Aldcroft: dialogue with regulators is important
Stewart Aldcroft’s Hong Kong office decor concurs with what he tells me as he ushers me to a seat. “I’ve only been here seven days,” he says of his new position as senior advisor for Securities and Fund Services within Citi’s Global Transaction Services.
The bare walls and empty bookshelves confirm that hasn’t quite made his office home yet. Aldcroft is a 25-year veteran of the Asian fund industry, and he’s bringing that experience to bear in his new advisory role. Citi is keen to expand its fund services business, from custody and transaction to trusteeship services. As Citi’s overseas clients come to Hong Kong and other Asian centres to scout the market with an eye towards opening an office, it is Aldcroft’s job to show them around and tell them what to expect.
He’s been there before, and offers a whirlwind tour of the Asian fund landscape. Firstly, he says many managers fail to appreciate the complexity, variety and size of the Asian market.
“China remains largely a domestic market that allows an occasional bite from a foreigner, but then they normally get bitten back,” Aldcroft says. “India, like China, is a massive market and has a long history of mass mutual funds, but it goes through highs and lows on regulation and complication.”
“Korea has potentially as good an opportunity as Taiwan has demonstrated,” with similar features such as a large middle class, high earnings and a desire to invest overseas. “And one market that could potentially be extremely exciting is Indonesia,” Aldcroft says. “It has sorted out its political and economic problems and is accumulating wealth at a rapid rate.”
While Aldcroft has had his own battles with regulators, he’s quick to defend Hong Kong’s SFC and Singapore’s MAS, and says they’re always open to meet with market participants, and particularly those planning new business. “Talk to them more often rather than less often. Perhaps go there without your lawyer,” he advises. “All the regulators in the region have opened up a lot in the past 10 years, in part through talking with each other”
Aldcroft says while it has become increasingly important for large industry players to have an Asian presence - given the lack of growth in the US and Europe – doing so has not become easier in the past five to 10 years. While many have gone before, and new group will clearly have to be patient to stay for several years.
And with the soaring cost of real estate, a tight supply of qualified staff and increasingly muscular and demanding regulation, the challenges have not diminished. “But, the opportunity is also very great,” he quickly adds.
One area in particular that Aldcroft is enthusiastic about is exchange traded funds, and it’s an area he has some recent, and personal, experience in. “Citi believes ETFs have a great future in this market,” he says.
Aldcroft took a break from his career and moved to Australia for two years. Upon his return in May 2010, he joined Paul So and Toby Bland at Enhanced Investment Products (EIP) to develop a series of synthetic ETFs for the Hong Kong market. However, after 16 months of working to get their products approved by the SFC, Aldcroft had decided to move to Citi instead.
Reflecting on his recent experience with the SFC, he says, “Like other regulators, they have a lot of concerns over how synthetic ETFs operate and they probably don’t have as good an understanding of how they operate as would be desirable. What they don’t want to have is another Lehman mini bonds type crisis. Not unnaturally, they are being extremely cautious.”
On August 29, the SFC announced that by the end of October synthetic ETF managers must top-up the collateral levels for domestic synthetic ETFs to at least 100%, to ensure there is no uncollateralised counterparty risk exposure arising from the use of financial derivatives to replicate index performance.
Managers have also been told to use a “prudent haircut policy” where the collateral taken is in equity securities with a market value of at least 120% of the related gross counterparty risk exposure.
Stricter rules for synthetic ETFs have long been under discussion, with everyone from the SFC to the Hong Kong exchange and the monetary authority weighing in with advisory notes. Aldcroft sees it as over concern in one area, while ignoring existing risks in another.
“They have ignored the risk of stock lending on the fully vested ETFs,” Aldcroft says. “It is just as big a risk. If you lend the stock out and don’t get it back because you lent it to the wrong organisation, the same risks apply.”
Although Hong Kong still lacks a strong distribution network, Aldcroft says it’s only a matter of time, because investors are demanding ETFs, and eventually banks will listen. Further encouragement is coming from north of the border, with the recent speech by China’s vice premier Li Keqiang in Hong Kong suggesting further cooperation between the mainland and Hong Kong’s ETF market. “China has put it’s stamp on ETFs as being the key component of the asset management landscape,” Aldcroft says.
ETFs could also offer a boost for the MPF scheme, which is currently Hong Kong’s largest pool of long-term investment funds. Aldcroft sees opportunity to create a fund of ETFs, which would reduce fee levels, a key concern for the MPFA. “The ETF market has been bubbling around for a long time and I think it will get some sort of tailwind or boost in the next 12 to 18 months.”