Standardising post-trade operations is necessary for a healthy cross-border funds industry in Asia. The Korea Securities Depository helped establish a forum to promote co-operation.
The global fund industry’s eyes are on Asia, a region brimming with potential for growth with dynamic and unique developments.
One such development is the emergence of multiple fund passport schemes, or mutual recognition agreements, as the region aspires to create its own version of Ucits. Separate approaches are taking place based in different blocs, with the ASEAN Collective Investment Scheme (CIS) established in August 2014, Mutual Recognition of Funds between mainland China and Hong Kong effective from July 2015, and the Asia Region Funds Passport poised to launch in early 2018. Their current outcomes are modest at best, but to be fair, the success of Ucits wasn’t achieved overnight and the differences in terms of regulation and market practice found between Asian economies are much wider than in the European market.
Overall, it is significant to note that the deeply fragmented region is trying to build bridges across the traditionally domestic-centric markets with regulatory arrangements that will gradually push for more cross-border fund flows.
However, even when one overcomes regulatory barriers by signing co-operation deals on complicated issues like tax, market players face another hurdle when trying to engage in cross-border trading: back-office processing. What kind of trading information should be conveyed overseas, to whom, and in what format, to open a fund account and manage book-entry? How are corporate actions notified, net asset values exchanged, and KYC [know-your-customer] verified? What constitutes a settlement instruction, and how is it delivered between entities? These are just a few examples of questions that companies need to answer in a region where market practices are disparate and un-harmonised, with the diversity of currency and language causing further complications. As many markets still largely rely on manual methods for back-office operations, which is itself inefficient and costly, processing across different time zones can result in substantial increase of operational risk.
Evolution
Meanwhile, another regional trend is the emergence of domestic fund platforms driven by market infrastructures and often urged by regulators. In some of the more advanced fund markets, market players have evolved their post-trade services to cut margin and increase competitiveness, more so because, when the front office matures, the focus is shifted towards the back office.
For economies with a shorter history of fund market development and less globalised environment, there hasn’t been the leisure of investing in back-office operations. Instead, the energy is concentrated in honing asset management skills and shaping the market. Hence, market infrastructures such as central securities depositaries (CSDs) came into the picture, introducing fund platform services to be used across the industry, boosting automation, offering harmonised business standards and cutting costs for everyone. Although differing in the scope of services provided, CSD fund platforms generally offer a single channel of contact to market players to avoid the spaghetti model of many-to-many connection. This system assists in post-trade operations such as order routing, trade confirmation, transfer agency and settlement.
Examples of CSD fund platforms include the Korea Securities Depository’s FundNet (2004), Taiwan Depository & Clearing Corporation’s FundClear (2005), Hong Kong Monetary Authority’s CMU Fund Order Routing and Settlement Service (2009), China Securities Depository & Clearing Corp’s Central Data Exchange Platform (2011), PT Kustodian Sentral Efek Indonesia’s S-INVEST (2016) and the most recent case of Stock Exchange of Thailand’s FundConnext (2017).
In some economies such as Korea and Indonesia, the use of the CSD platform for fund subscription/redemption is mandated by law, while for others, the CSD provides competing services in the market. Based on close relationships with regulators, CSDs are in a good strategic position to encourage industry-wide adoption of standardised practices. Hence, a growing number of CSDs in the region are seeking to expand and evolve their post-trade infrastructure, supporting the mutual development of the fund industry.
Against the backdrop of increased interest towards fund cross-border trading and expanding fund services of CSDs, a consultative body called the Asia Fund Standardisation Forum (AFSF) was established in November 2015, as an initiative under the ACG (Asia-Pacific CSD Group), an international organisation aiming to promote mutual co-operation among CSDs. The objective of the AFSF is to exchange information about different models of fund post-trade processing and to make recommendations on standardised practices to promote inter-operability and automation. Its regular members consist of 14 CSDs from 13 Asian economies (India has two national CSDs) and advisory members include six global fund service providers (Clearstream, Deutsche Bank, DTCC, Euroclear, Morningstar and SWIFT) as of August 2017. Its membership is continuously increasing.
The KSD, the national CSD of Korea, is leading the AFSF activities as a co-ordinator, being the initial proposer to establish the forum.
Knowledge exchange
Upon establishment, the AFSF has focused efforts on knowledge exchange among members through various means. For example, a survey on member economies’ fund markets was conducted to understand different characteristics and structures, and as a result, the ‘Asia Fund Market Report’ was published in December 2016.
The second survey conducted during 2017 aims to compare and analyse what types of fund information are documented for general investors. The aim is to learn whether the information disclosure in one economy meets the standards of another when funds are traded across borders.
Apart from surveys, the first physical meeting was held in June 2016 in Seoul, where members discussed fund platform features, business processes and plans for new services. The second was held in September 2017, in Mumbai, inviting not only AFSF members but also market players and regulators.
The activities of the AFSF have been noted and introduced in external outlets, including the ‘2016 Progress Report’ which was published by the Asia-Pacific Financial Forum (APFF) to be submitted to the APEC finance ministers’ meeting. Following this event, the AFSF participated in the APFF financial market infrastructure symposium, held in April 2017, to lead the fund services discussion on passport funds, fund processing standardisation and AFSF activities.
The AFSF and the importance of standardising fund back-office processing was also introduced in the 2016-17 annual report published by the ARFP joint committee, a working group overseeing the implementation and operation of the ARFP. Such exposure through diverse channels is expected to increase awareness of the organisation.
It is difficult to foresee how trends such as various fund passport schemes, CSD-operated platforms or regional discussion forums will shape the fund markets in Asia.
Asia is going through vibrant changes and unique developments not seen elsewhere, making comparison with other cases difficult.
Whether these initiatives will, albeit slowly, successfully integrate the fragmented markets together, time will have to tell. For sure, Asia will stay under the focus of the global fund industry for some time to come.
The Korea Securities Depository is co-ordinating the Asia Fund Standardisation Forum
©2017 funds global asia