State Street Global Services is preparing to expand its back-office outsourcing services to Taiwan, where traditionally it has been a challenge for global custodians to gain market share.
The only international firm to have won an outsourcing mandate from more than one asset manager there is understood to be HSBC, which handles fund accounting and transfer agency functions for several foreign asset managers, including BlackRock and Invesco.
Deutsche Bank, for example, has been offering back-office outsourcing in Taiwan for several years, but still has only one fund accounting client to show for it, confirms a bank spokesperson.
State Street’s drive comes despite the fact that only around five fund managers in Taiwan – all foreign players – have outsourced these functions to date, reckon industry players.
But Andrew Erickson, senior vice-president and North Asia head of SSGS, says State Street is looking to roll out back-office outsourcing in the near future. The market is speculating that it will take six months for State Street to on-board its first client.
“State Street has already been serving Taiwanese investment managers and trust banks – which serve as the fund managers’ onshore master custodians – by providing custodian and settlement services when these Taiwanese investment managers invest offshore,” he says. “Thus we can provide fund accounting and transfer agency outsourcing services on this established network of relationships.”
Industry players say one key reason why back-office outsourcing has not taken off to the extent that foreign custodian banks had hoped is that local reporting requirements, in complex Chinese characters, has made systems for transfer agency very bespoke. In other words, service providers cannot simply transplant their global systems directly into Taiwan.
Dean Chisholm, regional head of operations for Asia-Pacific at Invesco, points out that outsourcing is a practice only really accepted by foreign fund managers since Taiwanese players handle all functions in-house.
Invesco was the first foreign asset manager in Taiwan to outsource both fund accounting and transfer agency to HSBC five years ago.
“Foreign asset managers welcome outsourcing as their business is not sizeable enough onshore in Taiwan to support transfer agency and fund accounting,” he says.
“The cost of data feeds are so heavy these days, these systems are that expensive that unless their scale of business is very big it doesn’t make economic sense to handle these functions in-house.”
AsianInvestor was told that Citi is also looking to offer outsourcing services in Taiwan.
But sources close to the US bank say the fact that fund accounting on the island is dominated by two local providers – Jepun and Systemweb, which offer cheap valuation systems – local fund managers are still not keen to switch to international custodian banks for such a service.
As a consequence, they argue that global custodians seeking to provide back-office outsourcing in Taiwan must be prepared to make the local fund accounting system available to clients.
Despite the inertia among domestic fund managers towards outsourcing back-office functions, Chisholm believes foreign custodian banks will remain interested in the local market since they can target any foreign fund manager that has expanded into Taiwan in recent years.
Blackrock, AllianceBernstein, Value Partners and BNP Paribas Investment Partners have all expanded into Taiwan in the past two years, either by acquisition or forming joint ventures with local fund managers or financial institutions.
At present there are an estimated 34 foreign asset managers operating in Taiwan either as a securities investment trust enterprise (Site) or securities investment consultant enterprise (Sice).
Sites are allowed to organise, sell and manage mutual funds in Taiwan, while Sices are permitted to sell and manage overseas mutual funds.
Erickson cites State Street’s operation in Japan as a template for how it hopes to succeed in Taiwan. There it has been providing services to managers such as AllianceBernstein, handling its trade settlement, portfolio administration and reconciliation, derivative operations and client reporting functions.
“We look at what we have been doing in markets such as Japan, which is also considered difficult to enter as a foreign bank,” says Erickson. “We believe that as we have been solving problems for clients in Japan, we can serve the same type of clients in Taiwan. It is an attractive market for us.”