The exchange-traded fund (ETF) market has been dominated by the US and Europe, with offerings from Asia making up less than a tenth of total global volumes. This is set to change, however, as China continues to open up its capital markets.
Bond Connect went live in 2017, and its successor, ETF Connect, is slated to come online later this year, and both are expected to drive interest in the sector. With only six fixed-income ETFs currently trading in Hong Kong, the potential is clear for these two market integration initiatives to turbo-charge ETF volumes regionally.
HSBC Securities Services (HSS), which has provided custody and fund administration services for ETFs in Asia since 2001, saw an opportunity and looked to revamp its offering, with the aim of providing a more transparent, cost-effective solution for issuers looking to tap into the market.
“The heat has picked up over the last 18 months,” says Benjamin O’Hare, Hong Kong-based head of the asset managers sector at HSS. “One of the big sparks for this has been the interest in ETF Connect; this has been the driver for lots of new conversations around international managers who don’t yet manufacture in Asia and we have been helping these managers in their investigations.”
These discussions have seen several ETF managers look to consolidate their product range with either new launches or delisting of existing underperforming products, according to O’Hare. It has also driven a greater focus on costs and efficiency through increased automation.
To be able to meet these requirements, HSS sat down 18 months ago with its key Asia ETF clients to brainstorm new ways it could add value, reduce risk and increase efficiency in its servicing offering.
The net result was a rationalisation of the firm’s ETF engine, PRS, which has been serving the business for five years. The move to streamline PRS had immediate benefits for HSS’s existing book of business, with the firm managing to reduce the total number of reports for one major client by 40% at a stroke.
Online order portal
HSS built on this by launching an online order portal in the second quarter of this year, which links into PRS, and allows authorised participants (sometimes referred to as participant dealers) to automate the order-entry and approval process.
“The major differentiator here will be moving from a paper-based instruction to a fully automated STP system [which] will significantly reduce human error,” O’Hare says.
The recent launch of the online portal means its impact has yet to be felt in volumes. But the revamp of PRS and greater interest in Hong Kong-based ETFs – in anticipation of ETF Connect going live – has already had a positive impact on HSS’s numbers. As of April, its securities services arm saw annual growth in excess of 10%, bringing the total volume of its assets under administration to $36.7 billion.
This increase in volumes includes the successful launch of 17 leveraged and inverse (L&I) products from five separate issuers on the same day, which reached parity in 12 weeks. HSS now holds a 99% share of the Hong Kong L&I sector and 57% of the entire Hong Kong ETF market.
Risk management capability
A key aspect in the success of the L&I ETF sector is HSS’s risk management capability and experience in servicing derivatives portfolios for fund managers offering different products, according to Hazel Lai, Hong Kong-based sales director at HSS.
“Futures and swaps are commonly used for L&I ETFs. While subject to market movement, futures may need daily margin-call payment; swaps may also need daily settlement based on mark-to-market,” she says. “We help our clients manage these requirements in two ways. Firstly, we have a robust infrastructure, and on top of that is HSS’s long-term experience of service delivery for handling these types of instruments.”
This experience comes not only from the ETFs that HSS supports, but also from servicing other funds that use derivatives, as the firm can apply the knowledge back to the L&I ETFs and help clients to develop the daily procedure, Lai says.
She also points to strong relationships with market participants, including regulators, as another reason for HSS’s strength.
“When new initiatives are launched in the market, like the L&I ETFs, issuers would prefer to partner with firms that are experienced in both product and market,” Lai says. “HSS has a deep understanding of ETFs, as we have supported our clients investing in various asset classes, such as equities, fixed income, commodities and futures.”