Exploring the Asean fund passport s potential Reprinted by AsianInvestor April 214
Exploring the Asean fund passport s potential AsianInvestor asked Remi Toucheboeuf, Asia head of product management for asset and fund services, and Mostapha Tahiri, head of Singapore, for their views on some of the burning issues. has been involved in discussions with fund manager clients and regulators about the evolution of the Asean fund passport, one of the three different Asian initiatives being developed. AsianInvestor asked Remi Toucheboeuf, Asia head of product management for asset and fund services, and Mostapha Tahiri, head of Singapore, for their views on some of the burning issues. Many requirements have already Qbeen announced for the Asean scheme, but several things are still not allowed, such as securities lending, repo transactions and direct lending of monies. What do you think of the proposed rules as a starting point, and how will they evolve? ARemi Toucheboeuf: Of the three fund passport proposals, the Asean initiative offers the most visibility so far in terms of eligibility criteria and operating rules [the other schemes being Hong Kong-China mutual recognition and the Asian Region Fund Passport (ARFP)]. As for what the rules allow, it s normal for schemes like this to start out with plain-vanilla products that are easy for regulators to validate and are likely to create high demand. So the Asean passport will start with long-only and retail funds only, and the second stage may see the regulators permitting other asset classes. In any case, retail investor demand for alternative or more sophisticated funds in this region is still quite limited. www.asianinvestor.net May 214 AsianInvestor 1
Market sizing explanation The purpose of this exercise is to estimate the size of the market that an asset manager will be able to access by using a single CIS fund as investment vehicle and distributing it in Malaysia, Thailand and Singapore thanks to the Asean passport initiative. After projecting the size of the overall investible assets in those countries using two indicators provided by the IMF (the projected GDP growth and projected gross national savings as a percentage of GDP), we derive the size of the funds AUM based on three different scenarios: l Scenario 1: This scenario corresponds to a benchmark scenario in which we assume that the passporting initiative doesn t have any impact and that investors don t change their allocation between funds and bank deposits over the period. l Scenario 2: In the second scenario, we assume that due to the increased fund offering resulting from the Asean passporting and a natural shift in investors behaviour, the allocation of investible assets to funds as well as the cross border funds distribution increases. Some of the drivers of those cross border flows are the experience and broad fund offering offered by Singapore domiciled asset managers as well as the Islamic funds expertise and higher yield on bond funds proposed by Malaysian asset managers. l Scenario 3: In the third scenario, we use similar assumptions as the previous scenario but we assume that the Philippines and Indonesia join the passporting initiative. In terms of market size, Asean Qis the smallest among the passport schemes. Can it provide sufficient scale? AToucheboeuf: It s true that these markets are not as big as China, Japan or Australia, but they are mature fund industries with established local providers. Moreover the Asean markets are still sizeable. Taken together, Singapore, Malaysia and Thailand had a total AUM of $24 billion as of the end of 212. And growth is expected to be significant. Within BNP Paribas Securities Services we did a market sizing projection over the next five years based on different assumptions in term of asset growth, cross-border flows and participating countries (see chart 1). We project around 7% growth over the next five years to around $4 billion 9% for Singapore under reasonable expectations. Another internal projection includes Indonesia and the Philippines coming into the equation, and projects total AUM of around $47 billion in five years. Mostapha Tahiri: Expansion into other Asean markets is top of the agenda now for asset managers in Singapore. Also, as Malaysia and Thailand are relatively closed fund markets, the passport gives local and global players immediate benefits from cross border distribution. What are the incentives Qregulators have to get right here to make the Asean scheme workable? AToucheboeuf: The main incentives for the regulators with regard to the Asean passport are threefold: make it simple; make it live soon; and make it acceptable by all countries. Tahiri: You need the first step to be well organised and successful in order to build momentum. The purpose is to get the scheme live by Q3 this year, so there needs to be some concessions on the scope to find a reachable agreement. What are the incentives for Qinvestors to buy? AToucheboeuf: For investors across the three markets, the ultimate goals are to get access to a broader expertise from other countries or fund managers Chart 1 $ bn 5 4 3 2 1 $ bn 1 8 6 4 2 $ bn 2 15 1 5 $ bn 12 1 8 6 4 2 +33% 238 212 218 Scenario 1 Asean funds AuM 317 42 Singapore funds AuM 53 212 218 +7% 218 Scenario 2 Zoom on scenario 2 +9% 11 Malaysia funds AuM +67% 112 187 212 218 Thailand funds AuM +57% 73 115 212 218 Source: Cerulli Associates for 212 data and for 218 projections. 2 AsianInvestor May 214 www.asianinvestor.net
and to gain exposure to specialised investment strategies. This specialist exposure and expertise would include shariah experience from Malaysia and higher-yielding fixed income strategies from Malaysia. Another incentive would be the ability to export RQFII [renminbi qualified foreign institutional investor] funds to Malaysia and Thailand from Singapore. From a fund manager perspective, the immediate benefits will be a bigger pool of assets and an improved total expense ratio. But the challenge will be distribution in other countries if the fund management house does not have a distribution network in place or a partner on the ground. Tahiri: The three regulators are very keen to ensure that all three countries will be winners from this. If only Singapore were to benefit, I m not sure how the scheme will grow. What will be the main difficulties Qfor distribution under the Asean passport? Chart 2 $ bn USD $ bn USD 5 4 3 2 1 5 4 3 2 1 Indonesia funds AuM +13% 19 44 212 218 AToucheboeuf: In order to better understand the difficulties raised by the passporting initiative, asset managers should engage with global service providers who are experienced in cross border distribution. At BNP Paribas Securities Services, our strong leadership in supporting Ucits funds allows us to anticipate how the initiative will evolve in time. As with the Ucits scheme, it will take time to establish a true passport within the Asean community. There will be multiple steps and regulation will progress slowly. It s quite normal that we have question marks and challenges at this stage. The challenges include: l currency restrictions with regard to Malaysian ringgit and Thai baht, such as exchange controls and repatriation issues meaning multi-share class funds may be needed; l requirements on regulatory reporting and investor documentation may remain in Asean funds AuM including the Philippines and Indonesia +78% Indonesia & Philippines Malaysia, Thailand & Singapore 68 27 238 212 218 Scenario 3 Zoom on scenario 3 25 2 15 1 5 Philippines funds AuM Source: Cerulli Associates for 212 data and for 218 projections. $ bn USD 45 +165% 9 23 212 218 l place for each country, at least initially, which would mean higher costs; and investment restrictions, such as the 5% limit on international exposure for Malaysian asset managers with regard to conventional (not shariah) funds. There may be solutions coming for these issues, but if there s no change, we expect local practice to continue to be applied. In any case, our local presence has allowed us to develop a service offering flexible enough to efficiently partner with asset managers interested in cross distributing their funds using the Asean CIS scheme. Singapore has a foot in both ARFP Qand Asean. How will this work? ATahiri: Singapore has always played the role of financial hub in Asia and has strong experience in cross-border distribution, so it is not a surprise to see it being part of two of the passporting initiatives. Toucheboeuf: In any case, the two initiatives are working to different timelines: the Asean passport is expected shortly, while ARFP should come in 216. So Singapore could play a role in helping leverage on the Asean experience to facilitate the implementation of the ARFP scheme. How do passporting developments Qaffect global fund houses decision on whether to domicile in Hong Kong or Singapore? AToucheboeuf: We run a significant operation in Asia with a full range of solutions in both Singapore and Hong Kong for fund managers to set up their funds, and we don t see our clients struggling to choose between the two domiciles. Domiciling a fund in Hong Kong or Singapore is mainly a matter of distribution strategy. Our clients have a clear view on which is more suitable depending on their strategy and ambitions, and where they see potential growth. www.asianinvestor.net May 214 AsianInvestor 3
If any schemes were to merge, are QAsean and ARFP the most likely candidates to do so? AToucheboeuf: None of the three initiatives can pretend to be a true Asia passport on its own, so there s definitely an argument for consolidation. The ARFP and Asean passports do represent the best chance to converge, and it would make sense to bring them together. Based on the current published guidelines, there doesn t seem to be any incompatibility between the eligibility criteria of both schemes. For both the Asean passport and the ARFP the underlying vehicle is a local CIS regulated by one of the members. The winning strategy for a fund manager could be to create or use one of their existing CIS in Singapore and then distribute it regionally starting this year using the Asean passport. The asset manager has then two years to cross distribute it in the Asean market, build a track record and gain momentum for the fund before being able to distribute it in the bigger markets that will be accessible thanks to the ARFP. Will Ucits be allowed into the QAsean scheme, and if so, when? ATahiri: The key question is to what extent Ucits would be allowed into the Asean scheme without providing some reciprocity. We have seen the strong growth expected within the region and the opportunity for global products like Ucits to tap into this pool of assets. But would European jurisdictions also agree to have Asean product sold back to Europe? This would be the main challenge the European regulators would need to manage. I don t see Asean-Ucits reciprocity happening for at least two to three years. Discussions are increasing between Asian and European regulators, but it s more about a sharing of views. n Contact Desiree Tan Head of Sales, South Asia, Asset Owners, Asset Managers & Alternatives Tel: +65 621 4491 Email: desiree.tan@asia.bnpparibas.com How would BNP Paribas help clients capitalise on opportunities from the Asean fund passport? At we provide asset managers with end-to-end solutions encompassing global custody, fund accounting, trustee services, transfer agency (TA), middle office outsourcing and share class hedging for all types of Singapore CIS eligible under the passport. In Southeast Asia, we support cross-border distribution in Malaysia and Thailand through our TA connectivity with local distributors. Our expertise on cross-border distribution extends to Europe, where our local knowledge of investor requirements is a key advantage when customising operating models to launch cross-border funds. Finally, we have developed marketleading and innovative solutions to service two very specific products that we identified as potentially benefiting from strong cross-border inflows as part of the Asean passport scheme: RQFII and shariah-compliant funds. 4 AsianInvestor May 214 www.asianinvestor.net
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