Funds Global talks to Sebastien Chaker about Calastone’s plans for the Asia funds market amid the gathering momentum of automation.
“Our main objective is to help our clients distribute funds more efficiently,” says Sebastien Chaker, head of Asia at Calastone, spelling out the company’s global mission statement. “For asset managers, transfer agents and distributors, it is about getting them to connect electronically.
”Calastone’s fund transaction network has signed up more than 860 customers in 27 countries to process both domestic and cross-border fund transactions and it has been active in the Asia funds markets since 2012. It originally came to support its global asset manager clients that were operating in Asia and dealing with distributors that were not automated. Since then, the mandate has increased, with over 200 clients in Asia-Pacific connected to the network, processing both domestic and cross-border fund transactions.
For the past year, Calastone has focused on consolidating business in the more internationally focused markets of Taiwan, Singapore and Hong Kong, says Chaker. “This year, we experienced significant growth in terms of new clients and transaction levels. We had some notable wins, including our first Chinese bank and a number of regional fund managers in Singapore and Hong Kong.
The big development in 2015 has been the imminent arrival of the China Hong Kong Mutual Recognition Funds (MRF) programme, which has been a catalyst for the Hong Kong market and its adoption of automation, says Chaker. The Hong Kong market has until now been lagging behind Taiwan and Singapore in its automation rates, with distributors and managers alike content to muddle through with manual processes.
However, the domestic funds market in China, where every fund trade is electronically processed, could not be more different. “It is a relatively new industry in China, so it has been automated from the start. They do not want to have any manual transactions, so Hong Kong players have had to change fast in order to be ready for the MRF programme.”
In addition to the automation levels, China operates with very different processing standards and market practices to Hong Kong. The segregation of accounts may be the most visible difference, but there are many more. “Calastone has been translating these requirements into an international standard. Our value proposition is to allow global players to operate with China as they do with any other market. Right now we are completing the final testing with transfer agents, distributors and fund managers so that we will be ready when the first set of funds are approved under the MRF scheme.
”With the operational issues largely under control, the big unknown is how popular the MRF will prove to be and in which direction the majority of activity will flow – northbound for Hong Kong fund managers raising money in China or southbound for Chinese fund managers distributing in Hong Kong.
“The only thing you can look at are the facts,” says Chaker. “Firstly, there are currently approximately 850 Chinese funds and 100 Hong Kong funds that are eligible to participate, so that will have an impact in terms of volume. Secondly, one of the rules is that no more than 50% of the assets within a fund can be raised in another market. So, given the respective size of each markets, this gives Chinese managers more potential to raise money.
”In capital outflow terms, there seems to be more demand from Chinese investors to invest overseas, due to the recent depreciation of the renminbi and the volatility of the mainland stock markets. For example, the US Treasury reported that $500 billion of capital has flown out of China in the first eight months of 2015, despite the strict capital controls and FX quota systems in place. So, given that the MRF provides an official mechanism for investing overseas, this figure is likely to increase, says Chaker.
“I always hear international asset managers or service providers complaining about the difficulty of encouraging automation in Asia but I do not completely agree,” he adds. “Any player presented with a simple and cost-effective way of adopting automation will do it. But until recently, many of them have not had those solutions available to them. The economics of automation have not stacked up because it has involved too much investment in IT development or system migration.
“Minimising the cost of moving to automation is what has made our solutions a success in Europe and now in Asia-Pacific. Initially in Asia, fund automation progress was mainly restricted to global Western fund managers. These players remain ahead of the game in terms of global servicing and operational efficiency. But now that most Asian-based distributors are on-board, local and regional asset managers are following the trend. The final step to reach full fund order automation in Asia is to get the smaller and mid-sized local managers on-board.”
Up to now, Calastone’s focus has been on the automation of the order routing process. The plan for 2016 and beyond, once the MRF is up and running, is to automate more post-trade messaging such as net-settlement, statements, dividends, transfers and NAV reporting, says Chaker. “This is what we have done in Europe and now we will be looking to do the same in Asia.
”It is also looking to widen its asset class coverage by targeting the corporate pension sector in Hong Kong and Singapore. Part of the reason that Calastone is able to extend its coverage in Asia is because of the rapid momentum in terms of adopting automation, says Chaker. “It may be a more fragmented market than the US or Europe and with disparate levels of maturity, but the momentum in Asia is quite phenomenal. It is my belief that it will soon reach levels of fund automation higher than Europe. It may have started later but it is travelling much quicker.
”The fact that the Asian investment markets have started later has also given them the advantage of using newer and more efficient technology as the basis of their infrastructure. This is a particularly important point in terms of the current debate around the use of segregated accounts (as used in many domestic Asian markets such as China) versus omnibus accounts (as favoured in the Western markets).
“All the regulation that we see is pushing for more investor transparency. If you were to build an investment funds processing infrastructure today, you would base everything on individual accounts and not omnibus accounts. The big obstacle for the international markets is that systems have been built to operate at omnibus level and they have serious legacy issues to overcome to move to individual accounting. But it is inevitable that progress will only go one way.”
This inevitability could create another commercial opportunity for Calastone, illustrating that the process of automating the international funds market has gone full circle. “It may be that international players will need some kind of middleman to manage this migration from omnibus to individual accounts and to aggregate all of the associated information. This is an evolution that we are monitoring closely. Anything that is designed to make fund messaging more efficient is within our remit.”
Sebastien Chaker, Calastone
First published in Funds Global Asia, Winter 2015