Living in the past
Category: Asia, Asia-Pacific
By Hui Ching-hoo
Transfer agency still remains a highly labour intensive business
Transfer agents have been playing an increasingly important role for global fund managers in helping them to propel the distribution of offshore funds in the Asia Pacific region. Most are seeking to improve their capabilities in areas such as automated processing and services customisation as a key part of their efforts to cope with the burgeoning interest in Asia from international asset owners and managers.
Pointing to this focus on distribution of offshore funds in Asia, Camie West, head of global fund services in Asia for Northern Trust, remarks that offshore funds continue to dominate the fund landscape in certain Asian jurisdictions. The predominant fund ranges continue to be Cayman and European vehicles.
“Having said that, we are seeing a domestic market building in Hong Kong with the potential for the mutual recognition between Hong Kong and China. This has been a feature of conversations with our clients and this year we launched new services for Hong Kong-domiciled funds,” Ms. West says.
“Furthermore,” she adds, “recent announcements of fund passporting schemes in the region are an interesting development, although we do not anticipate this threatening the popularity of offshore funds in the immediate future. Asset management is a global business and funds are sold into multiple markets. Transfer agents need to create a standard operating model across multiple locations while ensuring local requirements are met.
According to Eddie Fong, head of operations for Asia Pacific with J.P. Morgan Asset Management, there has been significant progress in straight-through-processing (STP ) of fund order routing in Taiwan since the launch of the TDCC Offshore Fund Automation Service this year. For other Asian jurisdictions, like Hong Kong, Singapore, Korea etc., this STP progress is still slow. Scalability of processing capacity is correlated to overall STP levels. Therefore, the upsurge of volume in the first half of this year poses a challenge to the manpower resources of transfer agencies in Asia.
Mr. Fong adds: “Ten fund management companies, as members of the Asia Fund Automation Consortium (AFAC), meet on a monthly basis to promote STP for fund order routing for offshore funds in Asian countries. Standardisation of the SWIFT message format, agreement on automation solutions, pricing methodology, and testing arrangements with vendors have been accomplished.”
Jonathan James Willis, head of transfer agency EMEA & APAC for BNY Mellon, states that transfer agency is an important service. It is an integral component of the complete solution of the mutual funds life cycle. As such, the demand for this service is tied very closely to the development of the mutual funds market which, although it has grown over the last couple of decades in the region, is still spotty in that some countries have embraced it while others have yet to begin. There is also a fundamental difference between domestic transfer agency, which is often provided by distributors and/or fund managers in-house, and the export market.
Mr. Willis goes on to say that for those domestic markets where mutual funds have taken hold, there are providers who can offer decent products to their domestic unit holders (i.e. Australia, China, Taiwan, and Japan). In each of these cases, the providers work in sync within their country’s distinct “ecosystem” of local investors, primarily by investing into the local market, single currency, single time zone, one tax system, one language etc., where the cycle can go from end-to-end with manufacturing, distribution, subscription/collection and redemption and disbursement. The solutions are bespoke. And with a limited need for scaling up, they often lack STP and in fact have, in most cases, special terms that would not fit commercial STP models.
He adds that the challenge in transfer agency is one of scale: “There is still a lack of scale available in some countries that make the provision of a true “full service” difficult to achieve. People are still looking at the potential of an Asian passport to make entry to some countries easier.”
Ms. West notes that the company has a broad mix of international and local Asian asset managers using their transfer agency services. “From an Asian distribution perspective, this requires having support infrastructure across the region using a single operating model. Using a single platform delivers significant cost and performance benefits to our clients,” she says. “Furthermore, for clients distributing into multiple markets, we offer the added benefit of providing consistency in terms of investor experience. This is of particular benefit to those investors that invest in multiple client products, from multiple locations.”
According to Diana Senanayake, managing director of RBC Investor and Treasury Services in Singapore and Malaysia: “Distribution in Asia continues to be dominated by the large local and regional banks although we do see increasing demand coming from private banking and wealth management outlets. This is because of the growth of advisory and the need for specific products in the private equity and real estate space.”
She continues: “Transfer agents work closely with all the distributors and RBC offers an open infrastructure model, which can accommodate different distribution channels with varied order routing modes (swift, file, fax, platforms etc.).”
Despite the European fund industry leading the way ahead of their Asian counterparts in terms of automating settlement processes, the situation is gradually changing; in particular, an increasing number of international asset managers have introduced automated processing and distribution models as they set about expanding their presence in Asia.
Mr. Fong points out that the transfer agencies of the major fund management companies are willing to invest in automation solutions. Most of them can accept orders and send out confirmation via the SWIFT, TDCC/BBH solution, the TDCC/Calastone solution, and CMU operated by the Hong Kong Monetary Authority (HKMA). In turn, the level of STP utilisation depends on the willingness of the distributors to adopt any one of the STP solutions.
“J.P. Morgan Asset Management supports institutional and individual clients through direct and intermediary channels in various Asia countries. Automation can effectively reduce the risk of error while promoting efficiency and ultimately enhancing the client experience,” he adds. “Transfer agency needs to be broken down into different processes, but the most manual aspect of it remains the order routing process whereby distributors still use very manual processes – primarily fax.”
Ms. Senanayake notes: “We have seen some levels of automation increasing through initiatives like Calastone in Taiwan and Singapore. But the labour costs and the trade volumes may not be strong enough to compel distributors to automate, and the automation investment cost could also discourage them.”
She adds: “The AML/KYC and account opening process is not straightforward and so not easily automated, especially with a regulatory environment that is ramping up with more stringent requirements and the necessity for more case-by-case handling. In a nutshell, transfer agency still remains a highly labour intensive business and automation can only be achieved by a true collaboration between distributors, fund managers and transfer agents.”
Mr. Willis further points out that there is a lack of standards in each country, even in things that you would normally expect would be standard like ISO20022 messages. Each country uses them slightly differently, so you still need a country adaptor. Thus the market is still awaiting the emergence of an STP provider to really take hold in the region.
He explains: “Name formats alone can be a challenge to ensuring unique identifiers for each unit holder given the differences in norms (multiple surnames, no surnames, lengthy first and last names, etc.). The other challenge is currencies: some are restricted so even though you take them in domestically, they need converting locally before cross-border settlement can take place. This adds additional risk and overhead.
“There is no STP platform in a dominant position yet, so there is no standard. Fax is still seen as STP by distributors in certain countries.”
In terms of service customisation, George Hindmarsh, head of business development for Asia Pacific, corporate and institutional services at Northern Trust, notes: “We have never met identical asset managers. Every asset management client is different. Primary differences can be delineated across products, strategy, geography, regulation, technology, investors and personnel preferences.
“As a result, service providers have to be flexible and offer customisable services to varying degrees depending on the level of differentiation. Inevitably there are certain minimum activities which are uniform. But there is always an element of customisation. This is truer today than ever before as asset management firms strive to differentiate their business in an extremely competitive market.”
Regulation remains the biggest challenge for the transfer agency industry worldwide. According to a survey conducted by Linedata, 45% of 50 transfer agency respondents selected regulation as their major concern, specifying the US Foreign Account Tax Compliance Act (FATCA) as a particular challenge.
Mr. Hindmarsh says: “Regulation, regulation, regulation – after the global financial crisis we continue to see an ever-changing and more cumbersome regulatory environment. These developments are far reaching, whether FATCA, AIFMD, etc.; and they all impact our businesses and our clients at some level. Regulatory changes drive market changes and as a result the landscape is changing. We are at the forefront of these developments and are finding opportunities within this environment for our business. For example, our clients increasingly look to us as their eyes and ears on the ground. Our role has expanded to include that of an “educator” and market intelligence disseminator.”
Ms. Senanayake points out that there are a number of upcoming Asian cross-border initiatives, namely Hong Kong/China; New Zealand/Australia/Singapore/South Korea; and ASEAN. With these, the entire fund industry in these countries (regulators, fund managers, fund administrators, auditors, legal and tax advisors) will ideally work together to define an optimal model across the entire fund management value chain in which the distribution and fund administration aspects are well thought through.
“Often, such initiatives are led by the fund managers and regulators, whilst fund administrators are often left to sort out the operational framework. We must leverage on the framework established for the sale of UCITS in Asia and see how best we can replicate a similar model, only this time for Asian funds,” she says.