Asia
05 November 2014
Automation of Asia’s back-office is only the beginning of a series of changes that will bring domestic and global growth to the region
Image: Shutterstock
Asia is possibly the largest and most diverse region in the world. From the high-rise Singapore, to the high-speed Japan, to the highly relaxed Vietnam, banking in this region is going from strength to strength, and over the next few years the industry will be subjected to much change.
Depending on where you are standing, both in terms of geography and business function, post-trade processing environments vary considerably. Focusing on automation, Steve Murphy, regional manager for greater China at SmartStream, believes that firms across the Asia Pacific region “have the appetite to automate but their motivations are different”.
There is a growing pressure for automation in Asia in order to process cross-boarder transactions and support the vast range of markets. Akhter Khan, general manager of Asia Pacific, global technology and operations solutions at Broadridge, explains: “There is also an increased appetite for firms to extend the range of asset groups that they handle and to process them on a single unified solution instead of using discrete operational and IT silos.”
For the most part, automation is not the problem, but having the technology to do so is. Khan says: “Asia’s incumbent technology lacks the flexibility and underlying architecture to meet their strategic needs for multi-market and multi-asset operations.” This lack of sophisticated technology could be holding markets back.
Japan
As one of the largest territories in the post-trade space, Japan has been a leader in the automated field since fully automating its proxy voting system in 2005. Working with the Tokyo Stock Exchange (TSE) and Japan’s Securities Dealers Association, Investor Communications Japan, Broadridge’s ProxyEdge solution created a “radical improvement”, says Patricia Rosch, president of investor communication solutions international for Broadridge.
She added: “Efficiency to the cross-boarder investor community, extending voting deadlines up to meeting date-1 was a major advance from the meeting date-10 cut off that many international investors had been forced to work with under the prior volumes.”
To date, 466 Japanese companies are now using the shareholder communications and voting service, which Rosch says “includes almost all of Japan’s leading blue-chip listed companies, representing 80 percent of the market capitalisation of the TSE first section”. By having a high percentage of companies aligned with the proxy voting automation, timeliness and accuracy of cross-boarder voting has improved for foreign investors of the 466 companies.
Looking beyond Japan, automation and the benefits of it for post-trade processes are largely aligned to the volumes, the diversity/complexity of markets and products traded and narrowing settlement cycles. In some countries, there is not enough volume for automation to be “too much of a concern”.
However, Murphy explains that, as the markets become more interlinked and volumes increase across the region, securities operations will be expected to achieve consistent, transparent performance in execution or settlement with concessions only being made to less automated countries for so long.
If you consider many Asian markets’ adoption of T+2 settlement, and the constant search for efficiency, risk mitigation and regulatory compliance, institutions and markets with lower levels of automation levels will have to discard manual processes in order to compete and stand up to scrutiny among peer firms that have already made considerable investment in automated processing, such as those in Australia or Singapore.
Regulations
With global regulations interlinking markets more than ever before, their effect is being felt in Asian financial operations as well as their Western peers. Any significant level of investment exposure to Europe and the US demands institutions in Asia need to keep up and comply with the regulations in those geographies. “The Foreign Account Tax Compliance Act, Dodd-Frank Act, legal entity identifiers, know your customer; they are all very much front and centre for Asian institutions,” explains Murphy, “with the biggest regulatory demand arising from Basel III”.
Similar to the European Market Infrastructure Regulation and the Markets in Financial Instruments Directive, Basel III is a regulatory standard on capital requirements and maintaining proper leverage ratios. “The liquidity coverage ratios, the reporting, and the means to be able to report on demand is an imperative that everyone has to be able to meet,” says Murphy.
He adds: “We’ve gone from a situation where the regulator would ask if an institution has adequate liquidity to cover their positions; they could say ‘yes we have’ and the regulator would be happy. But now, under Basel III, this is no longer the case, institutions are under a lot more scrutiny and the regulators want to see evidence, in real-time, that institutions have the necessary liquidity at their disposal.”
Alongside global regulations, Murphy explains that certain markets in Asia have the added pressure of complying with their own domestic financial regulations. As well as Hong Kong licensed banks’ obligations under the Monetary Authority’s Basel III provisions, non-bank institutions regulated by the Standards and Futures commission must comply with its financial resources rules.
By keeping compliant with regulations and increasing focus on corporate governance and transparency, both Khan and Rosch agree, they “will also play a role in attracting foreign investment funds and, through that, growth”. Adopting these “international standards” will benefit not only the cross-boarder consistency and alignment, but will add to benefits on “an individual market level”.
Stock connect
On 1 October 2014, the Shanghai-Hong Kong Stock Connect (SHSC) will go live, which, according to Alistair Murray, regional head of asset managers sector at HSBC Securities Services, “is receiving a huge amount of interest from global investors”.
For some, as Murray explains, the SHSC is seen as an alternative to the traditional China market access routes, such as the qualified foreign institutional investor and the RMB qualified foreign institutional investor.
The SHSC is the first channel for mutual market access between mainland China and Hong Kong for a broad range of investors. The SHSC will give participants easy access to hundreds of companies’ shares. A spokesperson for the Hong Kong Exchange (HKEx) says: “The SHSC will pave the way for further opening up on mainland China’s capital account and RMB internationalisation … resulting in new investment opportunities and more choice for participants.”
The exchange is open to all participants and members of the stock exchanges in Hong Kong and Shanghai, but the SHSC is not mandatory to join. The initiative may not fit into strategies or business models of some firms, or they could take a ‘wait and see’ approach to how the market reacts to the SHSC. “It is a decision of the individual investors and brokers,” says the HKEx spokesperson. “If they want to join the scheme later, they are welcome to do so at any time.”
With a “scalable and replicable” design, the HKEx spokesperson says the future could see similar exchanges “expanded to cover other markets and/or asset classes on mainland China and elsewhere.” For now, the exchange remains exclusive to Shanghai and Hong Kong, although the introduction of passporting in the next two years will ease cross-boarder trading for the rest of Asia.
In the future
The year 2016 will see the implementation of the Association of Southeast Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation (APEC) fund passports. A similar style to the European UCITS, the passporting will reap huge benefits to the smaller, emerging Asian markets. The passports will work in conjunction with UCITS, allowing fund managers access to markets that Murrays says “are not currently available to their UCITS funds”.
“If the passporting schemes are successful,” says Murray, “then fund managers will be able to benefit from economies of scale, attract a larger population of investors and give them access to new markets that they would previously have been unable to enter.”
A recent release from the ASEAN Exchanges has suggested that steps are being put in place to create an ASEAN asset class. Speaking on behalf of ASEAN Exchanges, Magnus Bocker, CEO of Singapore Exchange, said: “The collaboration action amongst ASEAN Exchanges has been a vital force in moving things forward to achieve our goals and this is most evident in the significant progress we have made over a relatively short period of time.”
“Each of the exchange members has embarked on their own in-market engaging activities with the market players to market and create greater visibility of ASEAN products to investors.”
While Japan continues to enhance its proxy voting process, Broadridge sees interest across the region is spiking to move to electronic voting. Combine that with impending passport schemes and automation proving significant to Asian market, growth is likely to come both in domestic terms and in proving the Asian markets to be global players.
Depending on where you are standing, both in terms of geography and business function, post-trade processing environments vary considerably. Focusing on automation, Steve Murphy, regional manager for greater China at SmartStream, believes that firms across the Asia Pacific region “have the appetite to automate but their motivations are different”.
There is a growing pressure for automation in Asia in order to process cross-boarder transactions and support the vast range of markets. Akhter Khan, general manager of Asia Pacific, global technology and operations solutions at Broadridge, explains: “There is also an increased appetite for firms to extend the range of asset groups that they handle and to process them on a single unified solution instead of using discrete operational and IT silos.”
For the most part, automation is not the problem, but having the technology to do so is. Khan says: “Asia’s incumbent technology lacks the flexibility and underlying architecture to meet their strategic needs for multi-market and multi-asset operations.” This lack of sophisticated technology could be holding markets back.
Japan
As one of the largest territories in the post-trade space, Japan has been a leader in the automated field since fully automating its proxy voting system in 2005. Working with the Tokyo Stock Exchange (TSE) and Japan’s Securities Dealers Association, Investor Communications Japan, Broadridge’s ProxyEdge solution created a “radical improvement”, says Patricia Rosch, president of investor communication solutions international for Broadridge.
She added: “Efficiency to the cross-boarder investor community, extending voting deadlines up to meeting date-1 was a major advance from the meeting date-10 cut off that many international investors had been forced to work with under the prior volumes.”
To date, 466 Japanese companies are now using the shareholder communications and voting service, which Rosch says “includes almost all of Japan’s leading blue-chip listed companies, representing 80 percent of the market capitalisation of the TSE first section”. By having a high percentage of companies aligned with the proxy voting automation, timeliness and accuracy of cross-boarder voting has improved for foreign investors of the 466 companies.
Looking beyond Japan, automation and the benefits of it for post-trade processes are largely aligned to the volumes, the diversity/complexity of markets and products traded and narrowing settlement cycles. In some countries, there is not enough volume for automation to be “too much of a concern”.
However, Murphy explains that, as the markets become more interlinked and volumes increase across the region, securities operations will be expected to achieve consistent, transparent performance in execution or settlement with concessions only being made to less automated countries for so long.
If you consider many Asian markets’ adoption of T+2 settlement, and the constant search for efficiency, risk mitigation and regulatory compliance, institutions and markets with lower levels of automation levels will have to discard manual processes in order to compete and stand up to scrutiny among peer firms that have already made considerable investment in automated processing, such as those in Australia or Singapore.
Regulations
With global regulations interlinking markets more than ever before, their effect is being felt in Asian financial operations as well as their Western peers. Any significant level of investment exposure to Europe and the US demands institutions in Asia need to keep up and comply with the regulations in those geographies. “The Foreign Account Tax Compliance Act, Dodd-Frank Act, legal entity identifiers, know your customer; they are all very much front and centre for Asian institutions,” explains Murphy, “with the biggest regulatory demand arising from Basel III”.
Similar to the European Market Infrastructure Regulation and the Markets in Financial Instruments Directive, Basel III is a regulatory standard on capital requirements and maintaining proper leverage ratios. “The liquidity coverage ratios, the reporting, and the means to be able to report on demand is an imperative that everyone has to be able to meet,” says Murphy.
He adds: “We’ve gone from a situation where the regulator would ask if an institution has adequate liquidity to cover their positions; they could say ‘yes we have’ and the regulator would be happy. But now, under Basel III, this is no longer the case, institutions are under a lot more scrutiny and the regulators want to see evidence, in real-time, that institutions have the necessary liquidity at their disposal.”
Alongside global regulations, Murphy explains that certain markets in Asia have the added pressure of complying with their own domestic financial regulations. As well as Hong Kong licensed banks’ obligations under the Monetary Authority’s Basel III provisions, non-bank institutions regulated by the Standards and Futures commission must comply with its financial resources rules.
By keeping compliant with regulations and increasing focus on corporate governance and transparency, both Khan and Rosch agree, they “will also play a role in attracting foreign investment funds and, through that, growth”. Adopting these “international standards” will benefit not only the cross-boarder consistency and alignment, but will add to benefits on “an individual market level”.
Stock connect
On 1 October 2014, the Shanghai-Hong Kong Stock Connect (SHSC) will go live, which, according to Alistair Murray, regional head of asset managers sector at HSBC Securities Services, “is receiving a huge amount of interest from global investors”.
For some, as Murray explains, the SHSC is seen as an alternative to the traditional China market access routes, such as the qualified foreign institutional investor and the RMB qualified foreign institutional investor.
The SHSC is the first channel for mutual market access between mainland China and Hong Kong for a broad range of investors. The SHSC will give participants easy access to hundreds of companies’ shares. A spokesperson for the Hong Kong Exchange (HKEx) says: “The SHSC will pave the way for further opening up on mainland China’s capital account and RMB internationalisation … resulting in new investment opportunities and more choice for participants.”
The exchange is open to all participants and members of the stock exchanges in Hong Kong and Shanghai, but the SHSC is not mandatory to join. The initiative may not fit into strategies or business models of some firms, or they could take a ‘wait and see’ approach to how the market reacts to the SHSC. “It is a decision of the individual investors and brokers,” says the HKEx spokesperson. “If they want to join the scheme later, they are welcome to do so at any time.”
With a “scalable and replicable” design, the HKEx spokesperson says the future could see similar exchanges “expanded to cover other markets and/or asset classes on mainland China and elsewhere.” For now, the exchange remains exclusive to Shanghai and Hong Kong, although the introduction of passporting in the next two years will ease cross-boarder trading for the rest of Asia.
In the future
The year 2016 will see the implementation of the Association of Southeast Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation (APEC) fund passports. A similar style to the European UCITS, the passporting will reap huge benefits to the smaller, emerging Asian markets. The passports will work in conjunction with UCITS, allowing fund managers access to markets that Murrays says “are not currently available to their UCITS funds”.
“If the passporting schemes are successful,” says Murray, “then fund managers will be able to benefit from economies of scale, attract a larger population of investors and give them access to new markets that they would previously have been unable to enter.”
A recent release from the ASEAN Exchanges has suggested that steps are being put in place to create an ASEAN asset class. Speaking on behalf of ASEAN Exchanges, Magnus Bocker, CEO of Singapore Exchange, said: “The collaboration action amongst ASEAN Exchanges has been a vital force in moving things forward to achieve our goals and this is most evident in the significant progress we have made over a relatively short period of time.”
“Each of the exchange members has embarked on their own in-market engaging activities with the market players to market and create greater visibility of ASEAN products to investors.”
While Japan continues to enhance its proxy voting process, Broadridge sees interest across the region is spiking to move to electronic voting. Combine that with impending passport schemes and automation proving significant to Asian market, growth is likely to come both in domestic terms and in proving the Asian markets to be global players.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
