienne Carmon: The type of services that transfer agents are offering in Asia is changing. Traditionally, transfer agents such as Caceis have helped foreign managers to distribute products into local Asian (or European) markets, but as the number of market harmonisation or cooperation initiatives in Asia increases, transfer agents will increasingly be driven to offer services that cater to foreign asset managers, which create local law products for distribution in the same local market.
However, this new transfer agency trend is not simply a new market opportunity for the foreign transfer agent, it will become a necessity as initiatives such as the Asian passports and mutual fund recognition between Hong Kong and China will not include UCITS (not certain yet for the mutual fund recognition, and even doubtful for UCITS master-feeder structures).
Nevertheless, with a steady growth in pension fund numbers and sizes, the market for local-to-local distribution is a growth segment and transfer agents such as CACEIS are keen to enter it and bring their experience and expertise gained in Europe.
Remi Toucheboeuf: Asia is offering new opportunities for transfer agents. Transfer agency is no longer just an administrator role (handling subscription, redemption and sending investor reports), it has transformed into a fund distribution support role in recent years as more fund management companies are interested in setting up presences in Asia or taking their UCITS products to Asia.
Fund management companies require insights on the distribution landscape, regulatory requirements and infrastructure to support their fund distribution strategy. Transfer agents are playing an important role in sharing the information with fund management companies. The service they offer affects the investor experience directly, too. Local representative services are required to support clients, for example, BNP Paribas Securities Services have ground support in Hong Kong and Singapore, same time-zone and language support, and is able to offer cross-border fund distribution.
Kelly Ashe: Asia continues to be a strong and important area of growth for many transfer agents, both local and global. As expected, 2014 has seen momentum towards automation continue to accelerate, with transfer agents stepping up their efforts to motivate and incentivise industry participants 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, especially in Hong Kong, Singapore and Taiwan. The predicted trade automation revolution is certainly underway.
We also see potential opportunities for transfer agents emerging from the opening up of the Chinese market and RMB internationalisation, alongside the continued efforts on the Asia Region Funds Passport, Association of Southeast Asian Nations (ASEAN) Collective Investment Scheme (CIS) and Hong Kong-Mainland China mutual recognition cross–border fund ‘passporting’ initiatives.
Chee Seng Lok: Considering the number of ongoing cross-border initiatives underway in Asia, including ASEAN CIS, ARFP, StockConnect, China Hong Kong mutual recognition and renminbi qualified foreign institutional investor (RQFII), we predict that the region will be centre stage for attracting investment inflows over the coming years and that Asian fund managers will emerge as worldwide leaders in fund management.
The fund passporting schemes in particular will contribute to this growth and provide an ‘alternative’ option for managers that historically did not want to deal with the challenges of establishing a physical presence or manufacturing local funds. From an operational perspective, we expect to see an emergence of local centers of expertise, such as Luxembourg or Dublin in Europe.
This growth presents many opportunities for transfer agents to partner with fund managers, helping them to access the global market and manage their new scale. At the same time, the continued interest in shariah-compliant products is a big opportunity for specialist support, while efficiency, risk management and innovation will be important differentiators to attract business.
UCITS will continue to be a strong brand for cross-border distribution in Asia and transfer agents coming from Europe will already have this expertise, but to be successful in the future they will need to add a localised ‘Asian touch’.
This ‘local’ aspect is becoming increasingly important. Asian regulators have already become more cautious towards developed market products in the wake of the financial crisis. Recently, Lieven Debruyne, chairman of the Hong Kong Investment Funds Association, warned of a disconnection between European efforts to structure UCITS products and their plans for global distribution. Some UCITS developments in particular (for example, derivatives as a permissible asset class) have made Asian regulators uncomfortable and so they may start to place greater scrutiny on UCITS products.
This, coupled with Asian regulators’ desire to develop domestic funds, means that fund managers with more complex products are currently experiencing longer delays for authorisation.
What are the remaining challenges to overcome in Asia?
Carmon: Harmonisation in all forms remains the biggest challenge for transfer agents in the region. Asia has no one voice, in terms of a political voice and language and cultural diversity, like the EU, although there is no Asian Union, nor really any initiative to create one. Asia is not a block and is likely to stay this way for some time. The lack of harmonisation makes for a complex situation from the transfer agent’s perspective due to country-to-country differences in factors such as operational processes and account opening documents and procedures.
The aim of the various fund passport initiatives is to provide a level playing field where funds domiciled in one country could be marketed in another more easily, although tax and other regulations would remain very local. Asia a long-way off achieving the levels of harmonisation seen in the EU and transfer agents will have to take this into account for some years to come.
Toucheboeuf: The mutual recognition and fund passporting initiatives happening in Asia pose challenges on the transfer agent’s capability to operate in multiple jurisdictions, support regulatory reporting and communicate with clients using local languages, all and in the local time zone. Regulations are also very complex and are changing globally and locally, so transfer agency services need to adapt quickly in order to support fund distribution strategies.
Seng Lok: Economically and politically, Asia is even more diverse and fragmented than Europe. Each country has its own investment goals, taxation rules, regulations, language and culture. The growth of the funds industry has similarly differed from country-to-country, with each market taking on its own distinctive characteristics. This means that standardisation of regulation and market practice between the countries is a big challenge. On the one hand, you have Hong Kong and Singapore, which are mature markets with sophisticated investors. On the other hand, there is Thailand and Malaysia, which are emergent economies (Malaysia is attractive from an Islamic finance perspective, while fund managers in Thailand generally charge lower management fees).
This lack of standardisation means that automation is a bigger challenge to overcome, especially for administrators seeking to drive efficiency, keep costs competitive and retain margin. In our view, automation and technology is a priority for efficiency.
Ashe: The diversification of Asia continues to present challenges for transfer agents as it is still a fragmented and heterogeneous market with a mixture of third-party service providers and asset managers performing the transfer agency function for both local and regional products. All transfer agents are affected by the increasing impact of transnational regulations and face the same difficulties in deciphering the evolving regulatory framework in the region.
These challenges are not completely dissimilar to those that have been faced in other markets around the world but most have disappeared or lessened over time as products, models, regulations and processes have standardised. The lack of unification between countries presents transfer agents with difficulties when service providers start to try and automate processes and overall low levels of STP remains a real factor, with many fund distributors still relying on manual processes and fax communications.
There is also a lack of proven global transfer agency system solutions available to local transfer agents that are able to cater to the myriad complicated local regulations, and that will be able to accommodate the newer passport cross-border distribution arrangements. The more traditional systems available can be expensive to maintain, limited to one market and quickly become obsolete in such an environment of regulatory change without significant investment.
What effect will the various Asian fund passports have on transfer agents’ business?
Carmon: The passport, whether it’s the ASEAN CIS or ARFP, would favour the jurisdiction of Singapore as the location of choice for a transfer agent. Singapore, which has a large concentration of asset managers, would benefit from facilitated, harmonised distribution that the passports would permit between Australia, South Korea and New Zealand (APEC) on the one hand, and Thailand and Malaysia (ARFP), on the other. Facilitated fund distribution into these major markets could see Singapore rival Hong Kong as an international fund distribution hub.
For Hong Kong-based transfer agents, growth in the number and scope of mutual fund recognition initiatives (like that which is under discussion between Hong Kong and China), would be a very positive development. Hong Kong has great experience in selling and dealing with distributing funds internationally and has the systems to deal with distributing foreign funds in foreign markets. And Hong Kong acting as the entry point for asset managers to access the Chinese market (via Chinese RQFII structures) would be a major development for the autonomous region.
Seng Lok: Under the various Asian fund passport initiatives, asset managers will be able to distribute their funds regionally without a local operation, which will mean fund managers will find it much easier to tap into new markets. For example, the China Hong Kong mutual recognition scheme is expected to give fund managers exposure to more than $7.5 trillion of Chinese household savings.
However, as fund managers move into new markets, they will require support from their transfer agent, which will need to have strong pan-regional capabilities established. The smaller transfer agents that only focus on two or three Asian countries may struggle to get up-to-speed. As a result, we may see consolidation of some of these local transfer agents so that they can pool their capabilities.
From a systems perspective, transfer agents must ensure that their systems cater to the different local market requirements and regulations, and have the ability to handle multiple currencies, asset classes and languages. At Multifonds we have been watching all these schemes closely and are working with our clients to identify the impacts, as we did with UCITS and the Alternative Investment Fund Managers Directive.
Ashe: The progressing development of the regional passport schemes is a step forward but they all currently have major shortcomings that will need to be resolved in order to make these products attractive, whether it be in their tax and distribution rules, restrictions on foreign investment, or rules on omnibus accounts. We believe that there is a still a long journey ahead before the UCITS product’s domination is realistically challenged.
However, there is a real requirement for policymakers to offer asset managers an investment vehicle structure that offers the flexibility required to ease cross-border fund sales, marketing and servicing with streamlined fund approval and registration procedures.
How will passports challenge transfer agents’ way of doing things, and what must they do to modernise their operations?
Seng Lok: The fund passports will bring together countries across the region, separated by geography and fund management practices. Transfer agents will need to be equipped to provide quality services and remain flexible and innovative in supporting changing client requirements.
It will be important that providers offer one single point of entry to all funds belonging to the same promoter. A footprint spanning the key financial hubs with multi-lingual staff will ensure that providers are able to give excellent client service to fund houses, distributors and shareholders.
They will also need an operating model and the technology to manage complex requirements, for example, seasonal trailer fees schedules and a single platform that can service all the countries all the time. In particular, providers will need an excellent two-way web front-end and transparent reporting across locations, including regulatory reporting when needed, and automated order-routing, receipt, trailer and commission functionality.
Toucheboeuf: Transfer agents need to be prepared to be able to operate in multiple jurisdictions and, at the same time, on the same infrastructure to support the fund distribution activities of the fund in multiple jurisdictions. Depending on the distribution strategies and network of the fund management companies, transfer agents should be able to work with multiple counterparties. The BNP Paribas Securities Services transfer agent has an open architecture and is able to work with different sub-transfer agents and we see a demand of our expertise as a European bank to support fund managers in Asia in their cross-border fund distribution.
Ashe: The full impact of how the fund passport initiatives will challenge transfer agents existing way of operating cannot be fully assessed until the outstanding questions on the initiatives themselves are answered. However, based on the information known at present it is clear that the transfer agency systems available to transfer agents must be able to service the products distributed via these schemes, and most importantly, they must be able to accommodate the myriad complicated regulations and taxation treatment of investors.
Asia is not like Europe with one set of harmonised rules at a regional level alongside domestic law and this will present unique administrative challenges, particularly when looking at countries such as Singapore, which are common to more than one passport regime.
Where is Asia in terms of automation? Is manual dealing still the norm?
Carmon: The lack of harmonisation (or the diversity of the individual nations that make up Asia) means that each country has a different way of doing things. Factors including language, tax, business culture, payments and reporting to financial authorities and for tax purposes all differ between counties and this lack of harmonisation does not lend itself to automation.
Recent statistics (SWIFT/EFAMA Fund Processing Standardisation annual report published in 2014) show that in Asia, the average STP rate was 43.4 percent in 2012, but rose to 50.8 percent at the end of 2013. Singapore, for example, despite being one of the leading centres for funds in the region, still heavily relies on fax. SWIFT have been actively courting the market, which has been hard to crack as manual labour is cheap and readily available, and even the attempts to bring a less costly solution to market to compete better with manual labour (known as Swift Light) has not seen a particularly strong uptake across the region.
Interestingly, one company, Calastone, has seen some success in raising the automation rate, stepping in between the asset manager and the transfer agent. Calastone enables companies to keep their manual methods, and transmit faxes through its middleware software, which translates faxes into SWIFT messages, which are then automatically transmitted to the transfer agent. Asian STP rates remain low by European and US standards, but are showing signs of rising.
Toucheboeuf: Transfer agent operation in Asia for cross-border funds primarily relies on fax, phone calls or proprietary formats in communicating with fund investors. The level of standardisation is quite low despite the various automation initiatives underway in countries such as Taiwan and South Korea.
It was reported that the percentages of cross-border fund orders sent by APAC for Luxembourg and Ireland domiciled funds using ISO automation are 19.6 and 21.8 percent, respectively, according to the Annual Report on Automation and Standardisation of Cross-Border Funds Orders in 2013 by EFAMA and SWIFT. BNP Paribas Securities Services provides a one-stop shop, including a comprehensive reporting, risk analytics and performance platform.
Ashe: We see real progress in STP volumes in the region now thanks to the involvement of regulatory bodies and the availability of various industry utilities and clearing services. Unsurprisingly, the more mature markets of Hong Kong, Singapore and Taiwan have made more progress than others. However, the improvement in STP rates is region-wide in general, with distributors, local banks, asset managers and service providers all processing more trades via electronic means than ever before.
Seng Lok: Fund management is greatly focused on achieving greater STP and automation. Obviously, cost is a driver but this is not the only one. Risk and speed are now considered a priority by market players. Fund managers, solutions providers (such as Omgeo and SWIFT) and securities servicers are working together to achieve greater STP in the market. The tools and processes already exist, so the growing volume in Asian markets expected in the coming years is now a catalyst to accelerate investment in automation.
That said, as far as distribution is concerned, trade processing is still dominated by fax due to the lack of a common infrastructure in the region. It appears that distributors give little consideration to the operational risk, inefficiency and processing cost from non-automated channels and are not incentivised to transmit instructions electronically.
Transfer agents are keen to automate in order to reduce operational overheads, but conversely this drive for automation can erode the revenue gained from charging higher rates for processing non-automated transactions. As a result, the cost of manual processing is born by fund promoters, which ultimately pass it onto investors.
