HSBC has set up a project unit in Shanghai to look into fund admin outsourcing opportunities in anticipation of likely deregulation and is set to relocate a senior team leader in the near future.
Fund administration is performed in-house by Chinese fund houses at present since outsourcing is not permitted under national regulation, with the exception of the transfer agent function, which can be carried out by the China Securities Depository and Clearing Corporation.
Foreign banks act as global custodians for qualified domestic institutional investor (QDII) funds and provide fund accounting services. But outsourcing is seen as an inevitable development and HSBC is making preparations ahead of expected deregulation.
“In the future, mutual funds will utilise more financial instruments and be invested in multiple markets and denominated in multiple currencies,” says Lilian Wong, Asia-Pacific head of fund services at HSBC.
“The regulator has realised that, in the long run, it does not make economic sense for fund management companies to keep fund administration functions in-house, and local custodians dominate the market.
“The small and medium-sized FMCs realise that they must improve their back office to support future product development plans. But as of now they are not sure if they have enough money to spend building up their full back office, so they may opt for outsourcing.”
In fact, Wong says HSBC has already identified a fund management firm in Shanghai “which is willing to explore [outsourcing opportunities] with us and help us to understand what’s required in China and work out some detailed procedures.
“We will then come up with an operating model for fund administration outsourcing and propose it to the regulator later this year.”
As of January this year HSBC started providing fund services for QDII clients out of Shanghai, having switched the service from Hong Kong. It was regarded as a first step towards exploring the potential opportunities for fund administration outsourcing in China.
“We recruited 10 fund accountants locally last year and they have already received training in Hong Kong and Shanghai,” explains Wong.
“As of January they started assisting with the accounting and valuation work for our QDII clients. Originally this part of the work was done in Hong Kong and now we have started in-sourcing back to China.”
According to Chinese law, both fund management firms and master custodians bear trustee responsibilities. Therefore, the local practice is that fund managers reconcile NAVs on a daily basis with their domestic custodians; while foreign sub-custodians provide daily NAVs of QDII funds to their domestic partners for reference.
This double-checking of NAVs is a reflection of the low tolerance of error among Chinese fund houses. With this in mind, Wong adds: “We are working on the procedures and arrangements so that FMCs are comfortable to discharge responsibility and liability under the law to let us do the work for them.”