Waltzing technology
22 Oct 2018
Home to Bondi Beach, Australia boasts strong superannuation pension funds and record levels of assets under custody, while its asset servicing framework is embracing technological change
Image: Shutterstock
Australia is the fourth largest pension fund market in the world and the sixth largest from an asset management perspective.
In Australia, pension funds are administered by corporate structures. Super funds are largely unitised structures and they support various investment options for their members.
In 2010, the Cooper Superannuation system review noted that in 1996, the superannuation pool was equivalent to 47 percent of GDP. In 2009 this had increased to 90 percent of GDP. It predicted that by 2035, the pool would be at 130 percent of GDP.
The Australia Custodial Services Association (ACSA) produces statistics showing different categories of custody.
It found (as at June 2018), total assets under custody for Australian investors (both domestic and global assets) stood at AUD $3.62 trillion, representing growth of 4.0 percent over the prior six months.
Elsewhere, the Australian Stock Exchange (ASX), Australia’s financial beating heart—has reported a strong revenue performance this year—the strongest growth seen in the last eight years.
ASX’s FY18 Financial Results, released last month, stated revenue was up AUD $58.6 million to AUD $822.7 million—an increase of 7.7 percent.
This increase was seen across the firm, however, its equity trading market results reflected a somewhat pessimistic outlook, with a limited growth in the demand for trading, clearing and settlement services. So with this all in mind, what is Australia’s asset servicing outlook?
Perhaps ASX’s biggest news is its plan to replace Clearing House Electronic Sub-register System (CHESS) with a distributed ledger technology (DLT) solution as the post-trade infrastructure for Australia’s equity market.
The new system is estimated to go-live between Q4 2020 and Q1 2021 and shows just one aspect of the country’s move toward expanding and evolving its asset management offering.
Robert Brown, chief executive at ACSA, explains: “With a process underway to replace the 25-year-old CHESS system, regulatory changes ending settlement monopoly, and further reforms for corporate action efficiency, Australia is witnessing an intense period of change and innovation.”
He adds: “ACSA is engaged on all aspects of the transition, with a sharp focus on functionality, improved efficiency, features of the underlying technology (distributed ledger), systemic impact on the industry operating model and, of course, end client benefits.”
David Braga, head of Australia at BNP Paribas Securities Services, says: “The current proposals will remove inefficiencies in existing market practices and will remove elements of risk associated with a number of these processes.”
He adds: “With the ASX’s continued work on the replacement of the CHESS system with DLT, we are working directly with the ASX and our clients to understand the future landscape of the central securities depository.”
Let’s talk technology
With such a big responsibility relating to the size of its pension funds, funds need the best technology available to meet investment duties to clients.
Juliette Kennel, head of securities and FX Markets at SWIFT, said: “Blockchain or DLT has the potential to become one component of the future of back-middle office operations.”
“The extent to which it will impact back and middle office operations will depend on the readiness and eagerness of post-trade players to evolve their current, often well-functioning platforms towards the adoption of such a technology.”
As Yousaf Hafeez, head of business development at BT Radianz Services, mirrors: “There is no doubt that global firms and exchanges have been eagerly watching the Australian Stock Exchange’s deployment of blockchain, the success of which is likely to catalyse an uptake of the technology in clearing and settlement transactions process.”
Hafeez adds: “Technology is an enabler of change. When implemented correctly, new technologies offer the potential for cost savings, performance improvement and a source of competitive advantage. Attaining new services with speed and efficiency is increasingly important as firms and customers become more and more global.”
It is clear then that Australia’s asset management market framework is embracing blockchain, as well as other technologies, particularly within the areas of payments, post-trade and data—especially within the last year.
In Q2 this year, RBC I&TS carried out a poll of Australia-based asset managers, which identified data as the main focus of technology investment over the next 12 months.
Respondents anticipated that data would help them make more informed investment decisions and better anticipate client needs.
As Justin Burman, director of full service, product for Asia Pacific at RBC Investor & Treasury Services, articulates: “The results, together with RBC I&TS’ regular communication with clients, will continue to feed into our ‘agile’ methodology.”
He adds: “[We do this to ensure] that what we develop aligns with our clients’ requirements for improved efficiencies, enhanced data capabilities, reduced complexity and a seamless user experience.”
Clearing and settlement
Underpinned by technology, clearing is also currently going through a significant change in Australia.
Braga says: “The changing capital requirements accompanied with the need for technological change required for the CHESS replacement, represents a challenge to traditional Australian-based self-clearers.”
He adds that BNP, in particular, is “continuing to expand [its] augmented custody programme to improve cut off times, and provide information quicker to clients which is increasingly important with the shortening of settlement cycles globally”.
Concerning settlement, Brown explains: “ACSA is proposing key principles for efficiency, lower costs, fairness and certainty for the future competitive environment.”
“The Australian market currently has extremely low settlement fail rates, and a key consideration in any new environment is to ensure that there is no degradation in this regard.”
In other news
Last December, ASX also announced its commitment to the adoption of the ISO 20022 messaging standard.
Bill Doran, head of Oceania at SWIFT, comments: “SWIFT welcomes ASX’s proposal to move to ISO 20022 for it embraces the general global trend of market infrastructures, which will support their objective of moving away from bespoke domestic standards.”
In addition to adopting the ISO 20022 messaging standard, SWIFT also welcomed a New Payments Platform (NPP) in February, in an effort to improve how consumers, businesses and governments transact with one another, according to Doran.
He adds: “The rollout of the NPP, and the enablement of real-time payments, is the most significant development in the Australian payments industry in decades and will perhaps have the most revolutionary impact on the economy than any previous payments system innovation.”
Neighbours: closer each day, home and away
Australia’s wealth of asset management has inevitably led to large funds looking abroad for greater opportunities.
In particular, Australia’s closest neighbour, Asia, has an abundance of emerging markets willing to do business within Australasia.
These include the Philippines, India, Indonesia and China.
Hafeez indicates: “Australia has a very large domestic capital markets community and while this means there is room for growth, many exchanges face challenges in how to successfully grow internationally, as well as domestically.”
“As such, we are seeing an upward trend of exchanges trying to attract new international business.”
Robert Brown, chief executive of ACSA, indicates: “Consistent with the growth in total assets under custody, the amount of overseas client investment into Australia (assets held in sub-custody) also grew by 4.4 percent during the first half of 2018 to AUD $1.54 trillion indicating continued attractiveness of Australia as an investment destination for foreign institutional asset owners.”
Elsewhere in the fund’s space, the Asia Region’s Funds Passport is being piloted between participating countries, including Australia and Japan.
Doran discusses: “SWIFT is involved in the pilot and is working with the industry [...] to support the adoption of international best practices and standards to facilitate efficient, standardised cross-border funds and cash settlement.”
SWIFT has also started testing payments using the aforementioned NPP, together with banks from Australia, China, Singapore and Thailand.
As Doran adds: “This trial is currently focused on Australia-bound cross-border payments that are processed domestically through the NPP, however, the service is designed to scale and integrate with real-time systems around the region, and other real-time systems will be added in due course.”
But elsewhere, particularly where China is concerned, trade tensions with the US could have a knock-on effect when predicting future successes in that region.
However, Braga notes: “China [is] generating the most interest and demand.”
“We have built a robust product offering to support clients’ investment ambitions in China and can offer access to all the various stock and bond connect programmes.”
As Asia enjoys a technology and financial boom, Singapore has evolved and is now seen as a strong financial hub for Southeast Asia and globally.
Singapore’s advanced technological infrastructure has been a strength and the city-state remains in a prime position to increase in Asia’s custody market.
In Australia, pension funds are administered by corporate structures. Super funds are largely unitised structures and they support various investment options for their members.
In 2010, the Cooper Superannuation system review noted that in 1996, the superannuation pool was equivalent to 47 percent of GDP. In 2009 this had increased to 90 percent of GDP. It predicted that by 2035, the pool would be at 130 percent of GDP.
The Australia Custodial Services Association (ACSA) produces statistics showing different categories of custody.
It found (as at June 2018), total assets under custody for Australian investors (both domestic and global assets) stood at AUD $3.62 trillion, representing growth of 4.0 percent over the prior six months.
Elsewhere, the Australian Stock Exchange (ASX), Australia’s financial beating heart—has reported a strong revenue performance this year—the strongest growth seen in the last eight years.
ASX’s FY18 Financial Results, released last month, stated revenue was up AUD $58.6 million to AUD $822.7 million—an increase of 7.7 percent.
This increase was seen across the firm, however, its equity trading market results reflected a somewhat pessimistic outlook, with a limited growth in the demand for trading, clearing and settlement services. So with this all in mind, what is Australia’s asset servicing outlook?
Perhaps ASX’s biggest news is its plan to replace Clearing House Electronic Sub-register System (CHESS) with a distributed ledger technology (DLT) solution as the post-trade infrastructure for Australia’s equity market.
The new system is estimated to go-live between Q4 2020 and Q1 2021 and shows just one aspect of the country’s move toward expanding and evolving its asset management offering.
Robert Brown, chief executive at ACSA, explains: “With a process underway to replace the 25-year-old CHESS system, regulatory changes ending settlement monopoly, and further reforms for corporate action efficiency, Australia is witnessing an intense period of change and innovation.”
He adds: “ACSA is engaged on all aspects of the transition, with a sharp focus on functionality, improved efficiency, features of the underlying technology (distributed ledger), systemic impact on the industry operating model and, of course, end client benefits.”
David Braga, head of Australia at BNP Paribas Securities Services, says: “The current proposals will remove inefficiencies in existing market practices and will remove elements of risk associated with a number of these processes.”
He adds: “With the ASX’s continued work on the replacement of the CHESS system with DLT, we are working directly with the ASX and our clients to understand the future landscape of the central securities depository.”
Let’s talk technology
With such a big responsibility relating to the size of its pension funds, funds need the best technology available to meet investment duties to clients.
Juliette Kennel, head of securities and FX Markets at SWIFT, said: “Blockchain or DLT has the potential to become one component of the future of back-middle office operations.”
“The extent to which it will impact back and middle office operations will depend on the readiness and eagerness of post-trade players to evolve their current, often well-functioning platforms towards the adoption of such a technology.”
As Yousaf Hafeez, head of business development at BT Radianz Services, mirrors: “There is no doubt that global firms and exchanges have been eagerly watching the Australian Stock Exchange’s deployment of blockchain, the success of which is likely to catalyse an uptake of the technology in clearing and settlement transactions process.”
Hafeez adds: “Technology is an enabler of change. When implemented correctly, new technologies offer the potential for cost savings, performance improvement and a source of competitive advantage. Attaining new services with speed and efficiency is increasingly important as firms and customers become more and more global.”
It is clear then that Australia’s asset management market framework is embracing blockchain, as well as other technologies, particularly within the areas of payments, post-trade and data—especially within the last year.
In Q2 this year, RBC I&TS carried out a poll of Australia-based asset managers, which identified data as the main focus of technology investment over the next 12 months.
Respondents anticipated that data would help them make more informed investment decisions and better anticipate client needs.
As Justin Burman, director of full service, product for Asia Pacific at RBC Investor & Treasury Services, articulates: “The results, together with RBC I&TS’ regular communication with clients, will continue to feed into our ‘agile’ methodology.”
He adds: “[We do this to ensure] that what we develop aligns with our clients’ requirements for improved efficiencies, enhanced data capabilities, reduced complexity and a seamless user experience.”
Clearing and settlement
Underpinned by technology, clearing is also currently going through a significant change in Australia.
Braga says: “The changing capital requirements accompanied with the need for technological change required for the CHESS replacement, represents a challenge to traditional Australian-based self-clearers.”
He adds that BNP, in particular, is “continuing to expand [its] augmented custody programme to improve cut off times, and provide information quicker to clients which is increasingly important with the shortening of settlement cycles globally”.
Concerning settlement, Brown explains: “ACSA is proposing key principles for efficiency, lower costs, fairness and certainty for the future competitive environment.”
“The Australian market currently has extremely low settlement fail rates, and a key consideration in any new environment is to ensure that there is no degradation in this regard.”
In other news
Last December, ASX also announced its commitment to the adoption of the ISO 20022 messaging standard.
Bill Doran, head of Oceania at SWIFT, comments: “SWIFT welcomes ASX’s proposal to move to ISO 20022 for it embraces the general global trend of market infrastructures, which will support their objective of moving away from bespoke domestic standards.”
In addition to adopting the ISO 20022 messaging standard, SWIFT also welcomed a New Payments Platform (NPP) in February, in an effort to improve how consumers, businesses and governments transact with one another, according to Doran.
He adds: “The rollout of the NPP, and the enablement of real-time payments, is the most significant development in the Australian payments industry in decades and will perhaps have the most revolutionary impact on the economy than any previous payments system innovation.”
Neighbours: closer each day, home and away
Australia’s wealth of asset management has inevitably led to large funds looking abroad for greater opportunities.
In particular, Australia’s closest neighbour, Asia, has an abundance of emerging markets willing to do business within Australasia.
These include the Philippines, India, Indonesia and China.
Hafeez indicates: “Australia has a very large domestic capital markets community and while this means there is room for growth, many exchanges face challenges in how to successfully grow internationally, as well as domestically.”
“As such, we are seeing an upward trend of exchanges trying to attract new international business.”
Robert Brown, chief executive of ACSA, indicates: “Consistent with the growth in total assets under custody, the amount of overseas client investment into Australia (assets held in sub-custody) also grew by 4.4 percent during the first half of 2018 to AUD $1.54 trillion indicating continued attractiveness of Australia as an investment destination for foreign institutional asset owners.”
Elsewhere in the fund’s space, the Asia Region’s Funds Passport is being piloted between participating countries, including Australia and Japan.
Doran discusses: “SWIFT is involved in the pilot and is working with the industry [...] to support the adoption of international best practices and standards to facilitate efficient, standardised cross-border funds and cash settlement.”
SWIFT has also started testing payments using the aforementioned NPP, together with banks from Australia, China, Singapore and Thailand.
As Doran adds: “This trial is currently focused on Australia-bound cross-border payments that are processed domestically through the NPP, however, the service is designed to scale and integrate with real-time systems around the region, and other real-time systems will be added in due course.”
But elsewhere, particularly where China is concerned, trade tensions with the US could have a knock-on effect when predicting future successes in that region.
However, Braga notes: “China [is] generating the most interest and demand.”
“We have built a robust product offering to support clients’ investment ambitions in China and can offer access to all the various stock and bond connect programmes.”
As Asia enjoys a technology and financial boom, Singapore has evolved and is now seen as a strong financial hub for Southeast Asia and globally.
Singapore’s advanced technological infrastructure has been a strength and the city-state remains in a prime position to increase in Asia’s custody market.
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