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Funds Passporting in the Asia Pacific RegionFifteen markets, eight players, three schemes, one objective

Citi Securities and Fund Services2

Funds PassportingAfter years of waiting for an Asian equivalent of Europe’s successful UCITS platform for mutual funds, not one but three possible versions have come along in 2013, providing both global and local fund managers much to think about when planning the future for their businesses. Of the fifteen markets in the Asia Pacific region where mutual funds or unit trusts are actively sold, eight of them have, through the three proposals, got together to see whether they can agree among themselves on a “funds passport”. This paper takes a look at the proposals, with a view to providing guidance to fund management companies on each, to assist them in their planning.

Three “Passports”, Eight CountriesMost countries in the Asia Pacific region don’t allow the cross-border selling of collective investment funds (mutual funds or unit trusts). Thus, funds established and managed in one country cannot to be sold into another. However, Hong Kong, Singapore and Taiwan, subject to authorization by the local regulators, allow some offshore cross-border funds to be sold. It has been European UCITS vehicles that have facilitated the offering of funds in these three jurisdictions, but these funds are usually domiciled in Luxembourg or Dublin and then approved separately by local regulators in each country. While Hong Kong, Singapore and Taiwan are now well developed UCITS markets, others such as Korea, Japan, Australia, Indonesia, Malaysia, The Philippines, Sri Lanka, Thailand or Vietnam, are not, and markets such as China and India do not allow them at all, so UCITS have only been a partial regional solution for firms wanting to sell across borders.

For some years, governments and the funds industry have been talking about creating a regional vehicle which would allow collective investment funds to be manufactured in the region and sold across multiple countries in the Asia Pacific, instead of using European-based products. Detractors doubted that governments would be able to reach agreement due to the diversity of markets, the lack of a common currency, no single legal structure, and because of the competition between them to be regional financial centers. However, supporters argued that such a vehicle was inevitable as governments sought to have greater control over the regulation of funds being sold to local investors, and as they attempted to develop domestic financial industries and to recycle savings in the region rather than only in the US and Europe.

Assets Under Management as a Proportion of GDP (PwC Distribution Report 2012)

Source: Hong Kong Securities and Futures Commission, Asset Management Association of Korea, SITCA, Nomura, BCG, McKinsey, Lipper, Cornell University Press, Factiva, PwC analysis

160%

140%

120%

100%

80%

60%

40%

20%

0%

Po

ten

tial

gro

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China Hong Kong Taiwan Korea Japan US

Funds Passporting in the Asia Pacific Region 3

In the last year, three “funds passport” options have been announced which has surprised the market.

On January 23, 2013, Alexa Lam, the Deputy CEO of the Hong Kong Securities and Futures Commission (SFC) confirmed that it was in negotiations with the China Securities Regulatory Commission (CSRC) to introduce a “mutual recognition” scheme whereby mutual funds and unit trusts that had been authorized and domiciled in either China or Hong Kong respectively, could be sold in the other’s jurisdiction.

On September 24, 2013, Finance Ministers of Australia, South Korea, Singapore and New Zealand signed a proposed “Asia Region Funds Passport” Agreement in Indonesia on the sidelines of the Annual meeting of Asia-Pacific Economic Cooperation (APEC) Finance Ministers.

On October 2, 2013 the securities market regulators of Singapore, Malaysia and Thailand at a meeting of the ASEAN Capital Markets Forum in Bangkok, under a Memorandum of Understanding (MOU) agreed terms for the cross-border offering of collective investment schemes (CIS) in their three countries.

The proposals offer investment managers the option of selling the same product in more than one market of the region, allowing for economies of scale. But a minimum requirement will be local domicile and perhaps local management, which will have its costs. These conditions would also exclude UCITS vehicles from the new regime. The passporting schemes will not however, see the end of UCITS in the region. Investment managers will still use UCITS, particularly as part of a global strategy. Local funds will also be used for ease of access to some markets. The proposed passporting regimes offer a third option. Below we discuss the proposals and how firms can benefit.

The Prospects for Collective Investment Schemes (Funds) in the Asia Pacific RegionFor most of the last 20 years or so, the key markets for offshore funds (and thus cross-border selling) in Asia, i.e. Hong Kong, Taiwan and Singapore, have allowed the sale of Luxembourg or Dublin based UCITS products alongside domestic funds. In Taiwan, offshore funds currently represent over 60% market share of fund sales, whereas in Hong Kong and Singapore it is close to 95%. Clearly, whilst there has been a strong inflow of assets for management in these locations, usually by the local offices of global

fund managers, development of a local fund management industry has been limited. Policy makers in the governments of the Asia Pacific region have sought ways to boost their domestic capabilities to develop their financial services industry. Hence “recognition” or “passporting” options have emerged. Governments are also seeking to have greater control over the regulations of products their local investors use, as the pool of funds grows. The recycling of savings within the region for regional development rather than sending savings offshore to the US and Europe is also an objective.

Number of Cross-Border Funds in Asia, 2012

Singapore and Hong Kong lead in cross-border registrations.Note: Only true cross-border funds were taken into account (i.e., funds distributed in at least three countries, including their domiciles).

Distribution Markets

Key Fund Domiciles

Total Number of Registrations

Luxembourg Ireland CaymanUnited States

Hong Kong Singapore

Australia 22 8 N/A 20 N/A N/A 62

Hong Kong 879 212 75 1 N/A 1 1,214

Japan 55 1 2 4 N/A 1 91

Korea 316 12 N/A N/A N/A N/A 328

Macau 684 15 74 N/A 30 N/A 935

New Zealand N/A N/A N/A N/A N/A N/A 2

Singapore 1,651 411 25 86 31 N/A 2,409

Taiwan 657 154 N/A 2 19 N/A 864

Total 4,264 813 176 113 80 2 5,905

Source: PWC, Cerulli Associates


The Asian region has shown significant economic growth over the last 10 years which has led to a notable accumulation of assets. The region has moved from the manufacturing engine of the world to the place where private banks and other wealth managers, together with attendant fund management businesses have seen most opportunity to grow their businesses. It is forecast that the collective wealth of the Asian region will exceed that of North America within the next couple of years making the region an even more important market for fund managers and associated industries.

The Taiwan mutual fund management business for example, at around US$190 billion in size, is approximately equal to the size of Hong Kong and Singapore combined. China, which only started a mutual fund industry less than 15 years ago and now has more than US$400 billion in AUM, has more than 100 times the number of fund investors than are in Hong Kong. Thailand, Indonesia and the Philippines each have rapidly growing, young and increasingly economically independent populations larger than the size of Germany. The high average regional savings rate, the need to self-provide for retirement, and

HNWI Wealth Forecast, 2010 – 2015F

Note: Chart numbers may not add due to rounding; Mature Asia includes industrialized economies (consisting of Japan, Australia, and New Zealand) and Newly industrialized economies (consisting of Singapore, Hong Kong, Taiwan, and South Korea); Emerging Asia includes China, India, Indonesia, and Thailand; Rest of Asia includes Kazakhstan, Malaysia, Myanmar, Pakistan, Philippines, Sri Lanka, and Vietnam

Source: Asia-Pacific Wealth Report 2013, Capgemini and RBC Wealth Management

Asia-Pacific 9.8%

Rest of Asia 5.6%

Emerging Asia 10.9%

Mature Asia 9.7%(Industrialized + Newly industrialized Asia)

CAGR(2012-2015F)

16,000

12,000

8,000

4,000

0

9.8%Annualized

Growth

Rest of the WorldCAGR 5.3%

2010

6,457

3,612

751

10.8T

6,357

3,586

762

10.7T

2011

9,157

5,722

1,034

15.9T

2015

00

HNWIInvestable

Wealth

(US$ Billion)

6,942

3,586

878

2012

12.0T

CountryNo. of domestic funds

Q4 2011No. of foreign cross-border

funds notified for sale Q4 2011% foreign funds

China 913 N/A Not permitted

Hong Kong 233 1,240 84%

Japan 4,176 89 2%

Macau N/A 955 N/A

Singapore 558 2,125 79%

South Korea 9,488 280 3%

Taiwan 613 855 58%

Source: UCITS Fund Distribution 2012 PwC Ireland September 2012

Domestic Versus Cross-Border Fund Registrations


many other factors all lead to the potential in the next few years of seeing massive growth for the asset management business, and everyone wants a part of that!

The big questions therefore are: Will any of these new schemes work? If so which, and how best to prepare for each?

The SchemesAPEC Asia Region Funds Passport (ARFP)Australia initiated the APEC funds passport proposal following a 2009 review by the Australian government into “Australia as a financial center” (known as the Johnson Report). APEC Finance Ministers welcomed efforts to facilitate cross-border funds in their 2010 Finance Ministers’ Statement which was the first nod of support for exploration of the funds passport idea. In 2011 the possible exploration of a pilot was mentioned for the first time. In 2012 Ministers said they looked forward to further development of the proposed model, governing arrangements and policies for a pilot ARFP. In 2013 the proposal became more concrete with the public commitment of four countries to it and the release of a framework document. Finance Ministers noted in their September 24, 2013 Statement, the progress in the establishment of a passport including the development of a framework document with voluntary guiding principles and basic arrangements. They also welcomed the Statement of Intent (SOI) signed by Australia, New Zealand, Korea and Singapore to consult on the detailed rules for implementation with a view to possibly joining a pilot.

While only four markets have signaled their intent to move forward at this time, other markets may follow. Since 2010, when APEC Ministers first supported exploration of the idea, meetings were held in Hong Kong, Malaysia, Singapore, Thailand, Vietnam and Taiwan to explore the initiative. Up to 10 different markets participated in those meetings. Government representatives had discussions on detailed proposals such as product structure, licensing and dispute resolution. Those who have not committed might do so as the initiative progresses. The inclusion of several markets from the Asia Pacific, particularly the larger fund markets where substantial assets reside, would make the APEC initiative appealing.

The SOI sets out a timeline of action, detailed as follows:

• Joint public consultations will be held from January to June 2014 on technical and procedural rules and arrangements.

• Refinement of technical and procedural rules will occur from June to December 2014 taking into account public comments.

• In February 2015 an arrangement document will be signed by those markets that wish to become members of the passport when it is launched by a pilot group of markets.

• From February to December 2015 a pilot group of markets will implement legislation and measures where necessary to give effect to the arrangement document.

• In January 2016, eligible schemes in member markets can access the passport.

The Framework Document sets out the rationale for the scheme, as well as the scope and applicable rules of the passport. It also discusses the pilot group, including the eligibility to become a passport member economy. Supervisory and enforcement cooperation, governance and implementation are also addressed. In some areas, the host jurisdictions’ laws and regulations apply and in other areas special passport rules will apply. The vision is however, that over time the varied requirements will be reduced. Host economy laws and regulations will apply where they relate to the investor e.g. distribution, disclosure, complaints, marketing and communications. Additional rules, beyond those that apply to local collective funds, may be imposed on passport funds.

Special passport rules will apply to areas such as a streamlined authorization process i.e. standardized application forms and agreed processing times for applications with the goal of moving to a notification process in the longer-term. Rules will also apply to the types of legal vehicles, advanced qualifications and experience of operators, regulatory control over the fund, delegation, custody, valuation, independent oversight, derivatives, lending, borrowing, short-selling, redemption and suspension, audited accounts, regulatory powers.

September 2013,APEC announces ARFP

January to June 2014,public consultations incountries

July to December 2014, technical and proceduralrules to be developed

February 2015, Arrangement Document to be signed by participating countries

February to December2015, pilot groupcountries to implement domestic regulations

January 2016, commencement of ARFP Passport


A review of the passport arrangements will occur two years following the date it becomes operational or sooner if members decide. In addition, a Joint Committee with representatives from all passport member economies will oversee the operation of the passport and assess nominations by new members. A jurisdiction that wishes to join must obtain the consent of each existing passport member jurisdiction. This provides an incentive to be a first mover.

There are several important points to note.

1 A pilot group involving only a few markets will launch the programme first of all. Other markets are eligible to join after that if they meet the same criteria as those that initially joined.

2 Being a signatory to Appendix A of the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information will be one criteria of participation.

3 Broad implementation of IOSCO Principles on enforcement, cooperation and collective investment schemes will be another criteria.

4 Not being listed on the Financial Action Task Force’s list of high-risk and non-cooperative jurisdictions is another criteria.

5 Host economy laws and regulations will apply where they relate to interaction between the investor and fund, e.g. distribution, disclosure, complaints, marketing or communications.

6 Home economy laws and regulations will apply to the authorization of the collective investment scheme operator, managing conflicts of interest, outsourcing and service providers and risk-management requirements.

For global or regional firms contemplating participation in the APEC initiative it is worth noting that the Framework Document states that to ensure the benefits of the regime flow to member economies, the collective investment schemes must be authorized and constituted in member economies. The operator of the scheme must also be authorized, approved, registered, or licensed and have its principal place of business in a recognized home economy. Measures will be developed to ensure that operators based primarily in non-member economies cannot avoid the regulatory requirements that would otherwise apply.

“ASEAN Framework for Cross-Border Offering of Funds”South East Asian countries have been discussing a cross-border Collective Investment Scheme (CIS) for several years as part of efforts towards the development of an ASEAN Economic Community by 2015. The initiative is being pursued under the Capital Markets Integration Plan. Singapore and Thailand publicly signaled in mid-2012 that they were supportive of the idea. The Monetary Authority of Singapore issued a closed consultation with comprehensive details on the types of funds and managers that would be included. The Securities and Exchange Commission of Thailand issued a press release on the sale of such funds.

Mutual RecognitionPASSPORT

HK CN

Asia Region FundsPASSPORT

AUS NZ SG MY SG THKR

ASEAN Framework for Cross-Border

Offering CISPASSPORT

Participating Countries Participating Countries Participating Countries

Three Funds Passports

Countries not participating, so far:India | Indonesia | Japan | Philippines | Sri Lanka | Taiwan | Vietnam


It did however, take more than a year from these signs of support to the announcement in October 2013 of actual agreement to the initiative. In October, on the sidelines of the 2013 ASEAN Capital Markets Forum in Bangkok, Singapore, Thailand and Malaysia signed a Memorandum of Understanding (MOU) to establish the “ASEAN CIS Framework for cross-border offering of CIS”. The Framework allows fund managers operating in a member jurisdiction to offer CIS constituted and authorized in one jurisdiction to retail investors in another jurisdiction for the first time under a streamlined authorization process. In a separate initiative, relating to the offering of CIS to non-retail investors, the three countries also agreed to provide mutual assistance in relation to the supervision of cross-border offering of CIS.

On signing the MOU, detailed information in the form of a set of standards was released. Part I of the standards cover the qualifications of the CIS operation, Trustee/Fund Supervisor and requirements relating to approval, valuations and operational matters. Part II sets out the product restrictions for qualifying CIS. Signatories will issue a handbook “in due course” to provide guidance to fund managers on administrative matters and procedural matters including the application procedures, the use of local distributors in the offering process, and the procedures for the remittance of funds. The target implementation is in the first half of 2014.

The ASEAN standards are very similar to those proposed in the consultation by Singapore in mid-2012. In fact, as noted in the MAS press release, “the standards are broadly in line with Singapore’s domestic requirements governing funds offerings. Singapore-based fund managers will be able to offer their existing suite of retail funds to investors in Malaysia and Thailand without having to make significant modifications to the funds.”

There are a few points to note on the standards. The CIS Operators (Fund managers) must be licensed or registered by a participating home regulator and need to have a minimum 5 year track record, a minimum of US$500 million in AUM globally (including via its related companies). A CIS must be assessed as suitable to be a Qualifying CIS by the Home Regulator before it can be offered cross-border. The CIS’s underlying investments may only consist of transferable securities, money market instruments, deposits, units in other CIS, and financial derivatives. The CIS must not engage in activities such as securities lending, repurchase transactions and direct lending of moneys. Transferable securities and money market instruments must be dealt in an organized market. There are investment limits on single body, group, benchmark and other CIS investments. There are also additional rules on Money Market Funds, Master Feeder Funds, Fund-of-Funds and Exchange-Traded Funds. Credit ratings issued by Fitch, Moody’s or Standard and Poor’s will be used, not national, local or ASEAN ratings.

All assets must be deposited with an independent custodian but that custodian can be part of the same group as the CIS operator. The assets of a Qualifying CIS must be segregated from the custodian’s assets and those of other clients. Outsourcing is possible, including to sub-custodians, as long as proper controls are in place. An independent party is needed for valuations and NAV calculations and audits. The trustee/fund supervisor must be domiciled and regulated in the same jurisdiction as that of the Qualifying CIS it oversees. Where the trustee/fund supervisor is the custodian, segregation of the assets of the Qualifying CIS is required. But the trustee/fund supervisor must be independent from the CIS Operator. The holding of 10% of shares or the existence of a common shareholder or shared directors would mean the trustee/fund supervisor is not independent.

Standards Required of Qualifying CIS

Minimum AUM to qualify US$500m

Minimum track record 5 years

Fund Management delegation limit 20% NAV

Investment in transferable securities, money market instruments, deposits, units in other CIS, and financial derivatives

Allowed

Securities lending, repurchase transactions, direct lending of monies Not Allowed


The offer of a Qualifying CIS must be done through locally licensed or regulated intermediaries in the Host Jurisdiction. The Qualifying CIS Operator must submit to the non-exclusive jurisdiction of the Host Jurisdiction’s courts. Where the fund management function is to be delegated, up to 20% of the NAV of a Qualifying CIS may be delegated to foreign sub-managers/delegates that are not regulated by a Signatory to the Framework (i.e. those outside the three ASEAN countries initially in the scheme) but there are conditions. The 20% limit does not apply where the foreign sub-managers/delegates are regulated by a Signatory to the Framework. Foreign firms could therefore participate via Singapore, Thailand and Malaysia or even via other locations to a certain extent.

Hong Kong/China Mutual RecognitionIn a January 23, 2013 speech by Alexa Lam, the Hong Kong SFC announced that it was pursuing an agreement with China to allow for the mutual

The distribution dynamics in China are changing fast.

recognition of collective investment funds. Details were scant and it was predicted that negotiations would take many years given the complexity of the issues involved including China’s capital controls and the different levels of investor education in both markets. China and Hong Kong are however, apparently aiming at agreement in 2014.

Negotiations are said to be a two stage process. Stage One, which was completed in July 2013, was a “mapping” of the two sets of fund regulations. Stage Two is “implementation”. This will likely involve the two regulators working out many of the various issues in respect of fund companies, funds, and how distribution might be supported. Additionally, as there are distinctly different tax regimes between Hong Kong and China, account of this will be needed. On August 29, 2013, the mutual recognition scheme was added to the Hong Kong/China CEPA 10 (Closer Economic Partnership Agreement), which has the effect of giving official government support for the development.

The consequence of the mutual recognition scheme is that there are two scenarios for funds distribution to occur: Hong Kong funds being sold in China and China funds being sold in Hong Kong.

Initially the Hong Kong products will be Hong Kong- domiciled, Hong Kong SFC authorized unit trusts only. Currently there are less than 300 of these authorized, including 30+ exchange traded funds. For China, only CSRC approved products will be eligible. It is likely there will be investment restrictions on the use of derivatives in the funds that are allowed to participate, given China’s current stance on use of derivatives in local funds. An appropriate skill set needs to be in place in the fund management company, which of course should be fully licensed by the Hong Kong SFC or CSRC.

Distribution will be an issue. At the moment the distribution of funds is dominated by the big four Chinese banks. Access to those banks is difficult for foreign fund managers and smaller firms. Questions that remain unanswered include: Will other fund distributors be allowed to create a vibrant market? Will a major new funds distributor prevail? The distribution dynamics in China are changing fast though. It is hoped that the introduction of the mutual recognition scheme will be a catalyst for further broadening to distribution and a greater degree of investment advice being given.


Foreign firms would like to ensure they can participate. When RQFII was announced, foreign firms had to wait longer than they wanted to participate as only Chinese-owned firms based in Hong Kong were eligible for the program in the first round. Many global firms are seeking to prepare themselves by domiciling funds in Hong Kong, as the Hong Kong SFC has said this will be a requirement. There is speculation that local management of funds will also be required and so firms are considering how they might meet this requirement. As the other requirements are not yet known some firms are taking a guess at the likely requirements in terms of assets and asset manager requirements, based on other China entry programs such as QFII and QDII.

Once Hong Kong and China have concluded the negotiations and the scheme is up and running, it is very likely other markets in the region will want to join in. Of these, the most likely to be included is Taiwan, as it already has both a large RMB base and many other financial and corporate links with China. This would be a particularly attractive proposition longer term, as Taiwanese investors are already very substantial users of offshore fund products, and are actively interested in investing more into China. Singapore may also seek to establish a similar arrangement as it develops its China related programs such as RQFII.

What we do know What we don’t know What needs to be known

Bilateral agreement between China and Hong Kong, no changes to existing “Rules”

Will it be a “pilot”scheme with only a few initial participants?

Timing, will there be “advanced notice”?

Does not involve Taiwan, Singapore or anywhere else

Will there be restrictions based on AUM, age and size of fund, age of FMC, etc.?

Any secondary approval process in Hong Kong and China?

Hong Kong domiciled, Hong Kong SFC Authorized funds for Hong Kong

Are ETFs included and how? Who will be allowed to distribute?

China CSRC approved funds for China What restrictions on use of derivatives will be placed?

How to gain support from key market distributors?

No Hong Kong MPF, UCITS, Cayman or other funds

How will Mainland funds be allowed into Hong Kong? Will the SFC impose restrictions?

What fund types, markets, products will be attractive to Mainland investors?

CSRC and SFC are in two stage discussionsStage 1 • Mapping - Completed in July 2013Stage 2 • Implementation – On-going

Will hedge funds and alternative investment funds be allowed?

Will RMB Share classes be allowed for these and all other Hong Kong SFC Funds?

Hong Kong SFC Funds Authorization Code allows a wide variety of fund types

Can Fund of Fund products, managed in Hong Kong, invested in UCITS be allowed?

When will OEICs (i.e. mutual funds) be allowed?

“Technical study” groups meeting in Beijing and Hong Kong, regularly

Will this lead to a “Greater China Funds Passport”?

Will the SFC allow new fund applications “on spec” in parallel with these new recognition developments?

Purpose is to facilitate cross-border fund distribution between Hong Kong and China

As China does not have Trust Laws, and only unit trusts can currently be domiciled in Hong Kong, how will this work?

Will Chinese FMC in Hong Kong get priority on processing of products?

Of the 1,850+ Hong Kong SFC authorized funds, less than 300 currently qualify

Will this replace QDII? Is it necessary to set up offices in both Hong Kong and China?

“Mutual Recognition” added to CEPA 10 in August 2013

How will tax on both the funds and the investor be applied in China?

Will there be a need for operations management in both Hong Kong and China?

Hong Kong/China Mutual Funds “Recognition”


Whilst there have been some reports that European UCITS from Dublin or Luxembourg might be included, most observers view this as very unlikely as it defeats the original purpose of the scheme, i.e. to aid the development of a broader and deeper fund management industry in both Hong Kong and China. The intent of the initiative is to develop financial markets in Hong Kong and China, and particularly the fund management industry, by helping to attract assets to manage and fund managers. Allowing UCITS funds to access the program would risk assets and jobs flowing out of the region to Luxembourg and Ireland.

Undertakings for Collective Investments in Transferable Securities (UCITS)As noted, the UCITS product has been a vehicle which has allowed international fund managers to sell cross-border the same product into several

markets in the region. But the acceptance of UCITS differs from market to market. UCITS are widely accepted in Hong Kong, Singapore and Taiwan. Korea has blown “hot and cold” on UCITS, and currently is making its market very restrictive for these funds. Likewise, Australia, which has a very large funds market, has effectively prevented UCITS (and most other non-Australian fund products) from participating in its market through penal tax measures on the investors into such funds.

UCITS providers are constantly trying to expand the acceptance of UCITS around the globe. Access to large markets such as China, India and Indonesia would be welcomed. Expanding access has been difficult. Some markets are focused on other priorities, others are concerned about opening up local markets. In recent years, fund managers have also expressed concerns

Number of UCITS Funds in Asia, July 2012

UCITS are well received in several North Asian markets.Note: Other includes Australia, Japan, and New Zealand.


Rank Country Number of Registrations

1 Singapore 2,042

2 Hong Kong 1,157

3 Macau 862

4 Taiwan 845

5 Korea 317

6 Other 124


Regional UCITS Fund Registrations

Region of

distribution

Total registrations

Dec 2009

Total registrations

Dec 2010

Total registrations

Dec 2011

# new registrations

over the period

Europe 49,956 54,441 57,650 3,209

Asia Pacific 5,307 5,434 5,614 180

Americas 2,154 1,922 1,755 -147

Middle East 894 797 640 -157

Africa 233 218 252 34

Total 58,544 62,812 65,931 3,119

about the length of time it takes for approvals in established markets like Hong Kong. Some attribute the delay to regulatory concerns about foreign and complex products following the global financial crisis. Others see it as part of efforts to promote (or protect) the local funds industry.

UCITS will remain useful in the short term in the absence of any viable alternative regional vehicle. Even with the advent of the regional funds passporting initiatives UCITS will have a role. While UCITS products will probably not be eligible products in the passporting scheme due to regional domicile and management regulations, firms could still use it in the region. Firms wanting a product for the Asia Pacific, Europe, Latin America and the Middle East would still get value from a UCITS vehicle. Emerging regional managers, for example from China, are increasingly turning to UCITS vehicles as part of their regional and global strategies. It is unlikely that the use of UCITS will be prohibited in the region.

Exchange Traded Funds (ETFs)While collective investment funds have not been able to be passported across the region, Exchange Traded Funds have. ETFs have led the way in cross-border agreements. Taiwan and Hong Kong concluded a cross listing agreement for ETFs several years ago. China and Hong Kong also concluded an agreement. While the agreement with China has been focused on the development of RQFII ETFs issued by the Hong Kong branch of Mainland fund management companies, the Taiwan/Hong Kong agreement has not proven to be so popular, as very few ETFs have taken advantage of it. ETFs may well get included in the three mutual recognition agreements being considered as the regional regulators approve them as fund products rather than securities. ETFs are already part of the RQFII initiative. The ASEAN guidelines also refer to ETFs. Australia, which is part of the APEC initiative, is a large ETF market.

Which of the Three Will Work?The Hong Kong/China “Mutual Recognition” scheme is regulator-to-regulator initiated, with Government support. The fund industry is highly motivated by the opportunity because of the possibility of accessing the large Chinese market which hitherto has been difficult to enter. In addition, the scheme could be the first to actually be up and running probably in 2014. Most likely this will be a “pilot scheme” a term China uses when starting off something new in the financial services industry. This will most likely mean that a few fund houses with qualifying products, will be allowed to start to sell cross-border. Thus a number of Hong Kong based fund managers can start to have their funds sold in China, and some China managers have funds sold in Hong Kong. Key issues that will need to be addressed, especially in China are:

a Global fund managers have no local “branding” in China, they are unknown to local investors, and few have any local representation.

b Distribution will be a key ingredient to success. Presently in China this is dominated by the big 4 or 5 banks. There are few others yet to emerge with any meaningful market share. How will it be possible to get onto the banks’ platforms?

c For China managers, they have only created funds that invest into the Chinese stock and fixed income markets. The last 5 years has seen consistently negative returns on average, from Chinese equities, and the fixed income market looks well past its peak.

Possibly within 12 months of starting, this “mutual recognition” scheme will be more widely opened up, and soon after that Taiwan and possibly even Singapore might be able to join. And that would make a significant difference to the potential, given Taiwan and Singapore’s familiarity with international investing. What won’t happen, despite some reports otherwise, is the inclusion of UCITS products.

Source: Distributing Funds in Asia’s Growth Market (Asset Management Insights) PwC March 2012



Southeast Asian Mutual Fund Assets under Management by Country, 2008 - 2012 (US$ billions)

Malaysia, Thailand, and Singapore collectively capture nearly 88% of total Southeast Asia AUM.

Source: Cerulli Associates, based on data feeds from various organizations

Country 2008 2009 2010 2011 2012CAGR

2008 - 2012

Malayasia1 $41.90 $70.60 $78.90 $89.00 $111.60 27.7%

Thailand $39.50 $49.50 $55.30 $56.70 $73.20 16.7%

Singapore2 $30.40 $42.50 $46.80 $46.90 $53.10 14.9%

Indonesia $7.40 $11.20 $14.30 $15.80 $18.50 26.0%

Philippines $3.70 $4.40 $5.40 $6.10 $8.60 23.6%

Vietnam $0.10 $0.20 $0.20 $0.10 $0.20 2.0%

Total $123.00 $178.40 $200.90 $214.60 $265.10 21.2%

1 Includes Buniputra and wholesale fund assets2 Includes offshore fund assets

The APEC Finance Ministers “Asia Region Funds Passport” is Finance Minister led. The four markets that have signaled their willingness to pursue this initiative (Australia, New Zealand, Korea and Singapore) can already be accessed relatively easily. But they do have substantial assets which would be of interest to global fund managers. If more markets joined, the APEC passport would be more appealing.

Presently, both Australia and South Korea adopt internal tax policies that make the holding of non-domestic mutual funds very punitive. While both have a well-established, large domestic fund management industry, it will be hard to export their fund products to other markets if they continue to penalize those wishing to enter their domestic markets. Further thought will be needed to make that work. Without changes, this risks being a scheme which facilitates their export but not the import of funds. With the 2016 launch goal the APEC initiative looks set to be the last one out of the starting gate.

The ASEAN-led “ASEAN CIS Framework for Cross-border Offering of Funds” is regulator-led, and has published some clearly defined regulations. Singapore, Malaysia and Thailand also have a history of cooperation. If other ASEAN markets join, particularly larger markets like Indonesia, this scheme would become more appealing to global investment managers. It is however, more likely to benefit local fund managers than global, by placing some restrictions on the

management companies that can qualify, and the necessity of demonstrating sufficient years of experience and scale of assets managed in the location. Global fund managers could however, establish in Singapore to access the other markets. With a scheduled start in the first half of 2014 this scheme looks to be set for an early launch and get the opportunity of building traction to encourage other ASEAN countries to join in due course. Indonesia, the Philippines and Vietnam were muted to be members but they were absent from the initial agreement.

It is also worth noting a few points. Singapore has a foot in two camps. How this will work is not clear. Will Singapore seek to have two distinct schemes or to bring them together? Some hope the APEC and ASEAN schemes will be complementary and possibly link together in the future, believing that the region is too small to sustain both schemes. It is also worth noting that there is no participation yet by Japan, Taiwan, Indonesia, the Philippines, Sri Lanka, Vietnam and India. Will they join in the near future and will they be part of the APEC and/or ASEAN scheme. All but India and Sri Lanka are part of APEC. India, Japan, Sri Lanka, Taiwan are not part of ASEAN. Some could follow Singapore and be part of both. The ASEAN +3 process (ASEAN plus China, Japan, Korea) could link more countries into the ASEAN scheme. There is also an ASEAN CER process (Closer Economic Relations) which links Australia and New Zealand to ASEAN.


For regional fund managers the initiatives might encourage cross-border activity but there will be costs and infrastructure requirements.

How Will Fund Managers React?The markets and their asset size will determine the response of global fund managers. For this reason the Hong Kong/China mutual recognition scheme is the most immediately appealing. The four markets participating in the APEC initiative also have substantial assets. With the participation of only three markets the ASEAN proposal at the moment has the least number of accessible assets. For regional fund managers the initiatives might encourage cross-border activity but there will be costs and infrastructure requirements.

Firms will need to consider establishing locally domiciled vehicles at a minimum. They will also need to consider local management of products. In order to meet requirements on track record, funds may also need to be established earlier rather than later. Establishing funds before details are known is risky, but firms may be able to predict what the funds will basically look like based on the RQFII scheme and the consultation papers. A local and regional custodian will also be key, along with cross-border fund administration, transfer agency and trustee capabilities.

To benefit from the Hong Kong/China mutual recognition initiative there are several things firms can do. Firms can create Hong Kong domicile funds, use local Trustees, build a track record for the fund, and ensure the organization can meet the new criteria. There are benefits to be had by establishing Hong Kong local funds. They can be used in the Mandatory Provident Fund (MPF) and can be brought to market quickly. The funds are also lower cost and are not impacted by UCITS V & VI regulations in Europe, which are due to take effect in the next couple of years. In addition the funds cover relatively simple products. Regional specialties can also be developed. RMB shares classes are an option.

To access the ASEAN Scheme, firms should consider a presence and structures in Singapore, Malaysia and Thailand given the requirements to be regulated by a participating jurisdiction. The limits on fund management delegation might also necessitate re-structuring of investment management. As the APEC scheme intends to limit the passport to collective investment schemes authorized and constituted in member jurisdictions, firms will need to

consider the benefits and costs of operating in Singapore, Korea, Australia and New Zealand. Although, the requirement that the operator of the CIS have its principal place of business in a passport jurisdiction may limit the participation of foreign firms.

As the details of the three schemes are not yet finalized, firms should engage with policymakers on the details. Policy makers will be keen to create schemes that are workable in the market and of interest to market participants given how long it has taken to come to agreement on the launch of the schemes and the high hopes for them.


CountryLocal/ Direct

Custodian

Global Custody

ForexTrustee/

Supervisory Bank

Transfer Agency

Fund Accounting

Middle Office

Stock Lending

Collateral Management

PerformancePost-Trade Compliance

China Yes Yes Yes No No Yes No No Yes4 Yes3 Yes3

Hong Kong Yes Yes Yes Yes2 Yes Yes Yes3 Yes Yes Yes3 Yes3

Malaysia Yes Yes1 Yes No No Yes No Yes Yes4 Yes3 Yes3

Thailand Yes Yes1 Yes Yes No Yes No Yes Yes4 Yes3 Yes3

Singapore Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes

South Korea

Yes Yes1 Yes Yes No No No Yes Yes4 Yes3 Yes3

Australia/New Zealand

Yes Yes1 Yes No Yes Yes Yes Yes Yes4 Yes Yes

Indonesia Yes Yes1 Yes Yes Yes Yes No No Yes4 Yes3 Yes3

Philippines Yes Yes1 Yes No No Yes No No Yes4 Yes3 Yes3

Vietnam Yes Yes1 Yes Yes No Yes No No Yes4 Yes3 Yes3

Taiwan Yes Yes1 Yes No No No No Yes Yes4 Yes3 Yes3

India Yes Yes1 Yes No No Yes No Yes No Yes3 Yes3

Japan Yes Yes1 Yes No No No No Yes Yes4 Yes3 Yes3

What Citi Can Offer

1 Support via our global custody hubs in Hong Kong and Singapore2 We partner with a local trustee for services in Malaysia3 Support via Singapore4 Support via Singapore regional hub in Singapore and contracted under Citi Hong Kong or Citi Singapore. Clients may be subject to specific regulatory

rules, conditions prior to contracting the service with Citi Hong Kong or Singapore

Stewart AldcroftSenior Advisor and Managing DirectorChief Executive Officer, CitiTrust Limited, Asia PacificCiti Securities and Fund Services

Catherine SimmonsHead of Government Affairs, Managing Director, Asia PacificCiti


ResourcesA New Frontier for RMB Investment Products and Asset Management Businesshttp://www.sfc.hk/web/EN/files/ER/PDF/Alexa_20130123.pdf

Australian Government Welcomes Johnson Reporthttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/003.htm&pageID=003&min=ceba&Year=&DocType=

Government responds to Australia as a financial services centre reporthttp://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/050.htm&pageID=&min=ceba&Year=&DocType=0

PWC Report in Asia funds Passporthttp://www.pwc.com.au/media-centre/2010/asia-region-funds-passport-nov10.htm

APEC Finance Ministers’ Processhttp://www.apec.org/Home/Groups/Other-Groups/~/media/Files/Groups/FMP/201308_ARFP-Public-Info-Aug13.pdf

APEC Statement of Intenthttp://www.apec.org/Press/~/media/5626B2D00F704C69B0324FDF850FF67A.pdf

ASEAN Capital Markets Forum Press Release on CIS Schemehttp://www.theacmf.org/ACMF/webcontent.php?content_id=00018

ASEAN Framework for the Cross-Border Offering of ASEAN CIShttp://www.theacmf.org/ACMF/upload/standards_of_qualifying_cis.pdf

Monetary Authority of Singapore Press Release on ASEAN CIS Schemehttp://www.mas.gov.sg/news-and-publications/press-releases/2013/singapore-joins-malaysia-and-thailand-to-introduce-the-asean-cis-framework.aspx

Thai SEC News Release on ASEAN CIS Schemehttp://capital.sec.or.th/webapp/webnews/news.php?cboType=S&lg=en&news_no=92&news_yy=2013

Malaysian Securities Commission Press Release on ASEAN CIShttp://www.sc.com.my/post_archive/acmf-announced-the-framework-for-the-cross-border-offering-of-asean-cisacmf-umumkan-kerangka-bagi-tawaran-rentas-sempadan-asean-cis/

UCITS Fund Distribution 2012http://download.pwc.com/ie/pubs/2012_ucits_fund_distribution_exec_summary.pdf

PWC Fund Distribution Poster 2013http://www.pwc.lu/en/fund-distribution/docs/pwc-publ-gfd-march-2013.pdf

ASEAN CER Statementhttp://www.asean.org/images/2013/economic/aem/aem%20cer%2018%20-%20jms%2021%20aug%20final.pdf

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