The idea of the fund "passport" has proven a hit in Europe, and Asia looks to catch up rapidly, possibly even creating competitive pressures for European centres, as this article explores.

For investment professionals asked to name one of the standout successes of the European Union’s Single Market, an example that might come up is the funds “passport” regime known as UCITS. (The full term is Undertakings for Collective Investments in Transferable Securities.) The idea of being able to buy and sell funds throughout the 28 member states of the EU and bypass regulatory protectionism has proven a success. The hope has been that the EU’s fund market can achieve the same scale and efficiency as the mutual fund market of the US. Total net assets of the UCITS market now stand at €7.97 trillion ($8.81 trillion), according to figures from the European Fund and Asset Management Association.

The success of such a multi-jurisdictional fund market hasn’t been lost on Asia. A number of initiatives in the region are under way to push a cross-border investment sector that could rival or even surpass that of the UCITS one. Despite some economic headwinds, Asia’s recent history of rapid growth and an expanding middle class bodes well for such an approach – but the devils of tax and regulation can often be in the details. 

And firms such as Calastone, the global fund transaction network, are licking their lips at the prospect of a pan-Asian funds market.

"With about 13 per cent of global funds under management but nearly two-third of the world's population, Asia is the future growth engine for funds management. Today there is very limited intra-regional funds flows in Asia, but with the advent of MRF, the ASEAN and the ARFP fund passports, this will drastically change in the next five years,” Sebastien Chaker, head of Asia at Calastone, told this publication in a recent interview.

Passports
MRF is the Mutual Recognition of Funds regime recently enacted between Hong Kong and mainland China; the ASEAN fund passport initiative relates to how Singapore, Malaysia and Thailand have agreed a framework for the passporting of funds to enable cross-border offerings; ARFP is the Asia Region Funds Passport, initially set up by Singapore, New Zealand, Australia and South Korea. In all of these cases, it is probable that the number of jurisdictions involved will expand in time.

With the MRF system, this can be seen with how China is eager to widen access to its capital markets and boost international use of its renminbi currency, while Hong Kong aims to win a slice of the action and ward off competitive challenges from rival financial hubs such as Singapore.

Making cross-border fund markets work often involves ensuring that the “plumbing” of the system - the instructions and flows of information around buy and sell orders with funds - runs smoothly. And paradoxically, mainland China has been able to steal a march in technology terms over Hong Kong, Calastone’s Chaker said.

An issue is that in the mainland, domestic mutual funds transactions are processed electronically via a platform provided by the SSCC (Shenzhen Securities Communication Corporation), while Hong Kong players still mostly use faxes and other older communication methods to execute trade instructions for funds.

“There is a disconnect between the two,” Chaker said. 

“China’s mutual funds industry is only about 10 years old and has therefore been able to build a solid fully automated infrastructure using latest technology,” he said.

This mismatch is an area where Calastone can provide solutions, he said. “We are providing an electronic mutual funds messaging network connecting distributors globally with any funds they wish to distribute, including Chinese funds in the near future.
 
“The main fund managers and transfer agents in Hong Kong as well as a growing number of Hong Kong-based funds distributors are already connected to our network, so naturally they look for us to extend our solution to cover access in and out of China,” he continued. “There is no direction given to the players on how to operate; no-one is saying `this is how to process your trades'. However, it is believed that Chinese players will not accept manual processes for sending or receiving mutual funds trades cross-border.” 

Chaker said that around 26 fund managers have fielded registrations to get approval from the relevant authorities. The fact that so many fund management groups from both sides have applied in the three months since early July shows the enthusiasm surrounding this new scheme.

So far, no funds have yet been approved by the respective regulators, probably because Chinese authorities have been busy dealing with the stock market falls there; and Hong Kong authorities have most likely waited for China stock markets to settle, he said. 

Competition against Europe’s UCITS?
Interestingly, the desire of Asian countries to adopt a UCITS-style model is a mixed blessing for those European fund hubs offering Asian-currency share classes for UCITS funds. At present, a large chunk of mutual funds sold in Hong Kong and Singapore, for example, use UCITS structures, which generates plenty of business in centres such as Luxembourg and Dublin, where many fund administration firms are located. If Asia develops its own pan-Asian market, Europe might feel a bit of a pinch.

Indeed, at the recent Association of the Luxembourg Fund Industry conference in that country, there were a number of senior figures from the mainland China and Hong Kong investment industry, such as Michael Chow, head of international business, Fullgoal Asset Management (HK) from Hong Kong, and Peng Wah Choy, CEO Harvest Global Investments in Hong Kong. 

Denise Voss, chairman of ALFI, said she expects the expansion of China’s economy – notwithstanding some near-term issues – to be positive for UCITS funds in the future.

“We have seen over the last couple of years the top Chinese banks set up operations (in many cases their European headquarters in Luxembourg), as well as asset management activities, taking advantage of the global distribution capabilities of Luxembourg UCITS,” Voss told this publication on the sidelines of her organisation’s conference.

“In terms of renminbi-based funds, given the internationalisation of renminbi it is natural that UCITS funds are not only adding renminbi share classes but are investing in China via the recently launched Shanghai-Hong Kong Stock Connect facility. China’s growing economic importance and the global nature of Luxembourg UCITS means that there will continue to be more China-focused and renminbi products in UCITS,” she said.

Certainly, recent data points to a UCITS market in rude health, with Asia-linked business helping to drive this. As at the end of March this year, Luxembourg alone was home to €3.524.79 trillion of net assets under management, a rise of 13.89 per cent since the start of the year.

No wonder Asian policymakers want to create their own version of the UCITS system.