Momentum of a pipe dream: the operational challenges of Asian fund passports
03 Jun 2015
With rules and operational arrangements currently being developed in earnest, the dawn of the Asian funds passport seems fast upon us. Headlines in the FT have progressed from the rather negative “Regional mutual fund passport a ‘pipe dream’” in 2011, to the more positive “Asian fund passports gain momentum” in February 2015. But will an Asian funds passport really prove useful for fund managers?
Industry experts, such as Lawrence Au, head of the Asia Pacific at BNP Paribas Securities Services, think it will result in change in Asia, but only if investment companies customise their funds to suit Asian markets. Ernst & Young, one of the ‘Big Four’ accounting firms, has erred on the side of caution, advising: “Any firm with regional aspirations in Asia should at least consider its potential response to the proposals.”
The ARFP, backed by the Asia Pacific Economic Cooperation (APEC), was developed in order to provide a “multilaterally agreed framework to facilitate the cross-border marketing of managed funds across participating economies in the Asia region”. It is not, however, the only passporting initiative in the area. The Association of Southeast Asian Nations Collective Investment Schemes (ASEAN CIS passport), launched in August 2014 and covering, Singapore, Malaysia and Thailand, allows fund managers within those countries to distribute fund products “via a streamlined process” across borders to retail investors.
Yet the initiative that has attracted the most excitement is the imminent launch on 1 July of Hong Kong and China Mutual Recognition of Funds (MRF), not surprisingly because of the potential access to the lucrative Chinese market it represents.
Each of these three competing schemes have the same central goal, to give Asian investors a greater choice of investment and to revamp Asian capital markets in order that they become more integrated and resilient. In essence, each of these schemes aims to emulate the EU’s UCITS framework in which funds can operate freely throughout the EU on the basis of a single authorisation from one member state.
With only one of the schemes begun so far (at the time of writing, the official commencement of MRF was only just announced on 22 May), there remains scepticism over the launch date of the ARFP, as well as the amount of take-up each will attract. It is unlikely that the programmes will experience overnight the same levels of success currently enjoyed by UCITS products.
The programmes are also hindered by a region that is legislatively and economically divided. The lack of a central governing body, common currency and harmony, given that participation of some countries is dependent on their success in becoming the principle Asian domicile for funds, are all potential reasons standing in the way of success.
There are also uncertainties as to whether there would be sufficient values in order to attract investors and distributors, as well as concern over whether current operating models would be able to handle a move from pure domestic to regional servicing.
Strength in numbers
But does this pessimism count for much when we are talking about the fastest growing and most dynamic region in the world?
If the common aim of all three of the schemes is to better integrate and strengthen Asian capital markets, then it stands to reason that regional authorities will start to put more emphasis on their own schemes rather than continuing to approve UCITS distribution, although slows downs have been noted in Hong Kong and Taiwan.
In addition, Asian regulators continue to be uncomfortable with the introduction of UCITS III and its more extensive range of derivative investment products. While the lack of a central governing body for each of these schemes remains one of the most difficult hurdles to overcome, the desire to create a competitive product to rival UCITS may actually act as a catalyst in creating a consensus amongst Asian governing bodies.
As with UCITS, Asian funds passports will similarly take time to develop and reach similar maturity and success. The UCITS framework was created in 1985, with the first UCITS Directive implemented in 1988. It took another five years to see any material flow and more than 15 years for UCITS to become a real success. What’s more, there was no single currency at the time of UCITS’s creation; even today, several members of the EU do not use the euro, yet UCITS has successfully developed across Europe and even outside of Europe.
In terms of distribution, investors in less mature markets (including Malaysia, Thailand, Indonesia, Vietnam, Philippines and China) have a chance to greatly benefit from access to funds from experienced global and regional fund managers.
If the passporting schemes were to succeed, it will be mandatory for those firms interested in cross-border distribution to have an onshore presence in at least one of the participating markets, as well as strong branding and access to distribution networks across the region.
In terms of operating models, distributors and fund managers alike will need to leverage technology and service providers with a proven expertise and track record in cross-border fund processing.
Seamless cross-border distribution
The advent of Asian passport initiatives and the general trends towards globalisation of the mutual fund distribution industry create a great opportunity for Asia-based fund mangers to leverage their regional brand to export their fund management expertise and products to a broader investor base. But equally, cross-border distribution creates a wide range of new operating challenges, which need to be identified and understood in advance in order to unlock any opportunities.
While Asian fund managers still remain mostly domestically focused in terms of fund distribution, UCITS fund providers have nearly 30 years of experience in operating in a cross-border distribution environment. The most successful firms have set-up an efficient and scalable operating model that enables them to smoothly distribute a single-fund range to a wide range of disparate fund distributors located in more than 50 countries.
Calastone has been helping leading global fund managers in standardising and streamlining their fund transaction interactions with their key distributors globally. Calastone’s community includes more than 800 clients in 23 domiciles processing domestic and cross-border fund transactions over its network.
Positioned as the leading fund messaging network in the key markets actively involved in the Asian fund passporting schemes (Australia, Hong Kong and Singapore), Calastone is ideally placed to support the Asian fund community in building the efficient and secured fund messaging infrastructure required for the successful development of these passports.
(This article first appeared in the Asset Servicing Times, Issue 115, p27)