IPA: The emergence of Chinese institutional investors is a transformative development in modern global finance. As these entities become more sophisticated and expand into new asset classes and territories, so they require a build-out of back office capabilities, often a challenge given a relative lack of indigenous talent and under-developed overseas networks.
Please could you kick off with a brief overview of what exactly Securities Services entail and BNP Paribas’ business model.
Laurence Au: Securities Services provides services to support fund managers and institutional investors on a post-trade basis. When the manager has made an investment decision, something needs to happen, so we work with brokers, fund managers and the investors’ own back office. We provide independent custodian services and help to settle trades, protect the funds, evaluate the value, assess the risk and performance of an investment.
Patrick Colle: BNP Paribas Securities Services is essentially a custodian bank with over US$6 trillion assets under custody, so that makes us the largest non-US custodian bank in the world. We’re anything but a solely French custodian, as people sometimes think. We’re positioned as a global services provider. To give you an indication of this, we have 9000 employees. Two-thirds are outside France and 15% are in Asia Pacific. We operate globally in 102 markets across all asset classes. We have our own operations in 22 countries as well as an extensive network of sub-custodians, so we’re able to offer support in nearly any context.
IPA: What opportunities do you see in the Chinese market?
LA: BNP Paribas Securities Services was not the first to come to China, in fact we’re probably one of the later entrants. But when we make a strategic decision, we stick to it for the long term. We’re not in a hurry in China - we’re here for the long haul. Also, we wanted to be able to bring something new to the table, so we’re looking at how we leverage our European expertise and leadership and export international best practices in the custodian business.
For example, our local-global custodian model allows big institutions to decide if they just want one multi-currency account and be a bit removed from the local markets, or if they prefer to open a number of local accounts to be closer to the markets.
PC: We’re a leading administrator for UCITS funds in Europe. Currently, over 50% of funds distributed into Asia are UCITS. We are a leading administrator in Luxembourg and Dublin. Now, with our offices in HK and Singapore we can expand our support locally. It’s an end-to-end process.
With the brokers we work with in Hong Kong, we’re introducing a new practice which was previously not implemented: third-party clearing. This means any broker who is a member of the Exchange can delegate the clearing process to a third party with minimal infrastructure set-up. It’s common in Europe and US, but didn’t exist in HK. So we discussed the process with HK regulators to explain its benefits.
That was about 18 months ago, and we’re now the biggest third party clearer in HK clearing over 5% of the daily transactions. So this is how we like to operate, we like to come in with something new to offer that leverages our expertise to innovate the way clients can manage their business.
IPA: What are the major challenges facing Chinese investors going abroad and how can they overcome these?
LA: For asset management or securities companies going outside of China, it is a very important step. So, how do you support them, given the way that Chinese firms operate? You have a front office in HK but a back office in China. It’s a totally different operating model. You’re subject to two regulators - HK and China - but to be able to help them operate internally requires a lot of education and support, and in some cases the fund manager in HK will outsource a lot of the functions to us. This way they can start operating a lot quicker in the market rather than having to set up their own operations.
Secondly, while HK is the first step, the ambition is to distribute to other Asian markets because there’s a lot of investor interest in the region to gain China exposure. But the problem is you have to set up in HK, and then if you go to Taiwan, you have another regulatory approval to gain. But there is another option: UCITS. This is basically a fund passport, with a set of rules and guidelines that prescribe a standard that many regulators are comfortable with, including those in Asia. Currently UCITS can be distributed in Singapore, HK, Macau, Taiwan, Japan and Korea (although for the last two markets you need a local wrapper). What this means is that by setting up a UCITS fund, you can quickly distribute the fund in potentially 6 markets.
Jing Zeng: I’d like to add one point about what we bring to China. We’re not only a global player but also a leader in Europe, which is a major target destination for Chinese outbound investments. Europe is moving towards a common market with standardised procedures and we are a natural gateway to the Chinese understanding and operating in this environment. That’s really our speciality and we stand out from major competitors for this reason.
Chinese investments in Europe can take many forms. We’re seeing an interest in bonds, equities and direct investment, and we can offer services in all these areas, be it global or local. We also have a lot of Private Equity administrative support services. We’ve got M&A expertise, and a Real Estate subsidiary, so we can leverage these capabilities and introduce fund managers to potential investors.
We’re a global bank, and we can cover the whole investment chain. We can help Chinese investors in multiple ways, particularly into Europe where our expertise is concentrated.
IPA: What opportunities do you see in the Offshore RMB (CNH) space?
LA: We’re quite active in the offshore RMB space. We’re one of the earliest CNH clearing houses in Hong Kong and we’ve helped launch 3 CNH funds as fund administrator and transfer agent. We’re also helping firms to offer CNH-denominated fixed income instruments. We work with an investment bank, who is the lead underwriter, while we’re the paying agent for that instrument. So you can see that our thinking about China is very holistic. As a group, we’ve got a lot of vision and ambition to capitalise on the opportunities created by the internationalisation of the Chinese Renminbi.
UCITS have been around for 25 years, but nobody has marketed it properly in Asia. Typically it’s seen as a way to enter Europe, but actually it is a very powerful solution in Asia too, and we’re talking to a lot of Chinese firms about this. We’ve got one agreement in place already, but among the firms in HK, after RQFII they’re looking to launch UCITS funds for regional distribution. This might not be a new product, but an old product which has been changed into something new.
For a long time, the RQFII details were unclear. So when the fund managers made applications to set up RQFII funds, most people used a Chinese provider, thinking it would be easier. But when the second RQFII quota comes around, rather than using the old way which is a purely HK-registered fund for local distribution, they could feed into a UCITS structure and distribute in other markets. So investors in other markets could benefit from the opportunities of RQFII.
IPA: Looking at Securities Services more broadly, what are the major trends and how is technology changing the way investors operate?
LA: Technology is changing our industry radically. More and more, capital markets are about liquidity, so one of the processes that has been under way for some time, especially in Europe, is the harmonisation of stock markets. This means a stock may be listed in one country and traded in others, and similarly the settlement can be conducted anywhere.
For example, the T2S (Target to Settlement) is a platform to harmonise nearly all European markets, is planned to go live in 2015. This means a French fund manager can easily trade Italian stocks, as an example. A number of countries in Asia are now looking at that as a long-term potential solution to bring increased liquidity to the region.
Also, post-Lehman, a big trend is to improve transparency in capital markets. One issue is OTC derivatives, which was a major cause of the GFC. But now there is a major drive to push OTC derivatives into a centralised repository, from OTC to on the exchange. It’s happening in the US, and also in the process of happening in Europe and Asia. We’ve been involved in a number of sessions with the Chinese regulators and this is something they’re looking at very seriously.
JZ: China has the benefit of not having set up a derivatives market yet, so they can incorporate these experiences into their starting model.
LA: Yes, Asian investors face the same challenge as their European counterparts: how can I trade across multiple markets in the easiest possible way? For example, we’re on the working group for an Asian Development Bank initiative to look at how the T2S model could be adapted to Asia.
IPA: We’re seeing a lot of new regulations in Europe, including the French “Tobin Tax.” How are these changing your business?
PC: The avalanche of new regulations in Europe is absolutely unprecedented. It presents challenges and opportunities. For example, now we’re able to add European and Asian derivatives to our clearing services for global derivatives. So we’ll be able to offer a combined service of OTC and listed derivatives, along with collateral management.
Collateral management is a really key issue. It’s a big driver of change in the market. When the buy-side enters into OTC derivatives transactions, previously they didn’t have to put up any initial collateral margin, but now they will have to. So globally we’re talking about the industry having to find $2 trillion equivalent of collateral. This won’t be easy, since the Central Clearing Houses want cash or quasi-cash for these collateral margins. But this is an opportunity for us. For example, we can swap corporate bonds for government securities which the investor can offer the CCH as collateral. We’re trying to offer a combined global service for collateral management.
This works against single-country custodians, while firms like us will benefit from it because clients increasingly want consolidated services. For example, we’re offering T2S in major markets world-wide. On the buy-side T2S will be available outside Europe.
On the Tobin Tax, it’s fair to say the banks and markets generally were not in favour of it. But it seems it will go through and it is what it is. It is flow based so there’s no risk of funds moving offshore. The tax applies to all cash-equities and other activities of France-based corporates, so there’s no way around it. It’s basically the same as the UK’s stamp duty, but it shouldn’t have too much impact on investment inflows.
JZ: It will only apply to naked positions, so it may be a good thing. HK is a big advocate of short-selling, which they argue helps the market to normalize very quickly. But even there they discourage naked positions, so in some ways it’s the same objective in France. Certainly, it’s something China can watch as it develops its own derivatives markets and incorporate it as necessary.