State Street has thrown its weight behind the proposal for the Asian Pacific region to collaborate on development of an ‘Asian Funds Passport’ to facilitate the growth of locally domiciled managed funds.
The proposal, raised at last month’s meeting of Asia Pacific Economic Co-operation (APEC) in Japan, is to develop a UCITS-style platform through a series of bilateral or multilateral agreements for the standardised regulation of managed funds.
State Street, which is the world’s second largest funds manager (after BlackRock) and second largest custodian bank (after BNY Mellon), has produced a global paper on the subject as part of its ‘Vision’ series of research and thought leadership.
The paper points out that changes within the region have made the creation of a standard cross-border investment vehicle more viable.
These include: increased regional co-operation; more regulatory convergence; projected growth in the region’s assets under management; the desire to further develop local capital markets; and growing interest in the prospect of improved returns and access to more products.
It also points out that, unlike Europe, Asia Pacific does not have a single regulatory body nor a single currency. However, neither did Europe when the UCITS regime was launched in 1985. UCITS (Undertakings for Collective Investments in Transferable Securities) provides a framework for funds across various asset classes to be registered in the EU and are thereby given an imprimatur of good governance.
Bernard Reilly (pictured), head of State Street Global Advisors in Asia Pacific, said that the next version of UCITS – version four due for implementation mid next year – might entail extra costs for investors.
“More importantly, if you’re in Asia, do you want to be under a European style of regulation? This is about controlling our own destiny,” he said.
State Street’s argument is given more weight because the company does not have a particular vested interest. It administers and manages UCITS schemes alongside country-specific vehicles and mutual funds throughout Europe, Asia and its home country of the US.
“We believe that if we help the industry develop in Asia Pacific then it will be good for State Street,” Reilly said.
The paper recommends a softly softly approach to the funds passport, starting with bilateral agreements on regulations with countries which have similar legal systems. The obvious contenders in this regard are the former British colonies of India, Hong Kong, Singapore, Australia and New Zealand.
Australia would probably be a major beneficiary because it has the largest managed funds market in the region, accounting for an estimated 37 per cent of the $3.9 trillion in collectively managed funds, yet it has a tiny percentage only of the region’s total cross-border funds. Singapore has 2,300 cross-border funds, followed by Hong Kong’s 1,209. Australia has just 59.
The Australian government commissioned a report published in November last year by the Australian Financial Centre Forum, which proposed establishing a regional funds passport in Asia Pacific. The Australian government was also the one to raise the issue again at last month’s APEC meeting.
Japan, too, would be a big beneficiary. It has about 28 per cent of the region’s managed funds market but only 77 registered cross-border funds.
Reilly believes that regulators from various countries need to get behind the idea for it to succeed.
