Regulators moving closer to creating an Asian funds ‘passport’ regime
Asian regulators are increasingly warming to the concept of an Asian funds passport similar to the Ucits directive of the European Union. This might result in the region having its own cross-border fund vehicle enabling funds to be freely 'passported' and marketed among eligible member jurisdictions.
A small group of Asian countries could take the lead in coming up with a multilaterally agreed set of new common regulations for an Asian funds passport regime similar to the Undertakings for Collective Investment in Transferable Securities (Ucits) directive that has enabled the passporting of open-ended funds across European member states since 1995.
Hon Cheung, regional director for official institutions at State Street Global Advisors in Singapore and co-author of Asian Funds Passport to Growth, a report released this week, says there are increasing signs from Asian governments that the creation of an Asian funds passport regime is much higher on the discussion agenda than in the past.
For example, a joint statement made by members attending the Asia-Pacific Economic Co-operation finance ministers meeting in Kyoto on November 5-6, said participatory member countries "recognise the importance of creating more open and integrated financial markets in the region, and welcome efforts to facilitate cross-border marketing of fund management services within Asia".
A similar call for an Asian funds passport regime was recommended and outlined in the findings of a study led by Australia's minister for financial services, superannuation and corporate law, Chris Bowen, in a report, Australia as a financial centre - building on our strength, released late last year. One recommendation seen as instrumental in boosting the Australian financial sector's engagement in cross-border activities within the region lies in the creation of a fund passporting regime that would allow eligible funds from eligible jurisdictions to be marketed across borders.
The Australia Securities and Investment Commission (Asic) is expected to negotiate with other Asian jurisdictions on bilateral mutual recognition agreements as a first step to this end, after which regional governments and agencies would provide a forum in which these bilateral agreements could be expanded into a multilateral passport regime, the report recommended.
"There is a lot more excitement now about the Asian funds passport concept than in the past," says Cheung. "The amount of co-operation we have seen in this region marks a change from the past, and this makes me hugely optimistic that this Asian fund passport idea will be carried forward proactively by governments and authorities."
Asia's need for a common regulatory regime for financial services was also brought up by Bursa Malaysia's global head of Islamic markets, Raja Teh Maimunah, who told delegates attending an Islamic conference in Kuala Lumpur in October that the exchange wants to take Islamic finance to the next stage of evolution by working with regulators to establish a common, dedicated Islamic exchange using a multilateral trading facility similar to the Markets in Financial Instruments Directive (Mifid) in Europe.
Mifid provides a harmonised regulatory regime for investment services across the 30 member states of the European Economic Area (the 27 member states of the European Union plus Iceland, Norway and Liechtenstein). While it is a much broader directive than the investment fund-focused Ucits, Raja Teh said the ultimate goal for such development in Asia is also to bring about one regulatory framework applicable to members across the board.
Industry participants say an important incentive for Asian jurisdictions to begin looking at a common fund vehicle that could ‘passport' freely across border - despite Asia's lack of a common currency or regional rule-making body such as the European Union - is the growth potential of Asia's estimated $3.9 trillion in collective fund assets, an end-2009 estimate put together by State Street, Cerulli Associates and industry associations.
As the Asian fund industry grows, these participants say Asian governments believe having a share of the collective funds assets is beneficial to their local financial industry. Meanwhile, investors should benefit from operational efficiencies by having Asian-domiciled funds with Asian assets as underlying rather than investing in funds that are domiciled offshore, such as Ucits funds marketed in Asia, as they will reduce potential settlement risk. That is because offshore funds may not be priced for at least a day after the trade day in Asia and these funds are settled by proceeds transferred from Asia to Europe.
State Street says while an Asian regional product will need to compete with the existing pool of offshore funds that are distributed in the region, which are predominately Ucits funds, the expected growth of the Asian investment fund sector is likely to be strong enough to absorb the introduction of additional choice given by such a cross-border vehicle.
Cerruli Associates estimate the assets under management of collective funds in a number of countries are poised for double-digit annual growth during the next four years, with China's investment funds expected to grow at a compound annual growth rate of 15.3% to reach more than $700 billion by 2014.
Rather than using Asic's approach, State Street proposes several leading Asia-Pacific jurisdictions such as Australia, Hong Kong and Singapore could take the lead on agreeing to a set of new, separate regulations to create a cross-border fund project, rather than trying to amend or harmonise existing regulations, which the banks say could be time-consuming.
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