The regional fund services chiefs of two global banks leapt at the chance to offer “training” to China Securities Regulatory Commission (CSRC) officials on their recent visit to Hong Kong.
Foreign banks have been on tenterhooks in anticipation of regulatory sanction for them to provide fund admin services to Chinese fund houses. No doubt, they used this “training” exercise as a part-lobbying opportunity for CSRC approval.
Already banks such as Citi and HSBC, both incorporated in China, offer a limited custodian service for cross-border investments mostly to qualified foreign institutional investors and qualified domestic institutional investors.
While there are no specific regulations preventing a fund manager outsourcing to a service provider, whether domestic or foreign, the process has not yet received official CSRC approval, notes Yap Chee-ping, Asia-Pacific head of fund services at Citi.
His team is talking to “a number of joint-venture fund management firms” in China about potential outsourcing of fund accounting and transfer agency functions. In China, both the fund manager and custodian need to calculate their own set of NAVs, which must be reconciled daily.
Others are hopeful that proposed amendments to China’s Securities Investment Funds Law, which is awaiting State Council approval, will provide clarity on how service providers can take over some functions for fund managers, including calculating NAVs and providing valuations.
Expectations are that passage of the amended law will encourage CSRC to approve outsourcing applications from fund houses.
Lilian Wong, Asia-Pacific head of fund services at HSBC, notes that her team has 10 fund accountants based in Shanghai and a system already in place in readiness for CSRC sanction. NAV reconciliation would be assumed by her team.
But clearly, overseas banks will be competing for business with domestic players.
Zhou Yueqiu, general manager of ICBC’s custody services department, confirms his team has also been talking to several fund management firms about outsourcing of fund accounting, auditing and settlement.
In China, custodian services are closely tied with fund distribution. Regulations state a fund administrator that provides NAV calculations to a fund house cannot then also perform the same NAV function as a custodian – the two sets of calculations must be assumed by different banks.
Zhou expects that when fund management firms start to outsource fund admin to banks, they will likely leverage the relationship by trying to bargain for distribution support.
But Yap notes that foreign banks have had to take a calculated bet on whether regulators will open up fund admin or local custodian business first. The latter is generally viewed as the golden ticket for locally incorporated foreign banks to help them compete against the domestic players by developing their onshore wealth management services capability.
If foreign banks were also allowed to apply for local custodian licences, as opposed to only cross-border, then fund administrators already calculating NAVs for Chinese fund houses would presumably then be pre-empted from also performing that custodian function.
In China, a custodian can charge a fund house up to six times more for producing independent NAVs for reconciliation than a fund administrator calculating NAVs via outsourcing but without a custodian licence.
“There could be a timing-mismatch risk if regulators do not open up both fund administration and custodian licences to foreign commercial banks operating in China concurrently, leading to complications in business planning,” reflects Yap.