Introduction
Asian regulators are adopting standards that will mandate basic risk management practices in the areas of liquidity, fair valuation and trade execution at asset management firms.
While some firms have already implemented best practices in these three areas, many have yet to begin preparing for the inevitable regulatory mandates coming later this year.
The large number of international firms in key fund management markets in Asia like Hong Kong and Singapore has given rise to a ‘dual-track’ when it comes to readiness for emerging regulation. Firms headquartered in Europe and the United States have already undergone the heavy lifting to achieve best practices for liquidity, best execution and fair valuation, for compliance with stringent regulatory reporting norms under MiFID II and the US Securities and Exchange Commission (SEC) rules.
Asia’s fund management industry and regulators are converging to international regulatory and industrial best practices. As the asset management industry in Asia has grown steadily in the past few years, regulators are concerned about liquidity and redemption risk arising from funds.
As global and regional regulation converge, Asian funds are increasingly ramping up investment into sound risk management processes, systems and technology. International as well as regional firms in Asia have to deal with some challenges arising from different regulatory frameworks. However, different regulations have more in common than not and are much more aligned with international rules.
Firms will need to look at their structure to ensure seamless integration of their compliance functions across jurisdictions. At the moment, it is often easier for fund managers to centralise their compliance function in one location, usually from head office.
A Hong Kong-based industry representative also said that dealing with multiple jurisdictions and their specific requirements has led to some firms, even global ones, having a relatively small compliance presence in individual jurisdictions. This, coupled with the low-margin nature of the asset management business, means that many firms are likely to face an uphill task on compliance.
According to Derek McGibney, a director at Hong Kong risk and regulatory consulting firm Cordium, firms should not push for compliance to merely meet minimum regulatory requirements and deadlines.
"I think firms should be on top of this. It is important for firms to do a risk analysis and not just a gap analysis. There is a risk that in complying with these regulations through cookie-cutter solutions might actually put these firms in a worse position in the context of financial or liquidity crises," he says.
Vicky Cheng, head of government affairs, APAC at Bloomberg, says that Asia’s alignment with the global regulatory landscape is an opportunity for firms to adopt global best practices and gain an edge over international competitors.
"In Asia, we see the rule-making becoming more and more ‘MIFID friendly’ as firms seek to accommodate requests coming from their European counterparts and customers. If you are a firm in Asia trying to meet global standards, this is an opportunity for you to level the playing field with global competitors. Regulators in markets like Hong Kong and Singapore are taking elements which work well in practice and make sense for their local jurisdictions keeping in mind the twin goals of transparency and investor protection," she says.
Firms shouldn’t expect leniency in meeting the new requirements by the stipulated deadlines. A principles-based approach by regulators in Asia means that firms will need to re-assess risks and compliance requirements unique to their focus areas, make significant changes to risk analysis and reporting policies, and invest in a system that facilitates the aggregation and audit of data.
The following report looks at the global and regional regulatory frameworks impacting fund managers in Asia, with specific regard to liquidity risk management, fair valuation and best execution.
