Industry insiders share strategies as the market faces increased regulation and regional harmonisation.
2016 might be the Year of the Monkey, but there will be no time for fooling around as fast-paced changes in the custody and clearing sector keep Asian banks on their toes. Trends such as the Chinese currency’s rising profile and stricter regulations are shaking up the industry, and Asian banks seem to be adopting different strategies that they believe will push them ahead of the pack.
The Chinese currency is becoming more important to the custody and clearing industry due primarily to its increased usage, according to banking executives. “We should never lose sight of the global developments of RMB and also the related RMB investment products or services, which are already on an expansion mode,” says Fanny Wong, head of custody at Bank of China (Hong Kong).
For some banks like Industrial and Commercial Bank of China (ICBC) Singapore, the Chinese currency offers such immense potential that it has become their central focus. “The ongoing internationalisation of the yuan is an area that we are paying special attention to, especially in terms of the opportunities it will bring to the table for us – and our fellow Asian banks – in terms of custody and clearing,” says Yunchuan Cao, deputy general manager at ICBC Singapore.
Cao reckons the recent decision by the International Monetary Fund to include the yuan within the special drawing right (SDR) basket as the fifth currency, which takes effect on October 1, 2016, will be a strong growth catalyst that Asian banks would do well to ride.
“Given the IMF’s recent decision to include the yuan within the SDR basket, the space for further development of yuan-denominated assets looks set to grow further, and yuan-related innovations and investment channels to increase in number. With the SDR development, over 180 economic bodies will automatically hold the yuan within their foreign reserves, and central banks will also be exploring the option of investing in yuan products,” says Cao.
“These factors will drive the development of yuan-denominated financial products across both onshore and offshore markets, which will in turn generate huge demand for yuan product clearing and custody services for the Asian custody and clearing sector,” he adds.
While Asian banks face the challenge of incorporating the Chinese currency in their growth strategies, they must also allot enough attention to the influx of new industry regulations. In particular, regulatory reforms and obligations around OTC derivatives are pushing into Asia Pacific following Dodd Franck and the European Markets and Infrastructure Regulation, says Mostapha Tahiri, head of Singapore and ASEAN at BNP Paribas Securities Services.
He reckons keeping up with the reforms – which are undertaken in response to the global G20 commitments for reforms on trade reporting, clearing, electronic platforms, capital and margin requirements – can prove to be a challenge especially for banking clients in Asia Pacific.
“In Asia Pacific, each jurisdiction is at a different stage of the three areas of OTC derivatives reforms (clearing, reporting and collateral obligations). Our clients are looking for solutions to achieve operational efficiency, technology flexibility and scalability and managing risks,” says Tahiri.
By themselves, Asian banks might find it difficult to grapple with the onslaught of regulations as well as various tax regimes and market practices in each country in the region, so striking local partnerships will be a crucial strategy.
“Banks have to learn and understand these issues. To have enough knowledge of each country may not be possible, thus, building up a strong partner network in the local market is necessary,” says Noppawan Jermhansa, executive vice president at KASIKORNBANK.
Cao reckons one of the most pertinent issues in Asia’s OTC market is in the current variation of regulatory requirements among markets, but he hopes this will be addressed by national regulatory bodies in the near future. “A standard protocol will go a long way towards driving more participation in Asia’s OTC market,” he says.
Success in standardisation
Asia as a region is moving towards standardisation, and while the process will be fraught with painful changes and strong resistance, it is one that will elevate the custody and clearing sector.
“The winning strategy in Asia is similar to what has worked in North America and Europe. Leading firms should strive for a single platform across all asset classes with robust reporting and analytics while offering deep regulatory expertise,” says Mark Wightman, partner, Wealth & Asset Management Advisory at EY.
“While the strategy is similar, the operating environment is far more complex. Local players face complex operating conditions in the region, including nonconvertible currencies, product mix and multiple exchanges with different cutoffs, languages and cultures,” he adds.
Despite the difficulties in implementation, Wightman notes that there are a number of cross border schemes in process that are working towards standardising the trading and settlement and clearing process across Asia. “Full implementation of programs such as the Shanghai – Hong Kong Stock Connect and the ASEAN trading link will be positive for asset servicing firms,” he says.
“They are expected to increase global investment inflows to the region and also simplify back-office operations by standardising the settlement and clearing process and enhancing straight-through processing. This should allow asset servicers to take cost out of their operations while taking advantage of higher asset levels,” he adds.
“Regionally and globally increased standardisation will drive operational efficiency and allow firms to run a global operating model benefitting clients and firms alike,” he says further.
Bourses in Western countries have been striving going for integration, harmonisation and collaboration in various shapes and forms, but the process is proving much slower and a lot more complex in Asia, according to Wong. Still, developments such the Hong Kong Exchanges and Clearing Limited–LME Holdings acquisition three years ago, show that the trend is very much in Asia already. This calls on Asian banks to be more attentive and nimble.
“Meanwhile, stock exchanges in Singapore, Taiwan, Korea and so on are all trying new means to boost their market magnitude, turnovers, efficiency and governance requirements, so custodians and clearing banks are faced with new challenges every day. They can no longer stick to a market-by-market approach but will have to switch quickly to a more macro, holistic and dynamic view to be able to grasp and embrace such developments,” says Wong.
In outlining the hurdles required before Asia reaches a more harmonised post trade infrastructure, Tahiri reckons there will be a need to carefully address issues in currency, laws, trading rules, matching, valuation, clearing and settlement infrastructure, among others. As such, Asia’s harmonisation process will require a lot more time, at least if precursors are any indication.
For example, the harmonisation of European capital markets and the recent launch of TARGET2-Securities (T2S), the new central engine for European securities settlement, came after more than ten years of consultation and testing.
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