The chief of Hong Kong’s funds association has warned of a disconnect between European efforts to structure Ucits products and their plans for global distribution.
Lieven Debruyne, chairman of the Hong Kong Investment Funds Association, made the point at the Association of the Luxembourg Fund Industry (Alfi) forum in Luxembourg last week, noting how derivatives in particular made Asian regulators uncomfortable.
It came as Alfi chairman Marc Saluzzi also told the conference of the need for European and Asian regulators to work together closely to ensure Asia’s three pending passporting schemes complement rather than compete with Ucits funds.
“From Asia it seems sometimes there is a disconnect between the industry’s intention to use Ucits globally and the focusing of their design efforts at a European level,” said Debruyne, whose day job is Hong Kong chief and Asia-Pacific head of intermediary business for Schroder Investment Management. “Some of the developments that make sense in Europe make Asian regulators uncomfortable.”
Existing regulations allow Ucits funds to use financial derivatives as part of their general investment policies as well as for hedging.
Debruyne attributed Asian regulators’ greater scrutiny of Ucits products to a desire to develop domestic funds industries and greater caution towards developed market products in the wake of the financial crisis, which was caused in part by a poor understanding of investment products.
“The additional powers in the Ucits range give regulators a lot more to worry about,” explained Debruyne, adding that both Schroders and BlackRock had encountered difficulties, including longer delays for authorisation with more complex products. “The moment [a fund manager] introduces something new it can get very challenging.”
However, that is not to suggest the answer is to keep products simple since managers are keen to make full use of instruments to maximise returns, including the derivatives that Ucits product makes available to them, noted West Lockhart, managing director at BlackRock Investment Management in London.
“We have found that simpler funds are easier to distribute,” he said. “But our fund managers are keen to take on the new powers afforded by Ucits to employ more exotic instruments like derivatives to boost their returns.”
In deliberations for the latest ‘Ucits VI’ structure, the European Commission is considering limiting funds to investing in derivatives that are traded on multi-lateral platforms and cleared by a central counterparty.
Alfi chairman Saluzzi suggested that the growing scrutiny of Asian regulators had implications for how the European fund industry should focus its lobbying efforts internationally. “This is one of the reasons we are working hard to meet Asian regulators and consult with them,” he said.
This includes efforts to ensure that Asia’s fund passporting initiatives complement rather than compete with Ucits, and to enable mutual recognition between Luxembourg funds and those in the forthcoming Hong Kong-China cross-border funds scheme.