Five weeks. Chinese and Hong Kong fund managers, custodians and distributors have not been given much time when it comes to setting up operational process flows from and into their respective countries.
The China Securities Regulatory Commission (CSRC) and Hong Kong’s Securities and Futures Commission (HKSFC) announced the launch date for the Mutual Recognition of Funds (MRF) as of 1 July 2015. Given that Mainland China operates retail positions through CSDC’s highly automated infrastructure, in contrast with Hong Kong operating wholesale omnibus positions on a mostly manual basis (by fax), it is unlikely that Chinese distributors and fund managers will allow manual trades to and from Hong Kong. It is equally unlikely that Hong Kong fund managers and their respective transfer agents would be able to cope with manual retail trades from China, a country made up of approximately 300 million investors. Hong Kong players are now faced with having to make a rapid decision on how to structure their operating models in order to send and receive orders to and from China.
Integration and automation
Once the initial Chinese- and Hong Kong-registered funds are approved by respective regulators, the first MRF trades could commence as soon as the end of July according to industry sources. Fund managers on both sides are frantically preparing their applications and in discussion with distributors to list funds on respective platforms. By now the regulatory framework of the MRF, including eligibility criteria and the general “rules of the game”, are well ironed out. It is the operational aspects, however, that remain somewhat unclear.
Take fund-processing platforms, for example. On 12 June, HKSFC issued a FAQ confirming, “orders did not have to be routed via any particularised centralised platforms.” Fund managers and fund distributors, therefore, have a choice when deciding on how to place and receive their orders across the border. The fact that players can actually select their preferred messaging provider has flown somewhat under the radar in these early preparatory stages for MRF.
Lessons from Taiwan?
There are parallels to be drawn here from the launch of the Taiwan Depository & Clearing Corporation (TDCC) Automated Fund Information Transmission Service in 2012. The TDCC selected three international fund messaging providers to connect to offshore fund managers and transfer agents. Fund managers were able to choose one or multiple fund messaging providers and therefore benefit from re-using their existing connectivity methods and global standards to automate Taiwanese trades.
Key considerations can be taken into account by Hong Kong fund distributors and fund managers in order to ready themselves for the first China fund trades. Lessons incorporated from the Taiwan experience include:
- Single pipe connection: Via TDCC, Taiwan distributors were able to leverage a single local platform to process both Taiwanese funds and offshore funds. China distributors will have the same benefit via the CSDC. Hong Kong distributors, on the other hand, will need to make sure they can find a solution covering Chinese funds, Hong Kong funds and offshore funds distributed in Hong Kong (UCITS).
- Time to market: One of the key reasons of success for Taiwan’s order-routing service was that TDCC was able to rely on specialised fund messaging networks with strong cross-border transaction expertise. This allowed for immediate critical mass in offshore fund manager participation. In order to help ensure success with the fledgling MRF, it is crucial that an immediate critical mass of Hong Kong fund managers is likewise gained. It goes without saying that any solution should be light on in-house IT development, allowing for a quick rollout.
The main objective of Hong Kong fund managers and transfer agents (TA’s) operating on global TA systems using global messaging standards is to be able to receive trades electronically using the same global messaging and connectivity standards. Deviation from this would have immense cost impacts and negatively impact time to market through lengthy implementation and testing of new formats. As we can see from the Taiwan experience, it is critical for all parties to adopt the right operating model in the earliest stages of MRF in order to best maximise success in the long run.
Fund managers with an existing eligible MRF fund range, and with existing operations via a joint venture in China or a branch in Hong Kong, are keen to exploit these positions in order to be first to market. Product managers and sales people have been actively developing and promoting their MRF product range. Sooner rather than later, the operational departments of fund managers, distributors and custodians will all be faced with their first trades to process.
There is little uncertainty as to whether Chinese fund managers and distributors will be ready on July the 1st. Indeed, from their perspective the operational flows will, most likely, not change much. The risk will be whether Hong Kong players will be ready. Key lessons, however, can be learned from the launch of Taiwan’s automated order routing service. Success factors for firms included the use of single pipe connections and reduced time to market, with the specialised messaging provider’s track record constituting a key difference. In order to avoid chaos, immediate decisions are required.
Sebastien Chaker is head of Asia at Calastone