Pension reform may boost Asia asset servicing

Asian asset holders have well over four-fifths of their estimated $22 trillion tied up in domestic deposits and fixed income markets. But BNY Mellon Asset Servicing’s Asia chief, Leow Chong Jin, believes pension reform and changing attitudes to risk and investment could result in a much higher proportion of these assets being placed outside of traditional markets in the future. By Christopher Jeffery

Leow Chong Jin, head of Asia at BNY Mellon Asset Servicing in Singapore, was tasked with building out Bank of New York's asset services business from scratch after joining the group from State Street in 2006. He set about creating dedicated sales, operations, product management and client services capabilities in the region, and now employs some 200 staff, mostly in Singapore, but also in Taiwan, Hong Kong, Tokyo and, most recently, Beijing. "To be closer to our customers, we really needed to be in-country," says Leow. "So slowly over the past four years wherever we can, we hire local talent and we put them in local offices."

BNY Mellon Asset Servicing now looks after nearly $800 billion, out of the approximately $3.7 trillion held by Asia-domiciled asset holders, according to market practitioners. The other $2.9 trillion is serviced by global providers, such as State Street, JP Morgan and Northern Trust; regional powers, such as HSBC and Standard Chartered; and domestic financial institutions.

Competition for assets is fierce, but Leow believes BNY Mellon is well positioned since asset servicing is a core business of the US bank, with its $24.4 trillion global custody business contributing around 35% to total group profits. This means asset servicing is a top management focus. Leow should know the contrast, as he has worked at a number of asset services companies, including at Deutsche Bank as its head of customer management for Asia Pacific global securities services by 1999, and then for State Street after it bought Deutsche Bank's securities services unit in 2003.

The pool of assets in Asia is also vast, with some parties estimating Asian central banks, sovereign wealth funds, insurers, pension funds, mutual funds and unit trust hold some $22 trillion in assets. Today, these assets are primarily invested in domestic deposits and fixed-income instruments, but they could be invested into new asset classes and international markets in the future. Leow expects pension reform in a number of Asian jurisdictions will not only drive some of this transition but also result in an explosion of institutional wealth creation, pointing to the emergence of Australia's $1 trillion superannuation market as an example of the potential for the region. "Imagine what happened in Australia happening in India, China, Korea and Taiwan - this represents tremendous growth opportunities in Asia," says Leow. "And pension sector developments will fuel further growth in insurance and mutual fund and unit trust products."

Leow also predicts Chinese domestic investors, burnt by their initial forays into international markets via the qualified domestic institutional investor (QDII) scheme, are once more seeking diversification, with QDII quota approvals already in the pipeline. For example, China Construction Bank selected BNY Mellon in May as the global custodian for a QDII fund being launched by ICBC Credit Suisse Asset Management Co called the ICBCCS Global Selected Equity Fund.

BNY Mellon, which emerged from the global financial crisis with its vaunted triple-A credit rating intact, offers basic custody services, fund accounting, unit pricing, compliance reporting, performance reporting and securities lending through to risk reporting and foreign exchange cash management. These days, investors are placing more focus on fundamental risk and return, with emphasis in counterparty, market and operational risks. "Because customers are so much more focused on risks and risk mitigation in their RFPs [request for proposals], a big chunk of the questions are geared towards the service providers' internal operating procedures, audit processes and risk management processes," says Leow.

There is also an increasing trend among customers to visit BNY Mellon's offices to perform due diligence, also a growing trend among regulators. Another significant change is the demand for more data. "They want more data and information - either asking us to provide reports directly or feed raw data into their own internal data management system to generate more reports." This means risk reports including ‘what if' analyses often supplement the performance measurement reports produced by asset service providers. BNY Mellon has invested in risk systems, but much of the asset servicing focus is on compliance monitoring reporting and exception reporting - which comes in two forms: investment guideline violations and regulator breaches.

One of the bank's customers has consolidated its data requirements across multiple providers and appointed BNY Mellon as the master record keeper to offer a consolidated post-trade report covering all its positions for performance and risk reporting. This meant getting files transferred from another asset service provider and scrubbing the data to provide the reports - no easy task. While such transactions may be appealing moving forwards, Leow says: "The jury is still out as to whether this is a good business or not."

But risk looks set to remain a primary concern, says Leow. "If the recent events have confirmed anything, it is the need for risk management to be fully ingrained in the DNA of the asset servicing providers' practices and daily processes."