Standard Chartered launches Stock Connect II platform to trade China equites this week
The fund administration business of Standard Chartered Bank is one of the best kept secrets in the fund distribution industry. Though well-known as a retail bank and as a direct custodian and local clearing agent to global custodians, global investment banks and broker-dealers in multiple markets in Asia, the Middle East and Africa, it is still surprising to learn that the bank is either administrator or trustee to $202 billion managed by 5,200 long only, hedge, private equity and real estate fund managers active in 19 markets, mostly in Asia and the Middle East.
One reason for the low profile is that - like Apex and Citco in global alternative fund administration, and BNP Paribas Securities Services in Europe - Standard Chartered tends to recruit and service domestic fund managers and their mutual, hedge and private equity funds in local markets throughout Asia. Launched in Singapore and Hong Kong in 2002, the service has spread gradually through Indonesia (2003), Thailand (2005), China, the Philippines, Malaysia, India, Korea and Taiwan (2008) and Vietnam (2010).
In addition to a permanent five man regional sales team based in Hong Kong, the bank maintains locally based sales forces in China, Japan, Korea, Singapore and Taiwan. "Every office in the region operates off the same system, but the fund administration operations are not centralised," explains Joost Lobler, head of asset management sales in North Asia and Greater China for Standard Chartered in Hong Kong.
Yet the global importance of the business to Standard Chartered is not in doubt. The fund administration business - whose services include compliance monitoring and reporting, performance measurement and audit statements as well as fund accounting and transfer agency - is now part of the Transaction Banking division. This arm of the bank, which includes trade finance and cash payments, currently accounts for a third of the gross profits of Standard Chartered. The recent travails of the bank in more volatile markets than fund accounting, and the subsequent senior management changes, suggest that share is set to grow further.
The bank is now looking to service regional and international fund managers distributing throughout Asia. Two years ago Standard Chartered agreed a strategic partnership with European Fund Administration (EFA), a Luxemboug-based fund administrator, so it could support UCITS funds being distributed in Asia. The banks has also opened a trustee and depositary banking operation in the Grand Duchy, so it can provide depositary services to alternative investment funds under the Alternative Investment Fund Managers Directive (AIFMD) as well as mutual funds under the UCITS V directive.
Standard Chartered has invested heavily in new fund administration technology from Multi Fonds, Charles River and StatPro, giving it the capability to support the mounting demands of local as well regional and international fund managers. Last but not least, the bank has also invested in new leadership. In January 2013 it brought to Singapore Margaret Harwood-Jones, formerly head of asset managers and alternative investments at BNP Paribas Securities Services in London, as managing director of the transaction banking division.
In March last year she recruited Barnaby Nelson, head of client development for BNP Paribas Securities Services in Asia, to join her as managing director and regional head of investors and intermediaries in North East Asia and Greater China. Nelson, like Lobler, is based in Hong Kong, which is the natural base for Standard Chartered to build up its business in China. The bank has already built a 100-strong retail branch network, which will provide a useful network for distributing Hong Kong funds on the mainland when the authorities permit it, as they are expected to agree this year.
“The mutual recognition of Chinese onshore funds and Hong Kong onshore funds is expected to be announced this year,” says Lobler. “We expect foreign asset managers, of both mutual and hedge funds, to set up Hong Kong domiciled trust funds to distribute their strategies into mainland China. It should bring a lot of new business to our Hong Kong trustee services as well as custody and fund administration.”
In the meantime, the bank is competing with Citi and HSBC to service foreign fund managers and institutional investors winning the Qualified Domestic Limited Partnership (QDLP) and Renminbi Qualified Foreign Institutional Investor (RQFII) quotas issued by the mainland regulators. In addition to fund accounting, these mandates require custody services. The Asian custody business of Standard Chartered is nearly five times larger than its administration business, with assets of $842 billion in custody on behalf of fund managers.
Where Standard Chartered cannot yet support the managers with QDLP and RQFII quotas is trade execution. The quotas- which limit foreign investment in mainland stocks to 30 per cent of the outstanding shares- tend to buy and sell stocks via Stock Connect, the trading and clearing link between Hong Kong Exchanges and Clearing Limited (HKEx), the Shanghai Stock Exchange (SSE) and the China Securities Depository and Clearing Company (CSDC) system on the mainland.
Though Stock Connect allows mainland stocks to be traded and settled in Hong Kong dollars as well as offshore renminbi, its growth has been hampered by the need to deliver cash or stock to executing brokers the day before settlement, partly to avoid the risk of settlement failure, but mainly so that buys and sells can be policed to ensure the 30 per cent ownership ceilings are not exceeded. This is easier to achieve if the executing broker and the custodian are part of the same company.
Although the recent closure of the cash equities business of the bank means Standard Chartered cannot offer brokerage as an integral part of the clearing and custody services it offers to users of the Stock Connect link, this shortcoming will be less important as so-called “special segregated accounts” (SPSAs) become available this month to identify buyers and sellers. They work by allowing global custodians to place assets directly into sub-custody accounts, where the HKEx can police the quotas as efficiently as it does when the assets are pre-delivered to brokerage accounts.
Lack of in-house brokerage might even be advantageous in servicing regulated funds, such as UCITS, reckons Lobler. "They are obliged to demonstrate best execution, and that is hard to do if you put all your business through one broker," he says. The unforgiving settlement procedure of mainland China, with penalties for non-delivery of cash or securities, certainly favours banks - which can advance credit - over brokers.
The new Stock Connect phase II model allows fund managers to use their broker of choice, making it easier for them to demonstrate best execution. “Now that this issue is resolved, the Luxembourg regulator has started to approve the use of Stock Connect for UCITS funds, and Ireland is expected to follow soon,” says Lobler. Standard Chartered will be the first custodian in Hong Kong to launch a platform dedicated to servicing the Stock Connect Phase II model, together with their partners Goldman Sachs and State Street. The platform, called SCBestX, launches on Tuesday 21 April.