HSBC
HSBC’s head of client management in Asia Pacific talks to AST about how the market has weathered the global financial crisis, forthcoming regulatory changes and opportunities in the region
AST: How would you describe the market in Asia over the past 12-18 months?
Dan Massey: In terms of general observations as to what we have been seeing, volatility in the markets over the year has brought risk back on to the menu, both for clients and for the service providers such as HSBC Securities Services (HSS).
We have found that there is a degree of uncertainty around the growth prospects of the funds market due to the well publicised economic difficulties globally. Historically, the markets in Asia have been protected when the European and US markets are affected. However, this time the penetration of the difficulties would suggest that we may see recession in some of the Asian markets.
In terms of a market trend there is move towards increasing protection for investors which for HSS means more responsibility being placed on service providers to oversee the actions of fund managers.
This is driven by the regulators in the different markets who are faced with the dual purpose of trying to obtain a balance by encouraging product development and innovation but have retail investor concerns high on their agenda. Markets across the region show their diversity and differences which continue to present challenges to organisations who wish to be truly operational across the region.
There are more players entering this asset servicing space, including the traditional large global players and at the same time competition from regional/local players who wish to expand. This means growing pressure on product proposition, service quality and of course, pricing.
AST: The European and North American markets are struggling with a raft of new legislation and regulation. Are you having similar experiences in Asia, whether dealing with regulation from other continents or changes from domestic regulators?
Dan Massey: The regulatory changes introduced within the region have not had a significant impact on administrators as such, especially when compared to those introduced in the west. However, the regulatory changes in the EU and US do impact players in the region, often focusing on fund managers. This then extends to asset servicers. Any organisation involved with servicing assets will need to support the new regulatory requirements for their clients.
For example, fund administrators (and custodians) will need to play a significant role in meeting the FATCA requirements such as know your customer (KYC), account opening, tracking of investors, clients and investments, applying withholding tax etc. All this means a lot of changes across all our systems, a large project we have already started working on. Similarly, the Central Counterparty Clearing requirements for OTCs will mean incremental efforts around activities such as margins, collateral management, reconciliations etc for fund administrators. AIFMD has direct impact on custodians.
There are two key areas of regulatory change going on in emerging markets in Asia, firstly product enhancement eg, open-ended funds in Vietnam, hedge funds in Korea, streamlining order processing in Indonesia, etc. Fund administrators must respond by being ready for their clients to launch such products on day one, otherwise fund managers will look elsewhere and put at risk taking existing business with them.
Secondly, we are seeing an increase in fund manager oversight and regulatory reporting.
There is a steady increase in the burden for custodians and/or administrators to oversee the activities of fund managers and to report breaches and exceptions. Fund administrators and fund custodians must be able and willing to take on this quasi-fiduciary role in order to enter the emerging markets in Asia.
AST: Are you seeing the requirements of your clients changing? Are they asking for further services, or changes to the services you already provide?
Dan Massey: Earlier we mentioned the uncertainty and volatility that was shaping the market and we have found clients placing great importance on the relationship with their service provider.
They are looking for longevity and depth of solution provision. This suits HSS well and enables us to build on the security and balance sheet that are key parts of the wider HSBC offering.
Another development HSS is seeing is a dual requirement for seamless service provision at both a local and regional level. Clients are reacting to our local presence, on the ground capability, and ability to handle local regulations but at the same time want a consistent set of reporting and service provision at a regional level. This is becoming an increasingly important element to business operations for the asset managers we are in contact with.
This places HSS in a strong position as because of our network we are able to offer a broad product range in a wide geography in the region and globally.
We are also seeing more new products being launched which means that the provider needs to be constantly developing solutions to meet these product requirements and the flexibility and robustness of systems has become more critical.
AST: Where is the growth coming from?
Dan Massey: Asset flows for Asia have remained strong over the year. With the developed markets of Europe and US struggling, investors have looked to Asia as the driver for growth and there has been a transfer of funds in this direction.
Equally there is the development of Asian institutions who have started locally and have grown to regional level investors. This has also driven the South-South trade flows that have developed as a phenomenon.
The money is largely with the large asset owners and linked to this we are seeing the increased importance of the sovereign wealth funds on the world stage.
Any talk of growth has also to look at the enormous potential of China. Moves to internationalise the RMB has created a whole new market for Hong Kong, and a new set of opportunities for international investors.
AST: How important is the Chinese market? Is it already a vital part of your business, or is it more a case of preparing for its potential?
Dan Massey: Of course there is massive external interest in China as the economy is booming.
This is contributing to major interest in the RMB as an investment and eventual reserve currency.
HSS works to service assets both entering the country and the flows heading out. We have provided sub-custody services in China, so institutional investors, banks and broker dealers can use HSBC as a sub-custodian for QFII investments. And we also offer global custodian services for QDII investments, supporting local manager’s and local custodian’s investments outside of China.
I think the regulators are looking closely at whether to allow fund administration to be outsourced.
They are also looking at securities lending and how to progress in that area, but it will be in a slow and controlled manner.
I am sure that the large domestic banks will continue to be pushed, by their local clients, to provide custody services outside of China – as those clients start to invest outside of their home market. They then have a decision to make: do we find a partner to provide global custody services for us, or do we offer the services ourselves?
