Nicholas Pratt talks to three asset managers about the challenges of implementing large-scale automation projects in the Asian funds markets, the frustrations of the slow rate of movement, and the possibility of a light at the end of the tunnel in terms of encouraging automation.
Dean Chisholm, regional head of operations, Asia-Pacific, Invesco
Dean Chisholm has been working in the Asian funds market for almost 20 years and is regional head of operations for Asia-Pacific at Invesco, a role in which he oversees the investment operations and transfer agency functions of the firm.
In this time, the structure of the market has not really changed, says Chisholm. There are the handful of markets – Hong Kong, Singapore and Taiwan – that have decent cross-border funds and are, therefore, visible to EU investors. And beyond these three, the other Asian domiciles are domestic funds reliant on private placement.
Consequently, the Asian market is very different from Europe, even if Ucits funds are increasingly popular in the region and account for around a third of the orders received in Luxembourg and Dublin. On the regulatory side there is no central Asian body to bring markets together. In terms of distribution there are no funds supermarkets and, in technology terms, Asia has always lagged behind Europe, even if many of the purely domestic markets, such as Japan, are highly automated.
In addition to his role at Invesco, Chisholm is a prominent member of the Asian Fund Automation Consortium (AFAC), a group of international asset managers, fund promoters and transfer agents that have convened to promote the case for greater automation in funds processing.
The industry made a small amount of progress when Citi decided that it wanted to automate its distribution throughout Asia by using Swift messaging and the old ISO15022 standard. The messages were sent straight to the transfer agent in Europe and then progressed with five large local distributor banks in Taiwan, but the adoption never spread any further and a stalemate was reached.
“The other distributor banks could never prioritise a back office project over a distribution project,” says Chisholm.
Another impetus came when a number of national infrastructures or central securities depositories (CSDs) decided to get involved in pushing automation. However, the results have been mixed, he says.
First, the Korean Security Depositary (KSD) made automation mandatory for domestic funds orders and is now making it compulsory for cross-border funds. The problem, though, is that Korea’s fledgling cross-border market has largely faded away since previous tax incentives were removed.
In Taiwan, the regulator has mandated that cross-border funds be routed through the Taiwan Depository and Clearing Corporation’s (TDCC) newly established automated platform and three vendors – Brown Brothers Harriman (BBH), Calastone and Euroclear – have been licensed to provide services to help distributors connect to the TDCC platform.
Meanwhile in Hong Kong, the Hong Kong Monetary Authority has got in on the automation act by using the Central Moneymarkets Unit to build a link between the distributors and the fund houses but the adoption has been limited to a small number of distributors and does not include the two largest domestic banks – HSBC and its subsidiary Hang Seng.
“So overall it has been very slow and frustrating despite the push from the CSDs,” says Chisholm. And in the case of Taiwan, the role of the TDCC has possibly been more of a hindrance than a help.
“The industry would have got started earlier without the TDCC as BBH had a solution ready to go 18 months ago but the regulator stepped in and said that it wanted a level playing field, but it created a monopoly through the TDCC.”
Then there was the battle over fees. The original prices quoted by the vendors were far too high, says Chisholm, but the fund managers were able to bring these down.
So far, the Taiwanese project only involves order routing and not any post-trade functions, but Chisholm says this is a reasonable plan of action. “I think orders is the first place to start and it is important that you don’t run before you can walk.”
He also sees little rationale for including custody or cash settlement. “The Taiwanese banks settle their orders pretty quickly and I am not sure that cash clearing would be done easily by a third party. Reconciling cash is a complex process and I am not sure that all the central clearers understand the order flow in Taiwan. For example, there may be a Luxembourg holding involved but they may not all be Luxembourg funds. There are no standard cut-off times, there are multiple share classes, multiple currencies, differing treatments of public holidays by different funds and monthly cash dividends.”
In terms of AFAC’s ambition to push the automation agenda further, Chisholm believes it is time for the third party administrators to get more involved. “They have not really pushed automation and now it is time for them to catch up. Most of the effort has come from the large fund managers.”
The large administrators may be frightened of cannibalising their businesses but they must lower their costs, he says.
Chinese fund managers that come to Hong Kong are shocked at how expensive their third party administrators’ services are and they will have to reduce them by at least 50% if the adoption is going to reach any kind of meaningful level.
“They have to redefine their automation offerings but I’ve seen few signs that this will happen. I think many of them are trapped in a manual processing business model and they expect the fund managers to do all the work in promoting automation.”
So while there may be some grounds for optimism in that projects are going forward rather than backward, the over-riding feeling, says Chisholm, is one of frustration at the slow pace of movement.Ismail Gunes, global head of investment operations, Manulife Asset Management
Manulife Asset Management provides comprehensive asset management solutions for institutional investors and investment funds in key markets around the world, including ten territories in Asia. It has spent the last few years implementing a global operational platform. In Asia, the implementation has successfully been completed for Hong Kong, Malaysia, the Philippines, Singapore and Vietnam while work is underway in Indonesia.
Ismail Gunes, senior managing director and head of global investment operations at Manulife Asset Management, came to Asia at the beginning of 2011 to start the implementation programme in the region.
While he acknowledges that there have been some challenges, he states that the firm took each country’s unique business model and requirements into consideration during the implementation to enhance the global model rather than imposing the global model onto every country.
“Rather than keeping the norms and adapting the country to the norms, we did the opposite by looking at the different needs of each country and adapted and enhanced the global model to meet those needs. This may not be the most efficient way to implement a global model but it is certainly more effective and it means we have lesser reliance on the technology availability in that specific country than some of our competitors.”
When Gunes started the work in Asia he soon realised that not only is there no such thing as a single Asian market, there is also no single Asian service provider when it comes to the technology.
“Even though we are working with very big banks and global institutions, the technology available is not regional by any means and is suited very much to the country.”
The country-specific differences focused on two important aspects: middle office and back office connectivity and capital markets connectivity.
“Normally, when we set up the platform in other countries, we are able to rely on Swift [Society for Worldwide Interbank Financial Telecommunication] capabilities of the service providers, but not in Asia. We have had to set up separate data feeds from the service providers to ourselves, so there is a lot of customisation.
“We have the same challenge when it comes to the capital markets connectivity. There are specific regulatory requirements but no uniformity between countries.
“And the capability of the brokers and/or dealers is not always evident. For example, FIX [The Financial Information eXchange] is a commonly accepted communications standard in the industry, but its use in Asia is limited so country by country we have had to find solutions. We would like to automate further the banks and the brokers to enhance our straight-through processing in the region but that has not always been possible because of the technology limitations in certain countries.”
Manulife Asset Management has been able to introduce some post-trade automation in Hong Kong thanks to an initiative developed with post-trade service provider Omgeo. It is looking to repeat this in other countries, provided the challenges regarding country-specific differences in capital formation, tax withholding and software service providers can be overcome or can be suitably normalised.
Nevertheless, Gunes is optimistic that the operational landscape will improve and automation will become more prevalent across the region, especially once certain less developed countries begin to grow in size and attract the attention of the international infrastructure providers.
“The big challenge in the region is the different level of maturity between countries. Hong Kong and Singapore cannot be compared with Thailand and Vietnam. But I think that gap is going to close.
“When you look at the accumulation of wealth in markets like Indonesia and the Philippines, once they become a certain size, they will attract the interest of Euroclear,
Clearstream, Swift and Omgeo because they will begin to see a business case. Without the critical mass, the unit cost becomes very expensive and it remains unattractive to encourage automation while manual processes with cheaper labour costs is an alternative solution.”
Asia will not be the same as Europe or North America where there the markets are much more federal in structure, but Gunes is optimistic that the benefit of greater regional co-operation between Asian countries and the adoption of regional operating standards will become more apparent to the relevant authorities.
“The number of cross-border transactions is increasing all the time and I think the regulators will begin to realise the advantage of regional standards and regulatory co-operation. There is clearly a global operating model developing in asset management and I think Asia will take its place in that global model.”
In a practical sense there is also an advantage for certain Asian markets, such as Thailand or Taiwan, where the relative lack of any existing infrastructure has created a chance to embrace the latest technology standards.
“This is a very important point that must be emphasised. We should not try to build legacy systems that are unique to the market because it is expensive. We should rather encourage adopting open architecture that can work with latest accepted global standards like Swift. The cost of this kind of technology is coming down all the time and it will be at the reach of all key financial players in the region.”
SET AN EXAMPLE
Like many others in the Asian asset management market, Gunes cites the example of Taiwan, which has introduced automation for funds order routing. “I applaud what Taiwan did. Not only did it look to automate cross-border transactions within Asia but also looked to extend that to Luxembourg and Dublin which are very important markets to Asia. I think Taiwan will benefit from attracting capital into the country at reduced transaction costs. I would be very surprised if other Asian countries did not follow Taiwan’s example.
“We do have some manual processes in our processing chain but that is an unfortunate fact of Asia. We work very hard with our customers and service providers to stress the two big advantages of automated processes – that it reduces operational risk and it can also enhance the service quality that we provide to them in terms of reporting capabilities and the delivery cycle.”Eddy Fong, managing director and head of operations for Asia-Pacific at JP Morgan Asset Management
When examining the issue of automation in the funds processing chain, the end investors are often cited, along with distributors, as the most prolific users of manual processes and, therefore, one of the principal causes of the processing pain felt by asset managers. But according to Eddy Fong, managing director and head of operations for Asia-Pacific at JP Morgan Asset Management, this is not necessarily the case given that the connection between distributors and their investors is increasingly automated.
“In Asia, many of the distributors are banks and most of the investors are able to send orders over the internet. The real pain point in the processing chain is between the distributors and the transfer agents or asset managers.”
This pain comes in the form of faxed orders which leads to omissions, processing errors and, crucially, a lack of scalability. “With manual processes it is not possible to gain scale overnight. Volumes can be unpredictable and there is a very short processing window for subscriptions and redemptions.”
Fong says that the asset managers have met with the leading distributors many times in recent years to argue the case for automated order routing and have even formed their own association – the Asian Fund Automation Consortium (AFAC) – back in 2006. The consortium consists of the leading cross-border fund promoters such as Fidelity, Schroders and JP Morgan Asset Management who are keen to see the same level of automation and operating standards in Asia that they enjoy in more mature markets like North America and Europe.
However, the distributors in Asia have largely remained unmoved by these appeals, says Fong. “They are concerned with their own processing and it is very easy for them to send and receive faxes. When it comes to automation, their concern is the cost of IT changes and of Swift connectivity so it is difficult for them to make a business case.”
Fong recalls giving a speech to an audience of distributors at a Swift conference five years ago, extolling the benefits of automation for other participants in the chain – reduced operational risk, increased scalability and value added services like intra-day reporting – but there still remains minimal movement on the issue. “The distributors are all aware of the benefits, but no one wants to go first.”
What is needed is some regulatory intervention, says Fong, as has been the case in the domestic markets in China and India. “They have asked for orders to be sent in a standardised file format that goes through a central body. As a result, everything has become tidier and more efficient.
A lot of the funds of our joint venture are distributed throughout thousands of bank branches in China and we have close to 99% straight-through processing rates.”
Ensuring that centralisation is allied to standardisation is key to gaining more processing efficiency, says Fong. This is the scenario in Taiwan where the TDCC has introduced a centralised and standardised format for funds order routing.
“I am optimistic about this initiative because prior to the corporation setting this up there were a number of distributors looking at various solutions, but the pivotal point came with the fact that the TDCC is offering this free to distributors.”
So not only is there the supervisory input from the TDCC, there is also the removal of cost for the distributors and the benefit of a pilot for the distributing banks to witness before committing, thereby addressing almost all of the obstacles that have hindered the automation ambitions of Asian asset managers in previous attempts.
The Taiwan project has three service providers – Calastone, Brown Brothers Harriman and Euroclear – offering solutions for distributors and Fong welcomes this multi-option approach. “I prefer to see several providers offering several solutions otherwise you end up with a monopoly and little control over price. In this model, the beneficiaries will be the users.”
And in the use of Swift, there is a benefit to markets like Taiwan that it can move straight to the latest messaging standard – ISO 20022. “It is easier for Asia because we are late to automation so we do not have the historical burden of migrating from ISO15022 to the latest version and managing multiple messages.”
However, the Asian market remains highly siloed and there is little evidence of any pan-Asian harmonisation or centralisation to what the EU has tried to achieve. “All the markets are separate and I don’t see any move towards regional centralisation,” says Fong. “And there are different levels of automation in different countries.”
Even though Hong Kong and Singapore are the more mature asset management markets with a longer history of cross-border activity, they are both still reliant on faxes for much of the fund distribution, putting them behind Taiwan and Korea and even the domestically-focused markets of India and China.
“The first step is to introduce automation in each country before looking at any regional initiatives. But even then the cross-border links with Luxembourg and Dublin will be more important to the Asian funds market than any pan-Asian cross-border market.”Nevertheless, Fong is optimistic about the year ahead and what it will mean for encouraging automation in Asia’s funds markets. “We can see a light at the end of the tunnel. The Taiwan initiative will be very important and next year it will be as important to see how many distributors participate. But there are still a lot of big names in Hong Kong and Singapore that still have to come on-board.”
©2012 funds global asia