This is why, when one looks at the rates offered on liquidity deposits they tend (depending on the currency, of course) to be much more competitive at some Asian banks. Similarly, while in the West it is now widely accepted that trade finance will become more expensive as capital costs are priced in, that is not what has happened in Asia. On the contrary, there is almost an overflow of liquidity. That may be down to the region still being in reasonably good shape economically (notwithstanding the recent slowdown in China) and, as such, the commercial need to borrow is simply not there. It could also be explained, however, by the fact that Asian banks are not feeling quite so constrained by regulation. Either way, if a corporate can be satisfied that a regional Asian bank has the right capabilities and the footprint to service their needs – never exactly a given – they might find the rates that Asian banks can provide very attractive indeed.
“That is something we’ve been hearing from clients for some time,” Wandhöfer notes. “A multinational with business in 60-70 countries always needs to think about the bigger picture though. Sure it might be possible to get better rates with a regional bank in certain countries, but there are other aspects that give you a view on whether the bank you are with is giving you a good deal or not.”
Watch and learn
The journey to meeting the G20 objectives for establishing more transparency in OTC derivatives markets has also been smoother relative to the disruption we saw in the US and EU with the introduction of Dodd-Frank and the European Markets Infrastructure Regulation (EMIR).
This might be accounted for, on the one hand, by the fact that derivative markets in the Asia region are comparatively small, comprising a mere 8% of the current global turnover. But some credit must also be given to the approach taken by the region’s national regulatory authorities who, having carefully scrutinised how the G20 commitments were effected elsewhere, opted to take a more phased implementation unlike the ‘big bang’ approach favoured by Europe, for example.
Since implementation began several years ago, regulators have moved step-by-step to bringing trade reporting across different markets segments, asset classes. Last year, trade reporting was live for interest rates and credit only in Singapore. Five asset classes were live in Australia, meanwhile, but only for large institutions. Since then what we have seen is the asset classes and market participants subject to trade reporting slowly expand. Singapore went live, for example, with FX products in May of this year. In Australia, the regulators have changed their OTC derivatives requirements to include a much larger community of reporters.
So while banks, corporates and institutions faced a steep challenge in becoming compliant across all of their OTC derivatives activities in Europe, market participants in Asia have been somewhat less encumbered by the changes taking place. “Regulators in Asia have watched the European Securities and Markets Authority (ESMA), and the big bang approach taken by them where all segments, all sizes, all asset classes had to start reporting on the same day. I think the first lesson they learned is that it is an enormous universe, and a huge task by any measure,” says Peter Tierney, Regional Head, Asia at DTCC. “That phased implementation in Asia is a direct learning from global experience.”
A different approach to implementation notwithstanding, with respect to data the Asian regulators have been very careful to adopt any measure that looks like it is evolving as a global standard. Already, DTCC estimates that, across the nine jurisdictions they are live in, there are some 40m open positions in its database, accounting for around 70% of the global OTC derivatives market. This provides a strong incentive for Asia’s national regulators to look at the data standards being developed by other regulators such as ESMA. “Asia’s regulators realise that a lot of what they want to see has probably been reported somewhere in some shape or form. So they are seeing what they can leverage, looking at the fields reported by ESMA – a large share of the reported volume. The regulators are very pragmatic about adhering to global standards.”
If there is one major obstacle hampering the region in its journey towards the G20 objectives on the regulation of OTC derivatives, though, it is the region’s diversity. At the end of the day, the whole rationale behind the G20 accord to begin with was to bring transparency to a global market that had become notorious for its opaqueness. But in a fragmented, diverse region with each jurisdiction deeming it necessary to establish its own in-country rules, this has not been straightforward.
There is cause for optimism that this will not end up being the end-state for the region, however, says Tierney. “Two years ago it was difficult to discuss the importance of standards because none of the trade repositories were live. We simply couldn’t articulate, therefore, what the world was doing,” he explains. “But we’ve found over the past year that it has become a lot easier to go and visit jurisdictions and explain how firms are reporting their positions and what positions are probably already on our database.”
The next wave
Asia’s relatively smooth transition to meeting the Basel III capital and liquidity targets and the G20 OTC derivatives requirements makes what we are beginning to see now in the region all the more intriguing. Although the region largely escaped the same regulatory disruption witnessed in the US and Europe, there are signs that the overall regulatory burden – on financial institutions in particular – is now beginning to weigh down a bit more on market participants.
Every year, the information provider and technology firm Thomson Reuters publishes its Cost of Compliance Survey which assesses the impact of regulation on financial services in Asia. According to Thomson Reuters Annual Cost of Compliance Survey, compliance officers express regulatory fatigue and overload in the face of snowballing regulations. Seventy percent of firms are expecting regulators to publish even more regulatory information in the next year, with 28% expecting significantly more.
If neither capital adequacy nor derivatives reporting requirements have been especially troubling Asia’s financial services sector then what is? Sanjeev Chatrath, Managing Director and Head of Financial & Risk, Asia Pacific at Thomson Reuters, identifies two key factors. The first of these comes not from inside the region but from the activities of overseas bodies. “Over the past year, corporates in Asia have been extremely busy addressing some of these far-reaching, extra-territorial regulations that have been introduced; FATCA and the UK Bribery Act being two notable examples,” he says. “There are many US/UK headquartered or affiliated institutions operating here, of course, and they are trying to balance their compliance with regard to home country and host country regulations.”
Secondly, the region’s own regulators have also stepped up a gear, but are focusing on different issues to what we have seen in other regions. “I think there are different nuances in every part of Asia,” says Chatrath. “Korea has introduced significant changes around data privacy, driven by some of its experiences last year. In India and other Asian countries, there is a lot of focus now around corruption reforms. And China too has been making substantial changes allowing foreign investors to invest in China. In Australia, we are seeing a lot more personal liability initiatives that financial executives have to undertake.”
Chatrath’s observations are supported by Thomson Reuters 2015 Cost of Compliance Survey. The report reveals that compliance officers at financial institutions are increasingly concerned about Conduct Risk (67% of respondents citing this as the biggest driver of managing regulatory risk) as well as new data protection and anti-money laundering (AML) requirements based on the 2012 FATF recommendations.
The regulatory burden may well, as many financial services professionals believe, continue to increase in Asia over the coming years. Yet the traditional characterisation of Asia as a very strictly regulated region, relative to that of liberally managed economies in the US and Europe, has, as we have seen, been somewhat turned on its head in recent years.
Of course, as treasurers will point out, strict foreign exchange controls remain a liquidity management headache in many jurisdictions (even if, crucially, China has begun to liberalise its policies in this area). And in some countries, as noted earlier, banking regulation with respect to capital and liquidity ratios is even stricter than what has been introduced in many western countries.
An important difference though, say industry experts, is that regulators here in Asia have been more considered and thoughtful in the way they have planned and implemented there reforms. Unlike in the US or Europe where financial institutions and corporates alike have lamented time and time again that regulatory bodies have pressed ahead with regulatory changes with little consideration to the ‘unintended consequences’ those in the industry believe may emerge as a consequence of reform, Asia’s regulators have paused, and listened carefully to the views of all affected parties. Even when specific regulations – like the Basel capital ratios – have been set at a high level, they have, consciously, not been set so high as to be out of reach of those subjected to them. Likewise the recent amendments to Singapore’s AML legislation was only implemented after the Monetary Authority of Singapore went through a ten-month consultation phase. Financial services professionals in other regions could be forgiven, perhaps, with looking at how things have unfolded with a degree of envy.