Advancing Asia
04 Mar 2020
Asia’s asset servicing faces a multitude of challenges and opportunities over the next 12 months but its advancements in technology will help it see improvements in harmonisation and deliver additional services to clients
Image: Shutterstock
Being the largest and most populated continent on earth, Asia remains a key player in the world of technology development and innovation. Technological developments such as 3D printing, virtual reality, robots and driverless cars, are just some of the innovations emerging from the region. But it doesn’t stop there.
The financial services industry holds a tremendous potential that could be unleashed if fundamental underlying challenges are addressed. Technology acts as a double-edged sword, although in the financial services industry it can offer opportunities including automated processing and the delivery of tailored services to clients, it can also be costly.
Whether you hold a positive or negative view on technology, the fact is, the financial services industry is now heavily dependent on it as it continues to develop at lightning speed.
In Asia, Northern Trust’s head of global fund services, Caroline Higgins, suggests that technology is no longer transforming the way we do business, it’s now the way we do business.
Technology plays a prominent part in Asia’s asset servicing industry, and experts have identified that Hong Kong and Singapore are particular ‘stand-out’ countries, making them leading, mature and well-developed financial service centres within Asia.
Higgins notes that both Hong Kong and Singapore are home to many of the world’s leading banks, wealth and asset managers.
She says: “The Hong Kong market has continued to operate as the window to China, by developing programmes including the Hong Kong Stock and Bond Connect. Singapore launched the Variable Capital Company (VCC) fund structure in 2020 which includes alternative asset types as part of the pilot programme.”
Asia has an exciting year ahead, especially in terms of technology, but industry experts warn that the region will also face many hurdles. Experts from Northern Trust, BNY Mellon, and HSBC Securities Services explain more.
The current climate
Describing the current climate in Asia’s asset servicing industry, Higgins says that in 2020, Asia Pacific asset managers are focused on investors’ asset preferences, fee and performance pressure, technology use and growing their assets under management, in Asia and globally.
“The asset servicing industry is responding to these changes by extending their offerings, which were historically focused on traditional assets, to alternative investments and on providing strong global operating models and solutions to support front to back-office needs”, she explains.
Higgins adds: “Asian asset managers are starting to follow trends seen in the US and across Europe, Middle East and Africa for many years and are considering how they can transfer their operational risk, fixed costs and regulatory compliance to a global service provider. It’s important to manage the present whilst looking forward, in order to stay ahead of the fast pace of growth in areas such as tokenisation, cryptocurrency and distributed ledger technology (DLT).”
Meanwhile, Brian Godins, head of HSBC Securities Services, Asia Pacific, notes that the pace of change in the asset servicing industry across Asia continues unabated.
Godins identifies that one of the key reasons for this is the increasing demand for outsourcing by asset managers/owners and the demand for a robust asset servicing capability by banks and broker dealers.
He suggests that as their assets and portfolios grow in terms of scale and complexity, clients need to make a decision in terms of either investing in more robust/scalable technology or outsourcing to specialist asset servicers.
“The demands placed upon them by their underlying clients means most of these decisions lean towards outsourcing, to enable them to focus on generating returns and servicing their clients, rather than manage back and middle office activities in-house,” Godins says.
Additionally, Godins observes that other drivers to outsource include challenges linked to finding and retaining talent and the cost of managing the pace of change – whether it is new products, market requirements or indeed regulatory change requirements.
Besides the traditional custody and fund administration activities, Godins says there is an increased demand for solutions in the middle office and transfer agency across the region. He notes: “These present significant growth opportunities for asset servicers who have the capabilities and presence across various markets in the region.”
While there are opportunities, there are also challenges, especially in terms of costs since the expectation is to reduce the operational cost base, according to Godins.
He explains: “This is not always easy, especially in cases of relatively low cost of in-house operations on sub-standard/non-scalable technology models. Therefore, it is important for asset servicers to continue to drive efficiencies that deliver greater value for clients while ensuring profitability.”
In terms of the standout Asian market, Mathew Kathayanat, director and head of product and strategy for Asia Pacific, asset servicing, BNY Mellon, argues that China is the key focus and its capital markets are rising to meet the share of impact that the country’s economy has on the global economy.
“This is a process that has been ongoing for some time. Plus China offers an attractive opportunity as a source of yields. That being said, it poses challenges to get into Chinese assets, and investors are entering cautiously, assessing in particular how easy it is to get in and out of the market considering the remaining capital controls,” Kathayanat adds.
Technology takeover
Amidst challenges, technology is providing opportunities that has helped to improve harmonisation in Asia. Kathayanat highlights that Asia’s growing role in global markets and the financial ecosystem naturally mean that technology is a key enabler of improved harmonisation.
He suggests that the best example of this is blockchain, which regulators and big financial institutions are looking to as a means of increasing transparency, interoperability, and resilience to market events.
“Blockchain is already transforming the way in which securities are being issued, traded, cleared and settled, and not too far down the line, various types of assets will be tokenised, inevitably leading to greater regulatory and practical convergence between different jurisdictions,” Kathayanat says.
Discussing where technology can be further seen to unlock value in technology, Kathayanat states: “Essentially, it [technology] will help to continue to unlock value as asset servicing companies develop technologies such as AI and machine learning to deliver additional services to clients in a proactive fashion.”
Besides application programming interfaces (APIs) and real time data delivery, one of the areas where technology can play a big role is transfer agency services and the use of online/mobile tools, according to Godins.
He explains that this is already “in play” and has “the potential to tap into a huge untapped investor-base for asset managers in many other markets”.
“Given the geographic expanse of some of the Asian markets and very low penetration rates, effective technology solutions (combined with investor education initiatives) provide a huge opportunity for asset managers and asset servicers”, Godins adds.
Most Asian central security depositories (CSDs) largely rely on non-straight-through processing (STP) channels for delivery of asset servicing information, however, according to Godins, there is a move toward the use of DLT to capture, create and store corporate action related data on a distributed ledger.
Harmonisation
Aside from technology, regulation is also helping to improve harmonisation between markets in Asia by collaborating with other countries within the Asia Pacific region. Higgins explains that this enables them to understand both the challenges and lessons learnt.
Last year, China was the world’s best-performing major equity market, according to Kathayanat who says this makes it the most important in terms of harmonisation in Asia.
“We have seen clear moves towards harmonisation in China, the most obvious examples being the proposed merger of the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor schemes, the removal of investment quotas for those schemes, the easing of market entry rules, and the liberalisation of the foreign exchange market,” Kathayanat comments.
Godins also highlights that there have been a few funds passporting schemes launched in the region over the last few years such as the HK-China Mutual Recognition Scheme and the Association of Southeast Asian Nations passporting Scheme.
While this has been an attempt to improve harmonisation and efficiency in terms of fund manufacturing and asset servicing, Godins explains that the uptake of such schemes has not been encouraging.
He comments: “Therefore, this continues to present challenges for both asset managers and also asset servicers especially in areas like local regulatory requirements and tax requirements besides local investor buying behaviour/demand. It is not possible for global asset servicers to just roll out a standard proposition and model across markets in the region and be successful.”
He also notes that the proposition needs to be tailored for every market, although there is some degree of standardisation in the more mature markets.
“The challenge is to be able to successfully implement a global model while incorporating all local market nuances, and to do this at a low cost”, Godins says that those who can do this well will be successful.
The future horizon
Looking to the next 12 months, industry experts expect to see a close focus on the digitising processes, data integration and technologies such as AI and machine learning. Godins predicts this will only increase as companies in the industry either embrace the wave of change that is sweeping through it or find themselves left behind.
He also believes that there is likely to be an increased focus on alternative investments, such as private equity, real estate, emerging Asia and private credit, which is becoming more transparent.
Godins adds that climate change will help to make “environmental, social and governance increasingly mainstream – it’s doing so already – compelling asset servicing firms to reorient themselves accordingly”.
At Northern Trust, Higgins says: “We envisage the outsourcing trend continuing to gain momentum in Asia, particularly in areas such as the middle office. As asset managers in the Asia Pacific region face challenges such as evolving regulatory requirements and continuing pressure on fees, there are opportunities to be realised by middle office outsourcing.“
Higgins also predicts that as alternative assets continue to become mainstream, service providers must evolve their operating and service models to ensure they are fit-for-purpose for the Asian manager.
New fund structures such as the Singapore VCC are of international standards and offer flexibility for both traditional and alternative fund strategies, sub-funds and improve tax transparency, according to Higgins.
She says that with the launch of the VCC structure raising demand for alternatives and Singapore incentives, “we expect to see active interest throughout 2020 and onwards”.
“The pace of change has never been more rapid and asset service providers will need to be agile, flexible and increase their time to market,” Higgins concludes.
The financial services industry holds a tremendous potential that could be unleashed if fundamental underlying challenges are addressed. Technology acts as a double-edged sword, although in the financial services industry it can offer opportunities including automated processing and the delivery of tailored services to clients, it can also be costly.
Whether you hold a positive or negative view on technology, the fact is, the financial services industry is now heavily dependent on it as it continues to develop at lightning speed.
In Asia, Northern Trust’s head of global fund services, Caroline Higgins, suggests that technology is no longer transforming the way we do business, it’s now the way we do business.
Technology plays a prominent part in Asia’s asset servicing industry, and experts have identified that Hong Kong and Singapore are particular ‘stand-out’ countries, making them leading, mature and well-developed financial service centres within Asia.
Higgins notes that both Hong Kong and Singapore are home to many of the world’s leading banks, wealth and asset managers.
She says: “The Hong Kong market has continued to operate as the window to China, by developing programmes including the Hong Kong Stock and Bond Connect. Singapore launched the Variable Capital Company (VCC) fund structure in 2020 which includes alternative asset types as part of the pilot programme.”
Asia has an exciting year ahead, especially in terms of technology, but industry experts warn that the region will also face many hurdles. Experts from Northern Trust, BNY Mellon, and HSBC Securities Services explain more.
The current climate
Describing the current climate in Asia’s asset servicing industry, Higgins says that in 2020, Asia Pacific asset managers are focused on investors’ asset preferences, fee and performance pressure, technology use and growing their assets under management, in Asia and globally.
“The asset servicing industry is responding to these changes by extending their offerings, which were historically focused on traditional assets, to alternative investments and on providing strong global operating models and solutions to support front to back-office needs”, she explains.
Higgins adds: “Asian asset managers are starting to follow trends seen in the US and across Europe, Middle East and Africa for many years and are considering how they can transfer their operational risk, fixed costs and regulatory compliance to a global service provider. It’s important to manage the present whilst looking forward, in order to stay ahead of the fast pace of growth in areas such as tokenisation, cryptocurrency and distributed ledger technology (DLT).”
Meanwhile, Brian Godins, head of HSBC Securities Services, Asia Pacific, notes that the pace of change in the asset servicing industry across Asia continues unabated.
Godins identifies that one of the key reasons for this is the increasing demand for outsourcing by asset managers/owners and the demand for a robust asset servicing capability by banks and broker dealers.
He suggests that as their assets and portfolios grow in terms of scale and complexity, clients need to make a decision in terms of either investing in more robust/scalable technology or outsourcing to specialist asset servicers.
“The demands placed upon them by their underlying clients means most of these decisions lean towards outsourcing, to enable them to focus on generating returns and servicing their clients, rather than manage back and middle office activities in-house,” Godins says.
Additionally, Godins observes that other drivers to outsource include challenges linked to finding and retaining talent and the cost of managing the pace of change – whether it is new products, market requirements or indeed regulatory change requirements.
Besides the traditional custody and fund administration activities, Godins says there is an increased demand for solutions in the middle office and transfer agency across the region. He notes: “These present significant growth opportunities for asset servicers who have the capabilities and presence across various markets in the region.”
While there are opportunities, there are also challenges, especially in terms of costs since the expectation is to reduce the operational cost base, according to Godins.
He explains: “This is not always easy, especially in cases of relatively low cost of in-house operations on sub-standard/non-scalable technology models. Therefore, it is important for asset servicers to continue to drive efficiencies that deliver greater value for clients while ensuring profitability.”
In terms of the standout Asian market, Mathew Kathayanat, director and head of product and strategy for Asia Pacific, asset servicing, BNY Mellon, argues that China is the key focus and its capital markets are rising to meet the share of impact that the country’s economy has on the global economy.
“This is a process that has been ongoing for some time. Plus China offers an attractive opportunity as a source of yields. That being said, it poses challenges to get into Chinese assets, and investors are entering cautiously, assessing in particular how easy it is to get in and out of the market considering the remaining capital controls,” Kathayanat adds.
Technology takeover
Amidst challenges, technology is providing opportunities that has helped to improve harmonisation in Asia. Kathayanat highlights that Asia’s growing role in global markets and the financial ecosystem naturally mean that technology is a key enabler of improved harmonisation.
He suggests that the best example of this is blockchain, which regulators and big financial institutions are looking to as a means of increasing transparency, interoperability, and resilience to market events.
“Blockchain is already transforming the way in which securities are being issued, traded, cleared and settled, and not too far down the line, various types of assets will be tokenised, inevitably leading to greater regulatory and practical convergence between different jurisdictions,” Kathayanat says.
Discussing where technology can be further seen to unlock value in technology, Kathayanat states: “Essentially, it [technology] will help to continue to unlock value as asset servicing companies develop technologies such as AI and machine learning to deliver additional services to clients in a proactive fashion.”
Besides application programming interfaces (APIs) and real time data delivery, one of the areas where technology can play a big role is transfer agency services and the use of online/mobile tools, according to Godins.
He explains that this is already “in play” and has “the potential to tap into a huge untapped investor-base for asset managers in many other markets”.
“Given the geographic expanse of some of the Asian markets and very low penetration rates, effective technology solutions (combined with investor education initiatives) provide a huge opportunity for asset managers and asset servicers”, Godins adds.
Most Asian central security depositories (CSDs) largely rely on non-straight-through processing (STP) channels for delivery of asset servicing information, however, according to Godins, there is a move toward the use of DLT to capture, create and store corporate action related data on a distributed ledger.
Harmonisation
Aside from technology, regulation is also helping to improve harmonisation between markets in Asia by collaborating with other countries within the Asia Pacific region. Higgins explains that this enables them to understand both the challenges and lessons learnt.
Last year, China was the world’s best-performing major equity market, according to Kathayanat who says this makes it the most important in terms of harmonisation in Asia.
“We have seen clear moves towards harmonisation in China, the most obvious examples being the proposed merger of the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor schemes, the removal of investment quotas for those schemes, the easing of market entry rules, and the liberalisation of the foreign exchange market,” Kathayanat comments.
Godins also highlights that there have been a few funds passporting schemes launched in the region over the last few years such as the HK-China Mutual Recognition Scheme and the Association of Southeast Asian Nations passporting Scheme.
While this has been an attempt to improve harmonisation and efficiency in terms of fund manufacturing and asset servicing, Godins explains that the uptake of such schemes has not been encouraging.
He comments: “Therefore, this continues to present challenges for both asset managers and also asset servicers especially in areas like local regulatory requirements and tax requirements besides local investor buying behaviour/demand. It is not possible for global asset servicers to just roll out a standard proposition and model across markets in the region and be successful.”
He also notes that the proposition needs to be tailored for every market, although there is some degree of standardisation in the more mature markets.
“The challenge is to be able to successfully implement a global model while incorporating all local market nuances, and to do this at a low cost”, Godins says that those who can do this well will be successful.
The future horizon
Looking to the next 12 months, industry experts expect to see a close focus on the digitising processes, data integration and technologies such as AI and machine learning. Godins predicts this will only increase as companies in the industry either embrace the wave of change that is sweeping through it or find themselves left behind.
He also believes that there is likely to be an increased focus on alternative investments, such as private equity, real estate, emerging Asia and private credit, which is becoming more transparent.
Godins adds that climate change will help to make “environmental, social and governance increasingly mainstream – it’s doing so already – compelling asset servicing firms to reorient themselves accordingly”.
At Northern Trust, Higgins says: “We envisage the outsourcing trend continuing to gain momentum in Asia, particularly in areas such as the middle office. As asset managers in the Asia Pacific region face challenges such as evolving regulatory requirements and continuing pressure on fees, there are opportunities to be realised by middle office outsourcing.“
Higgins also predicts that as alternative assets continue to become mainstream, service providers must evolve their operating and service models to ensure they are fit-for-purpose for the Asian manager.
New fund structures such as the Singapore VCC are of international standards and offer flexibility for both traditional and alternative fund strategies, sub-funds and improve tax transparency, according to Higgins.
She says that with the launch of the VCC structure raising demand for alternatives and Singapore incentives, “we expect to see active interest throughout 2020 and onwards”.
“The pace of change has never been more rapid and asset service providers will need to be agile, flexible and increase their time to market,” Higgins concludes.
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