Nicholas Pratt talks to local and global service providers about the problems caused by manual processes and the probability of solutions.
Asia is an attractive destination for international fund promoters looking to distribute their funds to a region with economic growth and a high level of wealth.
The majority of this cross-border distribution is done via Hong Kong, Singapore and Taiwan and while these may be the more mature markets in the region, the extent of manual processes is a pernicious pain for transfer agents (TAs) and fund managers subject to these inefficiencies.
“As a TA we feel the pain of faxes and we recognise the need to automate those transactions,” says Bill Rosensweig, head of Brown Brothers Harriman Hong Kong and responsible for providing investor services for the firm’s Asian-based clients.
In Asia specifically, there is a lot of work for TAs in processing notes, calculating net asset values, automating reports for trailer fees, says Rosensweig.
“For European funds distributing in Asia it is important to have that capability. The flow is a little one-directional in terms of European funds being sold to Asian investors.
“We are not seeing it the other way round but some asset managers have invested in automation and will want to use it for both locally domiciled funds and cross-border funds.”
Straight-through processing (STP) rates are around 70% in Europe and closer to 0% in Asia and given that it is the same fund promoters working in Asia as in Europe,
Rosensweig sees no reason these two numbers cannot converge. “It should be win-win-win. Automation is good for the promoter because they are bearing the cost of manual processing, it is good for the distributor because of all the added benefits they get and it is good for the fund investor.”
According to George Nast, global head, product management, transaction banking at Standard Chartered Asia, the funds industry has gone beyond simply throwing more assets at processing problems.
“There is a general recognition of the benefits of standardisation and an increasing number of clients are using Ucits structures for the distribution of their Asian funds and this has increased the focus on the need for standardisation and automation.”
There are currently more than €470 billion ($615 billion) of Ucits funds distributed throughout Asia and in the absence of a collaborative pan-Asian funds market, Ucits acts as a great substitute, says Nast.
“There is no passportable standard in Asia but Luxembourg has effectively done that for funds distribution, while Euroclear and Clearstream have provided common clearing for fixed income instruments.
Each Asian country is at a different stage of operational maturity, be that the clients or the market infrastructure, he says. Singapore and Hong Kong are quite advanced. Taiwan, Korea and India have complexities built into the market but you can get scale in these markets because of the high volume of transactions. But a lot of the smaller markets don’t have the scale to be able to pursue automation and standardisation projects.
But the fact that many Asian markets are coming to automation relatively late does have some advantages.
“For mutual funds processing, many in Asia have leapt straight to ISO 20022 because there was no existing solution there, whereas in Europe many are using ISO15022 and there is now the task of trying to migrate them onto ISO 20022.
Fanny Wong, head of custody at the Bank of China (Hong Kong) says that are costs are becoming more relevant to all participants in the Asian funds market and should be a big incentive to automate the distribution of funds.
The cost concerns are especially important for local fund managers offering mandatory provident funds (MPFs). The MPFs are mandatory investment products designed to minimise risk. However, the rather onerous requirements of running an MPF leads to relatively high service cost.
“It is a balancing act,” says Wong, but one where a greater operational efficiency, via automation, and simplified structuring could play an important role.
In Taiwan and Korea as well as Hong Kong, the regulators and central securities depositories (CSDs) have become more prominent in mandating automation for the routing or processing of certain instruments.
But for the regulators’ initiatives to have any meaning, it is important that automation is only mandated for the more fundamental investment products and not for the more complex and idiosyncratic funds, says Wong.
“Once you can get the basic funds standardised, that is one thing, but there are special vehicles like fixed income funds denominated in restricted currencies, where human beings are still needed in the process.
And while there is a clear desire among local participants to see some standardisation of processes, these same participants are also aware that there are a number of different developments and initiatives from CSDs, International Central Securities Depositories (ICSDs), custodians and central banks.
Consequently, they want to know which one will prove to be the most successful or of the most value before committing to any costly implementation. “As a custodian, the system changes required for handling funds are not straightforward so the idea of going with one initiative without evidence of industry support is not overly attractive.”
Wong also feels that industry user groups have a role to play in furthering the use of automation and promoting operational standards. Prior to the financial crisis there were a number of user groups established to deal with Ucits requirements.
Developing standardised messaging in addition to automated order routing will also require participation from distributors that have so far been reluctant to get involved. “The large distributors have a legacy approach to processes and have little standardisation. Furthermore, it is these larger distributors that are able to dictate the terms of processing their funds and it will be difficult to encourage them to change their ways,” she says.
Post-crisis they largely died a natural death but, says Wong, it is high time for the industry groups to reconvene.
“We also have to invite other stakeholders and agree on a way forward. It is only when a lack of automation starts to influence how funds are developed that there will be a big change.”
©2012 funds global