The adoption of automation may be increasing across Asia but there is still a huge diversity in the operating models of each region. Nicholas Pratt
discovers how service providers can cope with this challenge.
The case for promoting automation in the funds industry is, at first glance, a straight forward argument. By replacing manual processes with automation, you increase efficiency, reduce operating costs and minimise operational risk. There are also a number of equally obvious drivers to help justify the move. Volumes are increasing all the time and automation helps meet the need for greater operational capacity.
Firms are also paying more attention to their costs, making it easier for chief operating officers to build a business case for automation projects and justify the initial investment that might be needed for purchasing new automated systems. And automation is an essential feature of the operating standards employed by the global players that are increasingly prominent as the funds industry continues to cross borders.
But a closer examination of the market shows that promoting automation in the Asian funds industry contains a number of nuances, not least the lack of harmony between Asian regions.
There are different operating standards, different rates of automation, different roles played by the regulators and different objectives – all of which have an impact on the way and the rate at which automation has been adopted.
“There are different drivers for different regions,” says Dean Chisholm, regional head of operations at Invesco when describing the STP landscape across Asian markets.
“Japan and China are both 100% automated for their domestic markets which makes them very easy markets to operate in. The rest of the region is hard work though. There is a legacy of manual processes and STP is around the mid-20 percent mark.”
A number of Asian regions have tried to address this diversity by embarking on passporting projects, designed to make domestic funds exportable across borders in the same way that Ucits funds are used throughout Europe. These initiatives, from the Asean Collective Investment Schemes and the ApcAsia Region Funds passport to Hong Kong China Mutual Fund Recognition, were also expected to heighten the need for greater automation and standardisation. However, all of the respective projects have more questions than answers in terms of how exactly they will work, how popular they will prove to be and what operational changes will be required.
International players in the funds industry, from the multinational asset managers to the global custodians to the international market infrastructure providers, are all keen to export their automated operating models to new regions and emerging markets. But the complex state of the automation in Asia presents something of a dilemma in devising an Asia-centric strategy, especially for the various service providers that view the adoption of automation as a way to generate revenue and not just reduce operating costs.
For example, one option for service providers is to operate in each market according to the specific standards and practices of that market as they currently stand and then adapt that model as or if the market evolves. A second strategy would be to pick what is expected to be the dominant market in the region, such as China, adopt a model that will work there and then wait for hopefully all the other markets in the region to fall into line. Or a third and more militant approach would be to remain dedicated to your own full service model based on international standards and simply wait for Asian markets to reach these standards.
The various passporting initiatives and their attempts to produce new fund vehicles to rival Ucits funds are being closely monitored by all global firms operating in the region. “Asia is still a fragmented market crowded with countries operating at different stage of development and the way the individual markets harmonise through the various passporting initiatives will be of great interest to everyone in the industry,” says Isaac Wong, Director, Product Management/Investment Funds, Euroclear.
“The need for automation is universal,” says Wong. “It removes the pain of manual processes, the risk of a paper-based model, the slow turnaround, the operational inefficiency, capacity constraints and failure to support cross-border flows.”
Similarly, the benefits of achieving automation by outsourcing to a third party provider, are also seen as universal, says Wong. “It offloads risk and gives companies scale and efficiency thereby enabling them to focus on their core competency.”
But looking at automation in a more granular way, Wong also recognises that different markets within Asia have different approaches. In part this is due to the various legacy issues that each region has in terms of technology and there are also different levels of government intervention.
By working with the national regulators and market participants to understand their specific needs, Euroclear has sought to educate the markets on the benefits of the operational efficiency for all in the investment chain.
“In China/Hong Kong we are keen to participate in the technical consultations over MFR as we believe operational efficiency is a critical factor. In Korea we intend to strengthen our relationship with the Korea Securities Depository (KSD) to encourage the adoption of more effective offshore connectivity by the fund of funds community through Euroclear’s FundSettle.”
The KSD has been something of a visionary in developing a very simple, automated platform for funds processing that is Swift-enabled, however the offshore space is predominantly fund of funds so the volumes are relatively modest. The main direct distribution centres for Ucits funds and consequently the centres with the biggest volumes are Singapore, Taiwan and Hong Kong.
“In Hong Kong we endeavour to collaborate with the Hong Kong Monetary Authority (HKMA), the direct bank distributors and global custodians with the provision of automated connectivity, primarily to the Ucits world and increasingly onshore domiciles,” says Wong. “And in Singapore we are in talks with the asset owners, commercial and private banks as it is another important booking centre for Ucits funds.”
According to Sooraj Sreenivasan, global head of product management, distribution support and transfer agency at HSBC, the first job for the markets involved in various passporting initiatives is to get the respective products on the shelf and create a business case for the investment needed to support them. However, given the disparity in the playing field, this is not a straight-forward task. “The sell-side has been dominant on the developments. The buy-side has been very passive but you need to get investors on-side for the product to work. That is a challenge and more has to happen on the distribution side. It is all about common benefits, so it will take time.”
Asia remains quite fragmented from an execution and processing perspective, says Sreenivasan. “There has been some investment over time from various regions in developing a standardised and automated market infrastructure either through their own platform or through third party services but in order to attract all parties, it has to be profitable.”
There is also a difference in the role of the regulators in promoting automation, as is noted by Aileen Yan, head of TA, Asia Pacific, IFDS State Street. “Every market is unique. In some, like Korea and Taiwan, automation is driven by regulators whereas in others, like Hong Kong, the initiatives are market-driven. In Hong Kong the STP rate remains relatively low.”
But in Taiwan, the local central securities depositary the Taiwan Depository & Clearing Corporation (TDCC) has introduced a platform for automating the order routing of cross-border funds. “The TDCC has pushed this platform and given a free trial to the distributors so the STP rate is much higher than in other countries,” says Yan. “With the help of service providers, Taiwan has been able to build a language for all participants.”
At the moment the automation in Taiwan is limited to order routing but the hope for many vendors and providers is that it can progress to include more processes. “We are encouraging the distributor community and the TDCC to extend the automated cross-border service beyond order routing to cover settlement and asset servicing in the form of a full service model,” says Euroclear’s Wong.
For Euroclear and other service providers, the key is achieving a balance that recognises the commonalities that exist in certain markets but also respects the different business practices in each country and devising appropriate solutions. “Across Asia we are talking to the CSDs about how we can set up an ideal infrastructure where you have flexibility at the front end for accepting various communication formats – Swift, browser to file transfer – but you have the full automation at the back end,” says Wong.
“We still believe in the full service model and many distributors have accepted the benefits of STP but it is also a big step for those firms that are still using manual processing. As a user-owned, user-governed market infrastructure, we are dedicated to assisting users with the adoption of a fully automated service model. Asia lags behind Europe but with the recent development of the various fund passport schemes, the available technology and necessity catching up with reality, Asia continues to advance. ”
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