HSBC
In a region as diverse as Asia, service providers must respect the charm and uniqueness of each market’s infrastructure, says Ian Banks of HSBC
What kind of market infrastructure challenges are your clients facing?
The market infrastructures themselves tend to focus primarily on efficiency, tightening settlement cycles and real-time settlement, whereas actually, the biggest problem areas for our clients are more around the increasing amount of data they’re dealing with. There is know-your-client (KYC) data, tax issues, and ongoing compliance for various local regulations.
We are seeing infrastructures looking at the issues from one perspective, which is all about making the in-country processes more and more efficient and cost-effective, but the costs of actually managing clients are still going up. The role of an international asset service provider is to take the diversity of requirements of its client base, which is made up of global institutions that each have their own idiosyncrasies, and fit those in to the market infrastructures, which, by definition, are locally oriented.
It is easy to over-simplify the problems and assume that things are getting easier and more efficient, but actually there are still serious complexities to address. A local payments infrastructure, for example, will be very focused on the local market, so it makes sense that they standardise there. But if a firm is dealing with clients in 50 countries, each of those markets will standardise to their own standards, meaning more diversity and more complexity for international investors.
Also, if infrastructures are working towards real-time settlement, then that works for clients if they’re in the currency in which the asset trades. Actually, many of HSBC’s securities services clients are managing cash out of either Europe or the US into different markets, and there is a big difference in time zones that we have to manage before even considering currencies. Although we are moving towards having delivery-versus-payment in all markets, there is still an agenda around credit to facilitate clients whose natural currency base is not the same as their assets.
The ultimate goal is quite simple: to join investors to assets through execution, settlement and safekeeping. On the execution side, there has been a lot of change within the brokerage community and it works fairly well, globally. On the settlement side, market infrastructures are tightening up settlement in-country, but most clients are still working out of euro or US dollars, so asset servicers have to be sure that the cash arrives at the right time to make sure the settlement cycle works, whatever the settlement cycle is in that country.
In large regions like Asia, there is a lot of disparity between countries and their infrastructures—how can service providers manage that?
They still need quite a material onshore presence. In Asia, for example, HSBC Securities Services has about 2,400 employees across 17 countries, as well as specialist offshore service centres that support those jurisdictions. People do tend to refer to Asia as a catchall, but it’s a bit of a misnomer as each country must be dealt with individually and we are not in a position where we can just hub everything.
Service providers need to deal with local characteristics to make sure things run smoothly. There is still quite a lot of diversity out there, and the problem is finding the motivation across the region to harmonise that.
Each market looks to what it needs, and there may be a big difference between, for example, what the Taiwanese market and what the Australian market needs. It’s unlikely that they will come up with the same standard. We try to influence as much as possible, talking to the regulators and trying to encourage harmonisation, but that’s not necessarily the priority today.
Do you think this will change?
In time it will change. People are talking about the future and looking at the technology available, and that gives us an opportunity to take the service to the next level—if you can reduce the costs of getting the basics right, that allows for more investment in adding value.
To clients, the cost of settlement activities is going down, but the cost of managing data is going up, so that is what we really have to focus on as an industry. In order to improve that, we have to find a common way of looking at clients, to identify them correctly in a standardised way, so common identifying numbers are a good start.
Then we will need collective data utilities. A large institution might have four or five core banks and dozens of counterparts, which all have their own KYC documents. We need that data from every client, but every bank and service provider is doing the same thing, so clients end up with multiple requests for the same data.
Utilities for jobs like KYC compliance makes sense—if there is a central repository of data that we can all go to and reference, and that hold 80 to 90 percent of the data that we need, that will cut down on a lot of the hassle of manipulating data yourself. It doesn’t make sense for everyone to be collecting the same data, when they could simply invest in something that is best practice once.
Are organisations willing to work together to create change?
With these types of initiatives they are—using a utility is preferable to banks trying to manage all the data themselves. However, data management is very much a core of what banks do, and so the business case for doing it a new way isn’t always clear. It’s not like there is a new problem to be solved, it’s a different way of solving it, which should make it more efficient for all parties.
It has to work for the clients, the banks, and the regulators as well. Theoretically, all stakeholders should be looking in the same direction—you wouldn’t expect this kind of thing to be done in isolation. And the broad trend is one, albeit slowly, of general convergence towards more common standards.
What we have been working on is harmonising the information around clients, and that comes back to the idiosyncrasies of each market. The documentation required for getting a fund into a market could be very different in multiple countries.
In India, for example, there is quite a complicated set of documents and it’s not always obvious which ones firms have to file. We have developed a fast-track tool that allows clients to put in a set of standard data for a fund, and the tool then creates the correct output for each regulatory filing.
It was a difficult piece of software to develop because there are so many rules and so many documents, but it is things like that which can really add value for clients.
How can large institutions like HSBC help their clients to ease the burden of regulation?
This can be hugely valuable to clients and thus a strong selling point. It is our job to work with clients interpreting the nuances of a marketplace. Many industry participants are working with clients to try to develop things like reporting suites to help with regulation, so I see it as an increasing part of the service proposition that we should be providing.
Part of the problem for clients is that, over the last few years there has been so much change in regulation that some just haven’t had the bandwidth to get everything done.
But now the regulatory burden is far better understood than it was two or three years ago, and we are starting to see much more useful products for clients.
We all have to do it. Sometimes we are the regulated entity, and sometimes the client is, but either way, once you solve it, it can become the standard. At the moment, some things are already done, ticking over and delivering outputs, while others are still in build-mode, but we are getting there.
There will always be complexities with markets and we see it as our role to solve those complexities with clients and to try to harmonise their experiences as much as possible.
