Singapore and custody: HSBC’s POV
30 May 2012
AST speaks to Tony Lewis of HSBC Securities Services in Singapore to discover what’s on the agenda for the bank’s asset servicing business
in that domicile
Image: Shutterstock
What do you do in your current role?
In my role as head of HSBC Securities Services (HSS) in Singapore, I spend my time meeting our customers and prospective customers, working closely with my team and HSBC Group colleagues to develop deeper partnerships with our customers and create new business opportunities. Externally, it is important that I am visible in the market, championing change as our client’s advocate, contributing to the development of local regulations and market infrastructure.
Change is a constant, so I am here to ensure that we bring to our customers the right products and deliver them in the most efficient manner, leveraging HSS’s global operating models and product solutions.
I spend a significant amount of my time with my team, developing our talent, ensuring that we have the right people in the right roles across the business and creating new and different development opportunities for all staff, whether in Singapore or elsewhere within the HSBC Group.
As a custodian, what kinds of products does your business look after in Singapore?
HSS in Singapore provides a full range of product solutions for a broad range of strategically important client groups. We provide custody, fund administration, trustee, securities lending, foreign exchange, collateral management, middle-office outsourcing, corporate trust and loan agency facilities solutions for alternative (including private equity) and traditional asset managers, sovereign wealth funds, insurance companies, banks and broker dealers.
We are trustee, administrator and custodian for locally listed ETFs (exchange-traded funds), including fixed income ETFs, requiring us to leverage the multi-location and multi-time zone operating model that we have to ensure prices are available to the locally-based asset managers at start of day, T+1.
Additionally, for many years, we have maintained significant market share as trustee and service provider for both the onshore regulated fund market and the SGX-listed (Singapore Exchange-) real estate investment trusts. Both trust products are regarded as collective investment schemes (CIS) and are governed by the Code on Collective Investment Schemes. The assets under custody extend to properties, cash deposits, listed securities, bonds, derivatives and units in other collective investment schemes.
How have the types of available products changed during your time in Singapore, and how has this affected the custody business?
During the last two years, we have seen evolving product needs from clients. For example, we have seen hedge funds looking for more sophisticated and comprehensive outsourcing services and performance fee calculations. We have been working with asset managers in the area of extending reach and automation of distribution. Interest in generating new revenues through entering into securities lending programmes has also become an area of focus for many asset managers.
Regulations around retail collective investment schemes continue to be developed and are increasingly aligned to the UCITs framework, driving transparency, liquidity and lower risk profiles in this area.
What does your client base look like?
In the asset management space, 70 percent of the fund managers are international companies and 30 percent are local Singapore companies. For REITs specifically, REIT managers have to be a Singapore company, although the sponsors behind them are 60 percent local and 40 percent foreign. On top of this, our clients will often have funds domiciled in locations outside of Singapore, but operating onshore. The vast majority of banks and broker dealers that we service are overseas. These clients generally use HSBC in multiple markets, with Singapore being just one of them.
On the settlement side of the custody business, what is concerning you the most in Singapore at the moment?
Today, we have a local market settlement model not dissimilar to Australia in respect of matching and settlement. Once matching is complete, settlement is irrevocable creating credit risk for service providers such as HSBC. Additionally, settlement proceeds or costs are netted and credited or debited ahead of the related securities transfers. The timing difference can be as much as six hours. We are therefore looking to work with market participants to reduce the time lag between securities and cash settlement legs. Better still, in our view, would be to move to a gross cash settlement (BIS Model 1) model and eventually a real-time settlement model with intra-day matching.
How fast and efficient is the financial transaction process in Singapore?
The trading environment in Singapore is world class in terms of speed and efficiency. Post-trade is a different story. To tackle the current challenges, SGX started its Mainframe Migration Project earlier this year. The project aims to create open access connectivity, moving us to a true settlement STP environment via an Application Programming Interface. This migration plan aims to also provide a direct link to the Pre Settlement Matching System, which will eliminate the manual up-loading and down-loading of trades. HSBC is very supportive of this initiative as it will create an environment that supports increased institutional activity, reduces operational risks, and eventually, lowers costs to investors.
What about reporting services?
Reporting requirements are generally in line with what we see in other locations across the different client sectors. Larger institutional banks, broker dealers and asset managers are looking for SWIFT-based messaging for settlements, corporate actions, reconciliations, banking and payments services. Clients also often wish to see real time information via online solutions such as our HSBCnet portal, and have the flexibility to extract data and create their own reports.
Reporting requirements for our trustee and fund administration services are a variation on what we see in other jurisdictions. Authorised unit trusts in Singapore are required to prepare their financial statements in the manner that is prescribed under Recommended Accounting Practice 7 (RAP 7). RAP 7 is only applicable to Singapore-authorised unit trusts and it sets out recommendations as to how the managers of a unit trust who are authorised by the MAS (Monetary Authority of Singapore) should prepare the unit trust’s financial statements.
The Code on Collective Investment Schemes additionally requires the semi-annual accounts and annual accounts to be sent to participants within two months and three months respectively. These requirements are more stringent to a degree when compared to many other jurisdictions, where we usually see publication periods of four-to-six months for annual accounts. The shorter time frames require us, as a service provider, to partner very closely with our clients during these reporting periods.
How do you identify, attract and select sub-custodians in Singapore and the Asia Pacific region?
Our sub-custodian selection process is institutionalised and globally centralised. In addition to the 41 markets where we use HSBC’s own sub-custody services, we appoint third-party sub-custodians applying the same criteria to all selections, whether HSBC Group or external appointments. These key criteria are based on reputation, credit rating and a due diligence process.
What is the regulatory environment like in Singapore at the moment?
Specifically in Singapore, we are seeing the regulator requiring greater transparency and this includes areas not previously subject to detailed regulation, such as OTC derivatives. Regulations that are applied to market participants continue to be reviewed and those entities previously exempted from certain aspects are increasingly likely to be subject to regulation.
Asset safety is still very high on the agenda. Generally, regulators have taken a lead in terms of looking more closely at custodians for asset safety. We have seen much more regulation focusing on knowing your customers’ clients, currently translating into the need to have more detailed information in respect of beneficial ownership. We are also seeing more attention on how a custodian is managing and monitoring the activities of sub-custodians and market participants.
What securities lending services do you offer as a custodian?
HSBC offers a full range of agency securities lending services to our clients. We have a securities lending proposition for clients with a number of possible options in order to maximise revenues within clear risk parameters.
We provide agency lending to a diverse group of borrowers backed by a HSBC indemnification. HSS offers multiple routes to market, including custody and third-party lending, discretionary lending and the exclusive auctioning of lending portfolios.
A defining feature of our agency lending programme is that it is backed by an indemnity provided by The Hong Kong and Shanghai Banking Corporation, which is rated AA-/Aa1 by Standard & Poor’s and Moody’s respectively. It also has shareholder equity of US $44 billion (as of 31 December 2011).
What is the demand for securities lending services in Singapore?
In the past six months, we have had a notable increase in the number of requests from beneficial owners who wish to establish securities lending programmes. These beneficial owners include institutional investors (insurance companies, pension funds) and more interestingly, for the first time, Singapore-domiciled mutual funds and unit trusts.
These beneficial owner lending requirements tend to be global in nature and are not limited to Singapore equities and bonds. Cost pressures have been encouraging beneficial owners and fund managers to seek out additional returns from their portfolios.
Beneficial owners have also focused on risk mitigation, showing a greater awareness of risk adjusted returns rather than absolute return as was previously the case.
What collateral requirement trends are you seeing in Singapore?
Over the past year, we have seen a significant increase from clients requiring collateral management services. The main reasons for this increased demand are as follows: to minimise counterparty credit exposure; to increase the number of counterparties with whom clients are able to transact; and to increase the return on trading activities
The increased collateral requirement has largely been linked to clients wishing to extend International Swaps and Derivatives Association agreements to include CSAs with trading counterparties. Many clients have been examining whether they have the infrastructure and people to support collateralised trading and what the alternative costs are in outsourcing this activity to securities services providers such as HSS.
In my role as head of HSBC Securities Services (HSS) in Singapore, I spend my time meeting our customers and prospective customers, working closely with my team and HSBC Group colleagues to develop deeper partnerships with our customers and create new business opportunities. Externally, it is important that I am visible in the market, championing change as our client’s advocate, contributing to the development of local regulations and market infrastructure.
Change is a constant, so I am here to ensure that we bring to our customers the right products and deliver them in the most efficient manner, leveraging HSS’s global operating models and product solutions.
I spend a significant amount of my time with my team, developing our talent, ensuring that we have the right people in the right roles across the business and creating new and different development opportunities for all staff, whether in Singapore or elsewhere within the HSBC Group.
As a custodian, what kinds of products does your business look after in Singapore?
HSS in Singapore provides a full range of product solutions for a broad range of strategically important client groups. We provide custody, fund administration, trustee, securities lending, foreign exchange, collateral management, middle-office outsourcing, corporate trust and loan agency facilities solutions for alternative (including private equity) and traditional asset managers, sovereign wealth funds, insurance companies, banks and broker dealers.
We are trustee, administrator and custodian for locally listed ETFs (exchange-traded funds), including fixed income ETFs, requiring us to leverage the multi-location and multi-time zone operating model that we have to ensure prices are available to the locally-based asset managers at start of day, T+1.
Additionally, for many years, we have maintained significant market share as trustee and service provider for both the onshore regulated fund market and the SGX-listed (Singapore Exchange-) real estate investment trusts. Both trust products are regarded as collective investment schemes (CIS) and are governed by the Code on Collective Investment Schemes. The assets under custody extend to properties, cash deposits, listed securities, bonds, derivatives and units in other collective investment schemes.
How have the types of available products changed during your time in Singapore, and how has this affected the custody business?
During the last two years, we have seen evolving product needs from clients. For example, we have seen hedge funds looking for more sophisticated and comprehensive outsourcing services and performance fee calculations. We have been working with asset managers in the area of extending reach and automation of distribution. Interest in generating new revenues through entering into securities lending programmes has also become an area of focus for many asset managers.
Regulations around retail collective investment schemes continue to be developed and are increasingly aligned to the UCITs framework, driving transparency, liquidity and lower risk profiles in this area.
What does your client base look like?
In the asset management space, 70 percent of the fund managers are international companies and 30 percent are local Singapore companies. For REITs specifically, REIT managers have to be a Singapore company, although the sponsors behind them are 60 percent local and 40 percent foreign. On top of this, our clients will often have funds domiciled in locations outside of Singapore, but operating onshore. The vast majority of banks and broker dealers that we service are overseas. These clients generally use HSBC in multiple markets, with Singapore being just one of them.
On the settlement side of the custody business, what is concerning you the most in Singapore at the moment?
Today, we have a local market settlement model not dissimilar to Australia in respect of matching and settlement. Once matching is complete, settlement is irrevocable creating credit risk for service providers such as HSBC. Additionally, settlement proceeds or costs are netted and credited or debited ahead of the related securities transfers. The timing difference can be as much as six hours. We are therefore looking to work with market participants to reduce the time lag between securities and cash settlement legs. Better still, in our view, would be to move to a gross cash settlement (BIS Model 1) model and eventually a real-time settlement model with intra-day matching.
How fast and efficient is the financial transaction process in Singapore?
The trading environment in Singapore is world class in terms of speed and efficiency. Post-trade is a different story. To tackle the current challenges, SGX started its Mainframe Migration Project earlier this year. The project aims to create open access connectivity, moving us to a true settlement STP environment via an Application Programming Interface. This migration plan aims to also provide a direct link to the Pre Settlement Matching System, which will eliminate the manual up-loading and down-loading of trades. HSBC is very supportive of this initiative as it will create an environment that supports increased institutional activity, reduces operational risks, and eventually, lowers costs to investors.
What about reporting services?
Reporting requirements are generally in line with what we see in other locations across the different client sectors. Larger institutional banks, broker dealers and asset managers are looking for SWIFT-based messaging for settlements, corporate actions, reconciliations, banking and payments services. Clients also often wish to see real time information via online solutions such as our HSBCnet portal, and have the flexibility to extract data and create their own reports.
Reporting requirements for our trustee and fund administration services are a variation on what we see in other jurisdictions. Authorised unit trusts in Singapore are required to prepare their financial statements in the manner that is prescribed under Recommended Accounting Practice 7 (RAP 7). RAP 7 is only applicable to Singapore-authorised unit trusts and it sets out recommendations as to how the managers of a unit trust who are authorised by the MAS (Monetary Authority of Singapore) should prepare the unit trust’s financial statements.
The Code on Collective Investment Schemes additionally requires the semi-annual accounts and annual accounts to be sent to participants within two months and three months respectively. These requirements are more stringent to a degree when compared to many other jurisdictions, where we usually see publication periods of four-to-six months for annual accounts. The shorter time frames require us, as a service provider, to partner very closely with our clients during these reporting periods.
How do you identify, attract and select sub-custodians in Singapore and the Asia Pacific region?
Our sub-custodian selection process is institutionalised and globally centralised. In addition to the 41 markets where we use HSBC’s own sub-custody services, we appoint third-party sub-custodians applying the same criteria to all selections, whether HSBC Group or external appointments. These key criteria are based on reputation, credit rating and a due diligence process.
What is the regulatory environment like in Singapore at the moment?
Specifically in Singapore, we are seeing the regulator requiring greater transparency and this includes areas not previously subject to detailed regulation, such as OTC derivatives. Regulations that are applied to market participants continue to be reviewed and those entities previously exempted from certain aspects are increasingly likely to be subject to regulation.
Asset safety is still very high on the agenda. Generally, regulators have taken a lead in terms of looking more closely at custodians for asset safety. We have seen much more regulation focusing on knowing your customers’ clients, currently translating into the need to have more detailed information in respect of beneficial ownership. We are also seeing more attention on how a custodian is managing and monitoring the activities of sub-custodians and market participants.
What securities lending services do you offer as a custodian?
HSBC offers a full range of agency securities lending services to our clients. We have a securities lending proposition for clients with a number of possible options in order to maximise revenues within clear risk parameters.
We provide agency lending to a diverse group of borrowers backed by a HSBC indemnification. HSS offers multiple routes to market, including custody and third-party lending, discretionary lending and the exclusive auctioning of lending portfolios.
A defining feature of our agency lending programme is that it is backed by an indemnity provided by The Hong Kong and Shanghai Banking Corporation, which is rated AA-/Aa1 by Standard & Poor’s and Moody’s respectively. It also has shareholder equity of US $44 billion (as of 31 December 2011).
What is the demand for securities lending services in Singapore?
In the past six months, we have had a notable increase in the number of requests from beneficial owners who wish to establish securities lending programmes. These beneficial owners include institutional investors (insurance companies, pension funds) and more interestingly, for the first time, Singapore-domiciled mutual funds and unit trusts.
These beneficial owner lending requirements tend to be global in nature and are not limited to Singapore equities and bonds. Cost pressures have been encouraging beneficial owners and fund managers to seek out additional returns from their portfolios.
Beneficial owners have also focused on risk mitigation, showing a greater awareness of risk adjusted returns rather than absolute return as was previously the case.
What collateral requirement trends are you seeing in Singapore?
Over the past year, we have seen a significant increase from clients requiring collateral management services. The main reasons for this increased demand are as follows: to minimise counterparty credit exposure; to increase the number of counterparties with whom clients are able to transact; and to increase the return on trading activities
The increased collateral requirement has largely been linked to clients wishing to extend International Swaps and Derivatives Association agreements to include CSAs with trading counterparties. Many clients have been examining whether they have the infrastructure and people to support collateralised trading and what the alternative costs are in outsourcing this activity to securities services providers such as HSS.
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