The Asian Region Funds Passport (ARFP) came a step closer to delivery last month when Australia, Singapore, South Korea and New Zealand signed a letter of intent to establish greater regulatory standardisation. The letter paves the way for a pilot ARFP to commence in 2016.
The Asian Region Funds Passport (ARFP) came a step closer to delivery last month when Australia, Singapore, South Korea and New Zealand signed a letter of intent to establish greater regulatory standardisation. The letter paves the way for a pilot ARFP to commence in 2016. It will, though, have to compete not only with UCITS, but with at least two other regional platforms: the ASEAN funds passport and the China-Hong Kong Mutual Recognition Scheme (CHKMRS). The ASEAN funds passport is targeted to go live in 2014, initially encompassing Singapore, Malaysia and Thailand, and while a date has not been set yet for the launch of CHKMRS, it has attracted much attention in the industry since its announcement early this year.
Although, the creation of these new initiatives is partly motivated by the fear in Asia of losing momentum vis-a-vis global fund distribution, there is no doubt that the local regulators are keen to push funds to be locally domiciled under their own control after the global financial crisis. The two new passport initiatives also seek to balance out the Chinese initiative, with Singapore involved in both. While Japan is the biggest market in the region, it is not participating in any of the three projects.
The asset management industry is now facing some interesting opportunities as well as challenging choices. For a long time, UCITS has been the de facto platform for distribution to Asian countries such as Hong Kong, Singapore, Taiwan, Korea and Japan (besides Europe). But asset managers now have to seriously consider whether they should set up locally domiciled funds to take advantage of the new passport platforms rather than just focusing on UCITS.
This is especially the case for the CHKMRS which is seen as a potential game changer by many in the industry. Despite that details of the scheme have yet to be announced, there have already been several high-profile global managers, such as BlackRock and J.P. Morgan, who have either re-domiciled some of their funds or set up new locally domiciled vehicles to position themselves for the launch of CHKMRS. While this potential new opportunity is certainly exciting, managing resources and building the scale to support multiple platforms will be challenging.
Instead of having one passport for the entire region, there are now three different initiatives. This creates a somewhat puzzling situation with a lot of competition for traction. But on the positive side, the common recognition of the need for streamlined cross-border distribution has led to the first steps to create such frameworks across multiple markets. It is still a step forward breaking away from the status quo of total market fragmentation.
First mover advantage
At this point, the potential access to the vast population of the greater China region through the CHKMRS has captured a lot of imagination, so much so that market stakeholders are now trying to better manage expectations. The newly announced ARFP and the ASEAN funds passport have yet to create the same buzz in the market. The industry still needs time to understand these two schemes and is waiting to see the details of each to decide the level of attention they will place on these two schemes.
Meanwhile, at present, UCITS remains the only working passport for distribution in over 60 countries globally including multiple markets in Asia.
Given that it is the only global brand that can be used to allow both Asian asset managers to sell their expertise outside Asia and European asset managers to distribute their funds in Asia, many UCITS funds are still being launched by managers. Although we have seen the approval of new UCITS funds in Hong Kong and Taiwan decelerate over the past two years, Japanese, Malaysian and Chinese managers based in Hong Kong,have continued to promote them locally.
We believe UCITS will continue to grow as a global brand for global distribution despite the regional initiatives in the Asia-Pacific region. The future of its continued success in the region will depend on its willingness and flexibility to incorporate and embrace the needs of local regulators and asset management industries in its decision making process, rather than being entirely EU-centric.
The region also needs to face the challenges of local distribution which is still bank controlled. As a result, global fund distribution strategies will require partnerships/joint ventures to be successful. There is a long road ahead to tackle.
Taking the initiative
It is hoped that through these passport schemes, investors in Asia will be able to access a much wider range of choices in terms of investment funds that are developed with a strong expertise on fast growing Asian economies. They should also lead to a reduction in costs as a result of the simplified and streamlined administrative structures.
Service providers with expertise in global distribution are key in facilitating these passport schemes. As advocates for their clients’ needs they are able to address issues that develop under these initiatives from a practitioner’s point of view. Firms that have set up trustee and fund administration operations across multiple jurisdictions in the region will be well placed to offer solutions and advice to clients who wish to take advantage of any of these schemes as they evolve.
Consulting with one’s service providers can deliver additional insight into the progress and opportunities each scheme offers. While there is time to watch them develop, beginning the conversation with partners now will ensure any future decision is as well-informed as possible.
