While the world is in a shifting regulatory landscape, the Asia-Pacific is also seeing a raft of changes that will shape the custodial and wider securities industry permanently.
In a region, where markets are emerging and somewhat fragmented, Global Custodians Lianna Brinded decided to take an in-depth look at the evolution of Asia-Pacific securities industry with Laurence Bailey, CEO of the Asia-Pacific at J.P. Morgan Worldwide Securities Services.
Q: The securities services sector is changing permanently. In Asia-Pacific, what key regulations do you see shaping the industry for good?
A: As we continue to emerge from the global financial crisis, we are facing significant regulatory developments in many markets around the world. Central to these changes mandated by regulators and to a certain degree, legislators, are systemic stability, a focus on elevating risk management, greater levels of transparency and additional enhancements aimed at bolstering investor protection.
The underlying objective is to create a stronger and more sustainable financial system, which will ultimately provide the foundation for steady growth amidst a more sophisticated, risk aware and risk averse financial landscape.
The impending Basel III regulations, which will affect the manner in which banks fund themselves, could precipitate a trickle down effect into other areas of the business. Notably, the implementation of the Basel III rules could see an increased demand for collateral services as clients seek access to high quality funding. Derivatives too are likely to be impacted, and we could see a rise in demand for collateral services in light of the increasingly complex operating environment and higher operational overheads.
We also see a much greater level of discussion on how services are offered, specifically what is done onshore versus which elements of a business can be executed in other locations. Take global custody for example, a segment which is evolving rapidly in Asia Pacific. Historically, global custody the settlement, safekeeping and servicing of assets around the world is carried out on global systems with some degree of flexibility as to where these services are ultimately carried out. However, clients and regulators are seeking more onshore support, and they are looking at where sales teams, relationship managers and day-to-day client servicing is carried out. At the heart of this move is a greater demand for local language capabilities and local, direct access to the systems, which ultimately result in the faster resolution of enquiries.
The onshore / offshore debate is an interesting conversation that we expect will play a greater role in the development of the regions respective regulatory environments as Asia Pacific continues to write the next chapter in its dynamic growth story.
Q: In terms of the liberalization of the renminbi, how do you see this shaping custodial services over the next few years?
A: Clearly, investment into and out of China remains a key topic in the industry. As the renminbi (RMB) continues its gradual path towards internationalization, were going to see a lot more discussion and debate in this space over the next few years, and I would expect, a multitude of regulatory developments aimed at further building the currencys international standing.
A great deal of China exposure continues to be realized through Hong Kong listings of Chinese companies, a trend which has sparked a significant upturn in activity on the Hong Kong stock exchange. While linearization of the RMB may see some of this activity gravitate back onshore, I think it will ultimately supplement the robust flows that we see in Hong Kong today. China will in all likelihood seek to grow outbound investment from China through the Qualified Domestic Institutional Investor (QDII) program, and, coupled with a growing range of investment avenues, the story will become more about diversification and less about increased yield.
For a global custodian, it will mean that we need to ensure we offer deep, holistic solutions that cater to our international clients who are looking for greater exposure within China. However, given that this is always one of our most important strategic imperatives, I think it is unlikely that the evolution of the RMB into a more international currency will have a significant impact on our business. Put simply, were already moving in this direction.
Q: CCPs are tipped to be mandatory in Hong Kong in 2012. Do you see this as a positive step because wont it actually create substantial costs?
A: It is an interesting question that ultimately boils down to the relationship between reduced risk on one hand but potentially increased costs on the other. Across every part of our business, we are constantly exploring ways in which we can mitigate risk, so broadly speaking, we see this as a positive development in theory. However, in practice, we do expect that this new regulatory environment could potentially raise the cost of doing business for our clients, which is not at all ideal. As such, we think it is important that banks, counterparties, clients and regulators continue working together to strike the best balance between improving risk management and minimizing the end cost of any new regulatory infrastructures.
Q: Has the Asia-Pacific unit had to change infrastructure substantially to accommodate impending regulatory changes?
A: I think the changes that we have made in the past few years have overwhelmingly been in response to our clients needs, although it is fair to say that some changes have come about as a result of the evolving regulatory landscape.
As I mentioned earlier, both clients and regulators in the Asia Pacific region are looking to move towards a more local service, and whilst global hubs are effective and appropriate for some services, having the services done in-country or in the same time zone has significant advantages. For example, four years ago we moved our fund accounting business from the US to Hong Kong for some key clients, and this has proved a major success.
How we contract with clients and which legal entity we use has also been a big topic over the last few years and we have worked diligently to make sure we satisfy both clients and regulatory requirements.
Q: What is your outlook for the future of securities services in the region, in terms of products, relationships between all parties (custodians, clients, prime brokers, fund administrators) and of course regulatory impacts.
A: In recent years we have seen a major convergence of services provided by the various cornerstones of the securities industry. Local custodians have been moving into the global custody space, whilst global custodians have been looking to self clear and provide direct custody services to certain markets. In addition, service providers have seen a rapidly changing playing field in the alternatives space, in particular hedge funds, with the growth of long / short funds significantly blurring the line between traditional fund managers and hedge funds.Fund managers are also looking to streamline the number of service providers they use.
To this end, they are looking for bundled services that include custody, fund administration, transfer agency, and more. This of course has sparked a robust industry debate on the benefits of using a single provider that is able to deliver strong linkages between these services.
Pension funds too are increasing looking and acting like fund managers, therefore prompting the need for enhanced real-time information flows and reports as they manage large portions of their portfolio and oversee the external managers they have appointed. It is about delivering timely and accurate information flows to and from all parties, thus allowing for more timely decisions to be made.
Amidst this evolving environment, it is inevitable that we will see regulatory change. Markets across Asia Pacific are growing in their sophistication and encountering change at an unprecedented rate. A local market infrastructure that worked 10 years ago now has to be adapted to cater to an increasingly global playing field.
For financial institutions, this period of change represents a significant opportunity to take a collaborative approach with regulators and legislators in each market. It is important that as an industry, we share our global best practices and experience to ensure that Asia Pacific continues to emerge as one of the most exciting, most robust regions in the world, with the right regulations in place for the right stage of the regions development.
(LB)