Post-trade service providers are racing to ink agreements with central securities depositories (CSDs) in Asia to boost penetration of funds automation. They hope the launch of the proposed Asia Region Funds Passport (ARFP) will help drive the creation of a centralised network.
Industry players expect exchanges and their depositories in these markets to explore becoming central counterparties for order routing, processing, settlement and custody of funds under the ARFP.
“Fund automation will be pertinent to promoting more cross-border fund distribution under the Asia Region Funds Passport framework,” says Stanley Poon, vice president of investment funds services at Clearstream, the international CSD owned by Deutsche Borse. “We want to be the infrastructure of choice and support this initiative.”
Momentum is building to this end in Korea, a member of the ARFP framework signed in September with Australia, New Zealand and Singapore. One example of the trend is last month’s linkup between Clearstream and Korea Securities Depository (KSD) to support cross-border fund distribution via Clearstream’s Vestima automation platform.
KSD has offered cross-border fund automation in collaboration with Euroclear, another CSD, since June 2012, but sources say the collaboration has not achieved the level of participation they had been hoping for. KSD declined to comment on this point.
Aki Valhodimos, Euroclear's spokesperson in Brussels, says the use of its fund platform ramped up in the last quarter of 2013, with managers and trustees starting to migrate assets onto the platform. But he did not offer any details.
KSD will use both Euroclear’s and Clearstream’s platforms as they can both provide an efficient back office for the ARFP scheme, says Kim Shin-wook, senior manager for the offshore fund services team at KSD’s fund market support department.
The addition of Clearstream should introduce more competition and reduce costs for participating trustee banks in Korea in respect of sending fund subscription, redemption and settlement instructions to transfer agents overseas, notes KSD's Kim.
Poon says Clearstream aims to have its fund order routing, settlement and custody connections in place by the end of June.
Eight custodian banks in Korea are clients of Clearstream’s other post-trade services. Poon expects that, following the Clearstream-KSD deal, these custodians will also consider using KSD’s FundNet automation service.
It is estimated that a large majority (some say more than 90%) of Korea’s fund industry participants – comprising local transfer agents, asset managers, trustee banks and fund administrators – use FundNet, which launched in 2004.
As of end-December 2012, assets of Korea-domiciled funds of funds (FoFs) invested in offshore funds totalled $7 billion, and assets invested in offshore funds by retail investors stood at $660 million, according to figures cited by KSD's Kim. (The FoF figure includes both institutional and retail assets.)
A centralised platform concentrates all the orders from distributors in participating countries and connects them to fund managers’ back offices, or to their transfer agents, located in the fund’s domicile. This saves distributors the work of building multiple bilateral links connecting each transfer agency or fund manager.
Funds automation is aimed at increasing speed and efficiency and reducing manual errors and operational risks from the faxing of orders for subscription, redemption, confirmation or settlement. In Asia, Taiwan is an example of a market where it has been widely adopted.