The heterogeneity of Asiaâs different regional markets is leading global asset managers to take the lead in promoting the virtues of processing standards. Nicholas Pratt asks what is involved.
Asia’s growing investment management market has traditionally been characterised as one that is full of potential, but also hampered by a lack of operational efficiency and an over-reliance on manual processes. This perception has been further strengthened by the relatively low cost of labour in many Asian countries, thus perpetuating the presence of manual processes.
The ambitions of international investment managers to expand their interests in the Asian markets have consequently been tempered by this perception of operational inefficiency. But with the economic prospects for the region looking increasingly attractive compared with Western markets, more efforts are being made by large, global investment managers and service providers to address the perceived lack of straight-through processing, automation and efficient settlement.
Since May, for example, global investment manager BlackRock and post-trade services provider Omgeo are jointly promoting the virtues of automated services and straight-through processing in Taiwan.
Julie Feaunati, director of relationship management, Asia Pacific, at Omgeo, says automation is not yet embedded in the Taiwanese market but same-day affirmation rates are high. Much of this is down to the short settlement cycle mandated by the regulator and the strict financial penalties that exist for late settlement.
Furthermore, settlement is often based on domestic settlement and trade processing systems. And for international investment managers operating across a number of Asian markets this means conforming to a range of different operating standards rather than being able to avail of a single global operating platform based on international standards across all of these markets.
So what is involved for investment managers to sign up to the BlackRock/Omgeo drive to encourage greater automation?
“The work mostly involves putting in linkages across systems, which is not a great investment,” says Feaunati. “But where the cost of labour is still cheap, we have to push the other advantages of automation – risk mitigation, for example. If there was a best processing practice across Asia, it would make our life easier but that doesn’t seem to be happening,” he says. “China is one area that we have seen a lot of interest in and they are looking to compare their post-trade environment with other markets. But in some other markets, we struggle to find the same level of interest.”
It is really about market standardisation and consistent processes in Asian markets, says Jeffrey Plein, managing director at BlackRock, of the company’s efforts to encourage greater automation to better minimise settlement-related risk.
“We want to streamline the trade confirmation and settlement process. But equally important is trying to come up with an industry standard,” he says. “In Taiwan, there is no standard, so if we as an industry can take the lead in creating this single standard, we will not have to work with a number of local processes.”
BlackRock is working with a number of post-trade processing vendors to migrate brokers and investment managers in these markets to automated systems. In the case of Taiwan, this system is Omgeo’s central trade matching utility.
“In Taiwan, trading volumes are low and the activity is very domestically focused. The regulators still require paper copies of trade confirmations so promoting the benefits of automation is quite a hard sell,” says Plein.
Another issue in the Taiwanese market is that regulatory interpretation of safeguarding clients’ data means portfolio-level data cannot be shared outside Taiwan. While there may be some merit to this conservativeness, the lack of transparency does hinder operational efficiency.
For any investment manager wanting to operate across multiple Asian markets, it would still be necessary to have a team in Taiwan carrying out operational processes, especially for that market, and another team doing the same for everywhere else in Asia.
Automation is often seen as something where its value is related to the volume of trades, but Plein says it is important to stress the additional benefits, not least its role in encouraging greater cross-border activity both from domestic outflow and international inflow perspective.
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