Asset and Wealth Management Research Digest · February 2019 Official launch of ARFP; Australia,...

PwC | AWM Asia Pacific Market Research CentreIssue 6 | 2019

Asset and WealthManagement Research Digest

Just as global trade benefits all and acts as a medium for economic expansion for any country, cross-border funds are a potential avenue for growth of fund management industries. Coincidentally, The Johnson Report, which explored the concept of an ARFP, was released back in 2010, and now, almost a decade later, five countries – Japan, Australia, South Korea, Thailand, and New Zealand, are existing members of this framework; each delivering on their commitment set out in the ARFP’s Memorandum of Cooperation.

Overview

Asia Region Funds Passport (ARFP)

Asia-Pacific (“APAC”) is a high-growth region and has been contributing considerably to global fund sales. However, the fragmented nature of the regional fund industry and a highly diverse distribution landscape poses challenges for large asset managers. Despite these challenges, global managers are increasingly turning towards APAC markets like China, where they are drawn to strong AUM growth, a rising middle class with increased investible assets, and swelling cohorts of High Net Worth Individuals (“HNWIs”).

The May 2019 issue of our research digest provided a helicopter view of the current APAC fund passporting and cross-border scheme landscape, examining ARFP, ASEAN Collective Investment Scheme (“CIS”), and the Hong Kong-China Mutual Recognition of Funds (“MRF”) programme.

This issue will examine the ARFP regime in greater detail and evaluate the potential for other APAC economies to jump on the bandwagon and benefit from fund passporting. Although the APAC passporting schemes are still in the early stages of development, PwC estimates that AUM for ASEAN CIS and ARFP will grow to almost US$7 billion by 2025, a sizeable pot for asset managers to get in on the act.

It has been said that arguing against globalisation is like arguing against the laws of gravity”

“- Kofi Anan, 7th UN Secretary General

https://www.pwc.com/sg/en/asset-management/assets/market-research-centre/research-digest/research-digest-201904.pdf

2 Asset and Wealth Management Research Digest

2010 2012 2014 2016 20182011 2013 2015 2017 2019

January 2010Johnson Report which explores the concept of Asia region Funds Passport is released

September 2013Signing of the Statement of Intent by Australia, New Zealand, Republic of Korea and Singapore

April 2016Signing of Memorandum of Cooperation by Australia, Japan, Republic of Korea and New Zealand

June 2016Memorandum of Cooperation enters into force along with Thailand signing up

December 2016Formation of Joint Commitee

July 2019New Zealand completed implementation of ARFP

February 2019Official launch of ARFP; Australia, Thailand and Japan completed implementation

April 2014Consultation paper released containing detailed passport arrangements

September 2015Statement of understanding signed by Australia, Japan, Korea, New Zealand, the Philippines and Thailand

ARFP Snapshot

Milestones

December 2012Formation of Asia Region Funds Passport Working Group, Australia, New Zealand, the Republic of Korea and Singapore accepted

March 2019Pilot process began in Australia, Japan and New Zealand

Asset and Wealth Management Research Digest 3

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Home Regulator Screening

Applying fund must be eligible to be considered an authorised CIS by Home Economy’s standards

Fund manager and related operators are required to have AUM of at least USD 500 million

Regulation in operation

A more operational aspects such as auditing requirements and risk management are regulated by Home regulator

Areas pertaining more to interaction with investors (disclosure, distribution, complaints) are subject to regulations outlined by the Host Regulator

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Host Regulator Assesment

Only after clearing the Home Regulator screening, the fund may then apply through the Host Regulator

Under the ARFP, the Host regulator has 21 days to process and provide a reply to an applying fund once a complete application has been filed

This minimises the delay of host-economy access and incurment of additional costs

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Why ARFP?

Application Assesment Operation

Qualifying asset managers can distribute funds in ARFP jurisdictions with limited additional regulatory hurdles;APAC’s asset management capabilities, economic integration, and capital markets will be further bolstered;Investors will access a wider range of investment products from diverse fund markets; andIncreased competition among asset managers could lead to lower fees, greater product innovation, and improved client servicing.

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yes

yes

Eligibility of financial instruments for ARFP funds

Financial Derivative Instrument?

Is the underlying a financial index?

Transferable Security?4 Money Market Instrument6

1. Normally deal in on the money market 2. Value can be accurately determined at any time 3. Liquid1

Is it an eligible financial index?

Is the underlying an eligible asset? 1. Eligible assets for ARFP Funds5

2. Interest rates3. Foreign exchanges rates/currencies

Are the following elibility criteria fulfilled? 1. Potential loss limited to the amount paid for purchasing the security 2. Liquidity3 3. Negotiability3 4. Consistent with the investment objectives of the ARFP Funds

Is it sufficiently diversified?1. Individual price movements are sufficiently uncorrelated to not influence the performance of the whole index 2. Maximum 25% per component 3. If the index is composed of several commodities, sub-categories of the same commodoties are considered as the same commodity if they are highly correlated

Is the index a representative benchmark?1. The measures the performance of a representative group 2. It is revised and rebalanced periodically 3. Underlyings are sufficiently liquid (possibility to replicate it if necessary)

Is the index subject to an independent valuation?

Is the derivative an OTC derivative?

Is the security listed?

Eligible Financial Derivative Instrument

Eligible Transferable Security or Money Market Instrument

Is the counterparty subject to prudential supervision?

Is the derivative subject to reliable and verifiable valuation on a daily basis?1. Either market value or value determined by a pricing model using a recognised methodology Are the following eligibility criteria

fulfilled?1.Valuation: reliable prices available on a periodic basis derived from issuers or competent investment research2. Information: regular and accurate

Are the following eligibility criteria fulfilled?1.Valuation: accurate, reliable, regular prices (market prices or prices made available by systems independent from issuers) 2. Information: regular, accurate and comprehensive

Does the derivative not result in the delivery or the transfer of non-eligible assets? E.g. bank loans, commodities

Is it published in an appropriate manner?1. Sound procedures to collect prices, calculate the index and publish it 2. Information provided on a wide and timely basis 3. Full calculation methodology and/or components/weights are available free of charge

no

no

i.e.

yes

no no no

yes yes yes yes

noyes yesyes

yes

yes

yes

yes

yes

yes

yesno

yes

yes

yes

no

no

no

no

no

no

no

no no

no

no

What do the smileys mean?

What do footnotes mean?

Key Restriction Reminders

• 5%/10%/35% limits are measurable at issuer level whereas the 20% combined limit is measurable at group level

• The global exposure of the AFRP Funds to financial derivative intruments may not exceed 100% of its net assets

• The law only refers to commitment approach

• Borrowings/overdrafts are permitted up to 10% also for investment purpose but only for a short period of time and not on a recurring basis

1. Converted into cash within any 7 business days2. Presumption of liquidity and negotiability when a transferable security is admitted to an clinical stock exchange 3. Eligible assets for ARFP Funds (transferrable securities, money market instruments, shared units of ARFP Funds, bank deposits, derivatives)

4. Financial instruments which• have a maturity at issuance up to and including

397 days• have a residual maturity of up to and including 397 days• undergo regular yield adjustments in line with the money

market conditions at least every 397 days• have a risk profile which corresponds to that of

instruments which have a maturity of up to and including 397 days or are subject to a yield adjustments

Not eligibleEligible within the trash ratio of 10%Eligible

no

Embedded derivatives

There is an embedded derivative in a transferable security or in a money market instrument if

1. Some or all the cash flows of the transferable security or money market instrument (host contract) can be modified according to a variable2. Its economic characteristics and risks are not closely related to the ones of the host contract 3. It has a significant impact on the risk profile and the pricing of the transferable security

yes


Eligible investment asset classes

Limits on leverage (if any)

Offer document conditionsClient acquisions and AML/KYC requirements

Custody arrangements Liquidity requirements

Registration arrangements Taxation (investor level, fund level and investment level)

Asset management business licensing

Investor protection and dispute resolution procedures

01 06

03 08

02 07

04 09

05 10

Common regulatory similarities and benefits of a passporting scheme

Our observations of common regulations relating to a fund passporting scheme generally include:


Mutual Funds

Structured Funds

Transferable securities

Money Market instruments

Bank Deposits

Financial derivatives instrumenets

Fund units

Others Cash -CurrencyDR over gold

Private equity, real estate, hedge funds, commodities, etc.

UCITS

AIFs1

ASEAN CIS

ASEAN CIS

ARFP

ARFP

Elig

ible

ass

ets

Comparative Asian Passports versus UCITS and AIFs

Source: Memorandum of Cooperation on the Establishment and Implementation of the Asia Region Funds Passport Standards of Qualifying CISALFI - Luxembourg investmenet vehicles: An overview of the legal and regulatory requirements

1Alternative Investment Funds (AIFs) under Alternative Investment Fund Managers Directive (AIFMD)

• •


Mutual Funds

Structured Funds

Transferable securities

Money Market instruments

Bank Deposits

Financial derivatives instrumenets

Combined total exposure per issuer

Fund units

Others

100%

100%

100%

100%

-

30%

49%

10/25/35%1

10/35%2

20%

5%/10%

Max 20%3

20/30%

-

Flexible4 10-30% or Flexible4

100%

100%

100%

100%

-

30%

-

10/35%1

10/35%2

20%

20%

Max 20%3

10/20%

5/15%

100%

100%

100%

100%

-

30%

25%

10/35%1

10/35%2

-

5%/15%

Max 20%3

10/20/30%

-

Private equity, real estate, hedge funds, commodities, etc.

AIFs5 ASEAN CIS ARFP

UCITSGlobal Limits Per Issuer Global Limits Per Issuer

ASEAN CISGlobal Limits Per Issuer

ARFP

1 25% for debt securities issued by a credit institution situated in an EU Member/35% for government bonds2 35% for government bonds3 Limit to be checked at group level4 Depends on fund’s structure 5 Alternative Investment Funds (AIFs) under Alternative Investment Fund Managers Directive (AIFMD)


1 Minimum capital limited to EUR 10 millions2 Minimum capital limited to USD 20 millions3 Considering holdings and subsidaries 4 Alternative Investment Funds (AIFs) under Alternative Investment Fund Managers Directive (AIFMD)NA - Not applicable

Administrator

Minimum capital requirement

Minimum AuM

Timing in the market

UCITS ASEAN CIS ARFP

EUR 125.000+0.02% > 500MMAuM1

NA

NA

EUR 125.000+0.02% > 500MMAuM1

NA

NA

USD 1 million+0.1% > 500MMAuM

Min AUM USD500 MM3

5 years

USD 1 million+0.1% > 500MMAuM2

Min AUM USD500 MM3

5 years

AIFs4




Documentation

Mutual Funds

Notification letter orApplication form

Timing for approval

Fund rules or itsconstitutional documents

Prospectus

Other Additional documentation according to each country regulation

21 days

UndertakingsAdditional documentation according to each country regulation (e.g. Fund Fact Sheet)

Depends on each country

KIID2

Financial StatementsService providers agreementsBusiness planRM policy

Home Regulator - 15 WDHost Regulator - 5 WD

Additional marketing documentation

20 WD

UCITSAIFs1 ASEAN CIS ARFP

2 Key Investor Information DocumentWD - working daysRM - Risk Management


1Alternative Investment Funds (AIFs) under Alternative Investment Fund Managers Directive (AIFMD)

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Degree of similarity

Identical Similar Low

Element

Operation of the passport fund

Custody arrangements

Independent oversight

Risk management

Investment restrictions

Delegation

Valuation basis for pricing

Redemption

Financial reporting and auditing

Related party transactions

Disclosure (including annual and periodic reports)

Duties of operators

Distribution and licensing of distributors

Record keeping

Member Complaints

Dealing with investors

Anti-money laundering and counter-terrorism financing

HomeHome + passport

rules

Only passport

rulesHost*

* Can apply other host laws if they don’t discriminate between foreign/domestic funds

The regulatory arrangements of the scheme are outlined in the following table:

Source: PwC AWM Research Centre Analysis

Set up in Home prior to Host

Reporting obligations

Fair value principles

Synthethic short-selling

through derivatives

Custody of assets by Trustee/operator and not

depository

Physical short-

selling banned

Independent depository/operator

Depository responsible

for delegation

Single entity risk 15% v/s 10%

UCITS III-Host registration

Sec lending 50% v/s 100%

Limited additional requirements for hosting

NAV calculation by Operator

Management Company = Operator

Deligation limitations

As the ARFP matures and develops across the region, there is hope within the asset and wealth management industry that it will emerge as an APAC-UCITS passporting regime. Based on these high-hopes, we have created a comparison between the two regimes examining their degree of similarity across a range of aspects:

Source: PwC AWM Research Centre Analysis


APACs fund industry development has been uneven amongst participating economies, with Australia at the higher end of the AUM spectrum and Thailand and Philippines, whose respective AUM is not only smaller in absolute terms but also as a percentage of their GDP, at the lower end.

ARFP Participating Economies

Forecasts are a combination of PwC Analysis, S&P Market Intelligence and Knight FrankPDI: Personal Disposable Income

Legend: 2018: 2020: 2023:

Market Parameter Australia Japan New Zealand South Korea Thailand

HNWI Population’000

Life Insurance Assets (USD bn)

Deposits (USD mn)

Annual Real PDI (USD bn)

11%

18%

1827

168 3514

0.1%

10%

3%

15%

24%

3%

10%

11%

27%

4%

25%

5%

30%

18%

26%

876

330

1809

148 3480

3597

2327

12979

105

56

221

2.2

724

185

1415

771

548

106

237

64

975

389

-1%

-12% -1%

3601

2558

13846

121

69

236

2.4

80

235

1536

962

600

138

280

81

Source: S&P Market Intelligence, World Bank, Knight Frank Global Wealth Report, country websites, PwC Analysis

Each economy within the existing ARFP signatories presents unique idiosyncracies within its asset and wealth management industry. For instance, New Zealand’s managed funds are, by comparison, heavy on overseas investments and have a scope for expansion with ARFP immersion. Thailand, on the other hand, had relaxed regulations pertaining to the sale of offshore funds to local investors. The country is poised to witness higher growth of deposits, life insurance assets and annual real Personal Disposable Income (“PDI”) going forward, as compared to other ARFP participating countries.

In Japan, institutional investors have been actively outsourcing to external managers providing substantial opportunities for asset managers with the required expertise, especially in alternative and foreign investments. Australia and South Korea present their own unique opportunities to global, regional, and local asset managers as well.


The ARFP is looking to expand its scope and promote the ARFP framework to member countries with the backing of the Asia-Pacific Economic Cooperation (“APEC”) organisation. Concurrently, the ARFP Joint Committee engages with economies that may be interested in joining the ARFP. Australia and Thailand, for example, have undertaken capacity building steps with Indonesia to assist Indonesian officials in their assessing and decision-making about participation, and have plans for further capacity building activities2.

Closer examination of potential ARFP participants

Potential Markets for ARFP Inclusion

Market Parameter

Hong Kong India Indonesia Malaysia Philippines Singapore Taiwan

Annual Real PDI (USD bn)

HNWI Population ’000

Deposits (USD mn)

Life Insurance Assets (USD bn)

2 Asia Regions Fund Passport: Annual Implementation Report 2017-2018

Legend: 2018: 2020: 2023: Life Insurance Assets: ^Indonesia’s data as at 2017, Malaysia and Philippines’ data as at June 2018.;

214

223

1,530

19

1,795

326

1,707

490

737

43

373

34^

207

29

578

44^

242

24

228

22^

166

172

790

162

276

136

1,330

767

25620%

26%

6%

23%19%

25%

-9% 14% 20%

22%

6% 6% -1% 8% 6% 4%

35% 28% 27%34% 21% 23%

37%29% 37% 35%

17% 16%

280

1,703

24

2,462

439

1,900

582

952

55

417

42

283

37

563

41

326

32

267

25

194

207

890

194

319

167

1,435

937

Source: S&P Market Intelligence, World Bank, Knight Frank Global Wealth Report, country websites, PwC Analysis


As with the existing participants of ARFP, the potential members also posses their unique attractions and opportunities, some of which are outlined below:

India

India witnessed a flurry of entries and exits of foreign asset managers over the past few years. Despite being regarded as a domestic, rather than a cross-border market, India’s high growth potential for GDP per-capita, HNWI population, and investors’ real disposable income provides many reasons for foreign managers to flock to this fund market. India’s mutual fund industry has grown at a CAGR of over 20% between 2013 and 2018, and is aiming for a five-fold growth in investor base over the next decade. Its potential inclusion in ARFP could be a game-changer for Asian mutual fund markets by opening up access to a ballooning mutual fund industry. However, foreign managers may face competition from local products owing to the large presence of domestic asset managers and will need to establish strong distribution channels to succeed.


Singapore continues to serve as the Global-Asia gateway for asset managers and investors to tap the region’s growth opportunities, with 75% of AUM sourced from outside of Singapore in 2018.

67% of total AUM was invested in the Asia Pacific, of which more than a third of Asia Pacific AUM were investments into ASEAN countries

Source: MAS Singapore Asset Management Survey, 2018

Hong Kong and Taiwan

Hong Kong is an attractive market due to its market depth and size, given the number of new asset managers establishing operations. This is further boosted by key initiatives, like the MRF between Hong Kong and China, to ease access between markets. Foreign asset managers are also taking initiatives to strengthen their onshore fund offerings. Both Hong Kong and Taiwan are regarded as fund markets with the largest share of cross-border fund AUM, accounting for more than 90% and 65% of their asset management industries respectively.

In Taiwan, though the retail space is definitely more challenging than before for offshore managers, those who persist and show heavy commitment are likely to yield positive results.

Singapore

With an asset management industry of US$2.5 trillion as of 2018, Singapore is a regional wealth management centre, home to multitudinous mass affluent investors and a vast abode for offshore funds. Singapore has shown an interest in the ARFP scheme and has been an observer throughout the scheme origination process and launch.

One of the prior hindrances of joining the ARFP for Singapore was unequal tax treatment making it not beneficial to fund managers in Singapore to participate in the scheme. With the introduction of Variable Capital Companies (“VCC”) fund structure in Singapore, there is potential for asset managers to tap into APAC markets under the ARFP scheme. By setting up a VCC in Singapore, it is possible to sell a fund in an ARFP participating country without having to separately register the particular fund in those fund markets.

This makes Singapore particularly well-positioned for ARFP implementation. Coupling this aspect with the city-state’s strategic position in Asia with respect to other neighbouring mutual fund markets, will see more asset managers eyeing the country as a location to do business.


Philippines

Though small in number, HNWIs in the Philippines hold a significant amount of wealth. Philippines’ increasing labour force and bank deposits indicate the domestic mutual fund market’s growth potential. Growing opportunities for foreign asset managers in the institutional space also prevail. Influential pension funds are becoming more active in seeking out external asset managers to help manage a portion of their assets as they look to increase their overseas investments.

Malaysia

Malaysia’s locally-domiciled foreign investment fund AUM increased to nearly USD 10 billion in 2018. Foreign managers continue to enter Malaysia through the master feeder structure, as opposed to establishing an onshore presence within the country. Similar to Thailand, Malaysia faces competition from feeder funds when it comes to cross-broder funds via passporting schemes.

Indonesia

Indonesia’s vast population and growing GDP per-capita, along with increasing household wealth and HNWIs, mean it is well-positioned to become an epicenter for many global fund managers. In Indonesia, a 15% overseas cap on Sharia funds was also lifted to allow full investment in overseas markets. However, given the dominance of local managers in the domestic fund management industry and limited entry points for foreign managers, it may be some time before Indonesia joins the ARFP scheme.

Other South East Asian Countries

Vietnam

Vietnam’s nascent, local, and comparatively small mutual fund market currently seems distant from being a party to fund passporting schemes. However, the country holds great potential, especially if policy-makers shift efforts away from strengthening capital markets to promoting cross-border funds at a later stage.


May 2019 issue of the research digest highlighted that the potential membership of APAC asset managers is substantial and dispersed across the whole of the APAC region.

Do

mes

tic

Mut

ual F

und

Mar

ket

Gro

wth

Po

tent

ial

High

Low High

ARFP Inclusion Potential

00 1 2 3 4 5

1

2

3

4

5

Indonesia

India

Singapore

TaiwanVietnam

Philippines

Malaysia

HongKong

With these asset managers potentially joining the ARFP, the future scope of the passporting scheme holds endless opportunities.

https://www.pwc.com/sg/en/asset-management/assets/market-research-centre/research-digest/research-digest-201904.pdf


Long Way Ahead

The uptake of ARFP has been slow and there was a considerable lag between its inception and implementation. This in turn, may have dampened the spirits of some fund managers. However, one should keep in mind that cross-border schemes take time to be successful.

This is especially true in APAC economies which, traditionally, restricted the growth of offshore funds by prohibiting its entry or making it untenable. The ARFP provides a means of eradicating those barriers to entry, creating a level playing field for asset managers, and bringing a wider choice of products for investors.

Some participants may already have access to offshore investments and may be dissuaded from joining passporting schemes due to a lack of demand for cross-border funds from Asian investors, competition from other products, or lack of branding and awareness to attract local distributors.

These objections are likely to be overcome by increased financial awareness, investor education initiatives, and a feedback mechanism for ARFP participants to streamline the challenges encountered by fund managers along the way. Moreover, the individual wealth growth rate is a significant indicator and contributor to asset growth across APAC, and it is timely for Asian Fund passports to fill the demand-supply gap between the institutional and the retail space.



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Operational Due Diligence (ODD) & Operational Due Diligence Readiness

Benchmarking

Distribution Strategy

Our structured, research-based analysis sheds light on the multiple factors affecting your asset management business.

Each market intelligence country digest provides you with:

The state of the asset & wealth management industry

The key trends shaping the future of the industry

Products that are in demand

Your competitors

Various types of investors and their asset allocations

Fund selectors and the asset classes that interest them

The distribution channels and how they are evolving

High level regulatory information to get you started

Prevailing market strategies

A robust and well-designed distribution strategy should identify the specific requirements and best practices of each local target market for the funds you wish to institute. Our analysis of local markets and key distribution channels (whether direct or via partnerships), along with current best practices, will help you develop a distribution strategy that will maximise your opportunities for success.

Benchmarking studies in the fund industry act as an important tool for establishing, evaluating, and justifying inter-company transactions. In achieving these objectives, the Market Research team provides support in developing such benchmarking studies – as part of the tax documentation and fund structuring process, or to help build revenue models – while also performing sensitivity analysis to help assess the impact of your funds’ fee structure on your profitability. In ensuring the reliability and accuracy of our studies, we work with data from specialized databases provided by credited and established vendors within the industry.

Poor operational infrastructure can be a drag on performance and service level. Since interdependencies exist between operational risk and other risk categories, operational failures tend to result in large losses. This is especially important since we are in an environment with increased regulatory requirements for operational risk. Our Investment Fund Centre has experience in performing ODD assessments for investors and has helped prepare asset managers for ODD requests in the APAC region.

PwC’s monthly Market Research Digest aims to keep you up to date with not only the ongoings and happenings in the Asset and Wealth Management space in Asia Pacific, but also provide interesting and thought provoking views and analysis of trends in the industry.

Subscribe to get monthly updates through this QR code https://bit.ly/2s4hijH

Asset and Wealth Management Research

India

Philippines

Australia

Taiwan

Malaysia

New Zealand

Japan

Hong Kong

China

Singapore

South Korea Indonesia

Asian Investment Fund Centre

Fund Flows

Customised benchmarking comparison

What fund buyers are looking at

House Views

Market Intelligence Country Digest

Regulatory Rules

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Budgeting

Market Mapping

Ayushi BainwalaSenior Associate, Market Research Centre, PwC Singapore+65 9862 [email protected]

Armin ChokseyPartner, Asian Investment Fund Centre & Market Research Centre LeaderPwC Singapore+65 6236 4648 [email protected]

© 2019 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as an agent of PwCIL or any other member firm.

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Conal McMahonSenior Manager, Market Research Centre,PwC Singapore+65 9678 [email protected]

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Asset and Wealth Management Research Digest · February 2019 Official launch of ARFP; Australia,...

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