Transfer agency: Helping to prepare Asia’s fund industry for growth
Category: Asia, Europe
For Asia’s asset management industry to achieve its full potential, re-engineering the overlooked trade order processing and settlement life cycle is key.
While Europe’s fund industry has moved forward with automation of functions like processing and settlement of fund orders, the predominance of manual execution in Asia risks holding back growth. Not only do faxed instructions increase operational and financial risks, but also they restrict economies of scale at a time when the region’s assets under management are expected to expand.
Asia’s fund industry has been slowly automating these processes, but most remain manual. Now a combination of greater affordability and the fund industry’s growing maturity are likely to make use of automated processes more prevalent. Such a transformation would give the industry more flexibility, preparing the way for steady growth in assets, both as the middle classes in countries such as China and Indonesia adopt an investment culture, and as developed country pension funds increase their regional allocations.
In three years’ time, it is expected that over 60% of all Asian fund orders, both domestic and cross border, will be automated, using standardised messaging formats. There’s a long way to go. Only 42% of Luxembourg-domiciled UCITS fund trades originating in Asia were automated in the first half of 2012, according to the European Fund and Asset Management Association (EFAMA), with 13% using ISO standards, while 29% had proprietary formats.1
Momentum towards automation is gathering. As international asset management companies expand in Asia, they are introducing the automated processing and distribution models they have elsewhere, seeking to enhance efficiency and improve risk control. Industry associations such as the Asia Fund Automation Consortium are pushing for automation and standardisation, as are local regulators, global distributors and service providers.
The region’s infrastructure is evolving too. For example, the Taiwan Depositary & Clearing Corporation is working with fund managers, service providers and distributors to automate order flows for offshore funds by the end of 2012. Additionally, Vietnam’s central securities depositary has started to analyse how it will support transfer agency services for open-ended funds.
As one of the region’s largest transfer agency providers, HSBC is encouraging industry participants to embrace automation. In 2012, the industry has made considerable progress, linking organisations to various automation platforms.
A tipping point
So why is Asia’s fund industry ready to automate now? Up until recently, relatively lower wages meant that manual processing was cheaper, while straight-through processing (STP) technology changes were expensive to implement. At the same time, thin trade volumes meant there was little need for scale. So many Asian fund distributors and managers still rely on manual processes and fax communications.
But the economics of processing are shifting. Wage inflation in Hong Kong, Singapore and other Asian markets mean the cost of manual processing is rising at a time when the expense of automated processing is falling. As more platforms enter the market, offering standard message formats such as ISO20022, the costs of implementing STP are declining.
At the same time, service providers are changing their rates to adapt to the cost-sensitive Asian market. Service providers that offer global distribution and transfer agency services will need to differentiate costs per trade, with automated trades costing less than manual trades.
The large international asset managers expanding into Asia want to use their automated systems and models built elsewhere. In Europe, by comparison, fund processing is highly automated – 80% of Luxembourg-domiciled UCITS orders were automated in the first six months of 2012 and 64% used ISO formats, according to EFAMA.
Expected long-term growth in Asian assets – both in absolute terms and as a proportion of asset managers’ businesses – justifies investments that improve scale and minimise operational risk. For the first half of 2012, approximately 30% of Luxembourg UCITS fund orders were from Asia, according to EFAMA.
Preparing for steady growth
Greater automation, backed by standardised message formats, is vital to prepare for Asia’s likely growth over the next five to ten years. With the general high acceptance of technology in the region, it’s natural to expect that the whole order process should be highly automated.
At HSBC, we are actively engaging industry players to look into how greater automation, including use of standard formats such as ISO 20022 messaging, can be introduced, so delivering efficiency and scalability while reducing the risks associated with manual inputs.
What’s more, as the current transfer agency model in Asia evolves to include distribution support, so the benefits of automation will increase. We are expanding our distribution support services and firmly believe that automation will improve communication with fund investors.
Asia’s asset management industry is on the cusp of a major breakthrough in efficiency that will prepare the way for accelerating growth.
1 Fund processing standardisation: Mid 2012 update (EFAMA).