Laurence Bailey is chief executive officer of the Asia-Pacific region for JP Morgan Worldwide Securities Services, based in Hong Kong. He has over 26 years' experience with JP Morgan, including positions in operations, sales and client management.
What effect will growing interest in Asian local-currency bonds have on securities services and fund administration? What issues does it raise for service providers?
With the strengthening of Asian economies, we have seen a growing interest in Asian local-currency bonds. Statistics from AsianBondsOnline show that Asia’s local currency bond markets had grown to just over $5 trillion at the end of September 2010, rising 17.2% year-on-year – driven by strong growth in corporate bonds and increasing foreign investor interest. RMB bond trading in Hong Kong is a good example and one which I think will allow international investors to gain exposure to China via the Hong Kong market, something that they have been doing for some time on the equity front. The growth of Asian local-currency bonds will see a corresponding growth in demand for securities services and fund administration in the region, as increased funds flow into the region. J.P. Morgan will continue to anticipate and work with local exchanges as local currency bonds are listed and traded in markets other than their home country.
What future do you see for securities lending in Asia in the year ahead? Will hedge funds find it any easier to borrow securities going forward?
The future for the securities lending sector in Asia is on an extremely strong footing, with a recent Data Explorer survey covering securities lending practitioners tipping the Asian equities market share as a percentage of global equities available for loans to continue to rise from 17% in 2010 to as much as 25% in 2011. Currently, borrowers are finding insufficient supply of hard-to-get securities, which when combined with expected dividend growth and buoyant M&A and IPO activity over the coming year will likely spark a corresponding increase in rates, which in turn will encourage supply, ultimately driving the sector upwards on the back of rising volumes. As a subset of the securities lending space, hedge funds may find that the coming year provides something of a reprieve from a challenging 2010. This demand presents an attractive yield enhancement opportunity for hedge funds, especially for long-bias hedge funds with long, unencumbered assets that can be offered to the market. While regulations in specific markets will continue to impact the way in which funds operate, it looks positive for the broader regional hedge funds. One major trend is that investors are focusing even more on risk adjusted returns as opposed to purely the best returns, and so more focus has been placed on collateral reinvestment and counterparty exposure and we see this trend continuing throughout 2011 and beyond.
How big an issue for custodians is the EU’s approved AIFM directive? Will it go through in its current form and, if so, what changes will it mean going forward?
The AIFM directive is in its final form as Level 1 text, and we are now concentrating on Level 2, where more detail and definition will be developed. Strict liability, which would have been immensely problematic for the market, has been avoided at this stage. Almost certainly custodians anticipate they will need to make adjustments to their practices, re-evaluate business models and deal with additional costs. The extent of these changes is as yet unclear. It’s important that custodians continue to work with the industry’s trade associations with a view to developing a workable solution that minimises disruption and additional costs.
Did you see the increase in demand for bundled global custody solutions as predicted by Shaun Parkes? If not, why not, and what do you see happening in 2011?
2010 was a pivotal year in Asia. The challenges in the European and US markets meant that new fund launches were limited and Asian investors looked hard at their current asset manager and custodian relationships (many of which had been in place for many years) with a view to reviewing the services they were providing.
In 2010 and we think in 2011, we have seen and will continue to see an increase in the number of changes clients demand of their custodians. These changes reflect a growing understanding of the services a custodian can provide to investors, both in terms of traditional safekeeping and servicing of the underlying investments, as well as other “added value“ services, such as performance measurement, compliance monitoring, and also revenue enhancing services such as securities lending, foreign exchange and transition management.
Finally clients are looking for new services to help mitigate risks, and demanding services related to collateral management, private equity administration and more transparent securities pricing. From the perspective of a fund manager, the bundling of these services through one custodian provider has natural benefits, in terms of costs through the reduction of service providers, elimination of some of the operational risks involved, and speeding up the delivery of information back to the end client.
How do you see the market for collateral management and depositary receipt services panning out in 2011, and what will be the main issues for clients?
Our outlook on the depositary receipt sector continues to be bullish. During the second half of 2010 we saw a significant pick-up in activity, particularly from Chinese companies executing an ADR program and Indian companies pushing into the GDR space. Equities markets finished the year strongly, and we expect the first quarter will also be strong. Beyond that, it will depend on many factors, in particular whether we achieve more clarity on the strength, speed and sustainability of the current global recovery. In terms of collateral management, we will see a further flight to quality, as counterparties place a greater emphasis on ensuring the liquidity and quality of the collaterals they receive as security. Counterparties are becoming significantly more selective in what they’ll accept, which means that there is a significantly higher demand for high-quality collateral.
What do you expect to see in transition management for the coming year?
While still in its formative stages, transition management is building greater gravitas across the wider region as plan sponsors recognise the reduction in costs and risks that a transition manager can achieve. As a result of increased investor confidence with the recovery of Asian markets, in 2010 we saw clients begin to issue transition management RFPs as they prepared to restructure their investment strategies ahead of their expansion into global markets. While activity was limited last year, we think there will be an increase in 2011 as investors execute the changes that they have planned in 2010.