Regulation & Standards

Uncertain certainties

Published: Nov 2014

Regulation, like death and taxation, is an immutable fact of life; for businesses the world over it applies in varying degrees of difficulty but it will always be something to deal with. “In Asia Pacific, we cover 41 countries. This means that we are continuously impacted by central banks and tax regulations,” Helen Toh, Corporate Finance – Regional Treasury Asia Pacific Deutsche Post – DHL told Treasury Today Asia in a recent interview. One of the major difficulties faced by companies such as Deutsche Post – DHL in Asia is the lack of regulatory uniformity; attempts are made to implement global or regional standards but as the old adage goes, the problem with standards is that there are just so many of them.

For a treasurer, keeping on top of change when change comes at you from many different angles is challenging. Whilst there are “some commonalities”, Charlotte Robins, Corporate Partner with international law firm, Norton Rose Fulbright Hong Kong, warns that businesses operating in the region “need to be cognisant of the different nuances and granular facts within each jurisdiction that may trip them up”. A simple but key consideration from a corporate perspective is understanding where it is actually doing business and how; there being no all-encompassing ‘Asian regulation’ per se. Whilst Robins notes from experience that it does not necessarily make dealing with regulation more onerous if a corporate is carrying out its business on a cross-border basis in Asia, there are still many considerations.

Only trying to help

According to the World Bank’s annual ‘Doing Business’ report 2014, “governments support economic activity by establishing and enforcing rules that clarify property rights and reduce the cost of dispute resolution, increasing predictability of economic interactions”. It states too that “doing business is not about less regulation but about better regulation”. If regulators are there to help, there is clearly still work to be done: Treasury Today’s 2013 Asia Pacific Corporate Treasury Benchmarking Study reveals that 68% of treasurers see regulation as a challenge. This is more than in any other region (and up from 38% in 2012).

Despite this, the ‘Doing Business’ report 2014 ranks 189 countries for ‘Ease of Doing Business’. This reads as something of a Who’s Who of Asian economies. Singapore takes the number one spot, followed by Hong Kong and then New Zealand. Malaysia comes in at number six, with the Republic of Korea following in seventh place. Australia is in 11th place whilst China is 16th and Thailand 18th. Rounding off the top 20 is Mauritius. Japan is 27th.

Some territories are clearly trying to make life easier for treasury operations. Hong Kong’s Financial Secretary, John Tsang Chun-Wah, announced plans at the end of September to enable it to become a more attractive financial hub, against rivals such as Singapore. According to the South China Morning Post, the Hong Kong government has already established a taskforce “to develop proposals to attract more multinationals and mainland firms to set up corporate treasury centres in the city”.

A general view

It is apparent that some Asian markets, such as Hong Kong Australia, and Singapore, are making more regulatory progress than others. But for the treasury community, it is still the lack of any regulatory connectedness across the region that poses the biggest challenge. Blaik Wilson, Director of Solutions, APAC, for technology firm, Reval, comments that “there is a feeling sometimes that it might be three steps forward and two steps back”, he says, adding that “the intentions are good and we are seeing improvements in regulations across the board”.

For Robins, there are positive developments too. “Asian regulators are increasingly communicating about regulatory change, for example US or European extra-territorial regulation, about which Asian regulators are consulting one another and responding with a stronger voice,” she observes.

Some key changes

In terms of specific regulation, Asian corporates are seeing many more (and enhanced) data privacy controls, says Robins. “The world is that much more sensitive when it comes to the transfer of data and regulators in this space are becoming increasingly active,” she notes. “As such, we are seeing a trend in Asia towards the enhancement and greater focus on the transfer and use of personal data.” A new wave of data privacy changes were implemented in 2011 across Hong Kong, South Korea, India, China, Malaysia and Taiwan. Singapore implemented changes to its data privacy laws in 2012. And proving that regulators do talk to each other, in mid-September of this year the Australian Securities and Investments Commission and the Monetary Authority of Singapore signed an agreement (a world first) to facilitate the mutual monitoring of OTC derivatives trading data. Under existing national data protection laws this had not been possible.

Money laundering, bribery and corruption is a concern for corporates everywhere. With the delivery of the European Commission’s Fourth Money Laundering Directive (4MLD), following pronouncements from the global anti-money laundering standards body, the Financial Action Task Force (FATF), it is now a requirement for multinationals to have group-wide policies and procedures around data protection, the sharing of information on anti-money laundering (AML) and combating terrorist financing. The Commission expects companies to implement these policies at branch level and majority-owned subsidiaries in member states and third countries.

“From a corporate treasury perspective it is necessary to be aware of the issues and ultimately know who you are dealing with,” says Robins. She feels that it is incumbent upon all senior personnel to fully understand the risks inherent in their own industry and enable appropriate policies to be implemented to mitigate the issues.

Derivatives reform

Perhaps the most significant current regulatory event to affect the Asian financial sector flows from reform principles for OTC derivatives set during the 2009 G20 Pittsburgh Summit. Whilst those that have progressed furthest (Singapore, Hong Kong, Australia and Japan) have all moved forward with trade repositories, reporting requirements and centralised clearing, there is still divergence in the detail. In the absence of a single body to oversee progress the potential exists to inadvertently undermine the G20 goals of making the global markets more transparent. Corporates will need to ensure they have read, interpreted and understood the laws and regulations correctly across each country in which they operate, warns Robins.

An interesting outcome for Asian OTC derivative reform will be the extent to which corporates can and will rely on their banks to report on their behalf – and indeed how this might play out for inter-company transactions (whether they are excluded or included, as they are in EMIR). Reval’s Wilson notes that many corporates maintain their own records even though their banks report on their behalf – something he feels is driven by acute corporate awareness that they still carry all the reporting responsibility. As reform rolls out across Asia, he suggests that the largest corporates may also adopt this ‘belt and braces’ approach.

One angle to derivatives reform that Wilson suggests many corporates may not yet have fully taken on board is the potential for a pricing differential between companies that post collateral where they have a bi-lateral agreement with the counterparty, and those that don’t.

Many Asian corporates do rely on their banks to post collateral on a day-to-day basis and all banks charge for doing so. “The question is, at what point does the price differential make corporates want to start posting collateral on their derivatives?” It is a difficult decision: a treasury under the obligation to manage daily posting of collateral will need to be rather more slick in how its working capital is managed to meet any shortfall. “On the systems side I think we will see companies move to more sophisticated liquidity planning and management tools,” suggests Wilson.

Listing differences

In the capital markets space, companies in Asia seeking an IPO should be aware of just how different the regulatory approaches of various stock exchanges can be. Of significant interest is the way in which the Hong Kong stock exchange (HKEx) implemented a number of changes to the process by which companies may become listed.

“They have not changed the financial requirements to qualify as a listed company but they have raised the level of scrutiny over first-time applicants,” notes Stephen Peepels, Head of US Capital Markets, Asia-Pacific for multinational law firm, DLA Piper Hong Kong. As of 1st May 2014, HKEx requires virtually all of the due diligence and related work to be done before a company can even submit a draft application and a prospectus to the stock exchange for listing, he explains. The sponsors must certify that all legal opinions, auditor certificates and other foundational work is substantially complete, or risk having their filing rejected. The rejection will be publicly disclosed. The potential for reputational damage if this happens should not be underestimated. As a result, he has seen a lot of commentary suggesting many Chinese companies have been “scared away” from going forward with an IPO in Hong Kong. If a company has the flexibility to think about where it lists, the view that the Hong Kong market is a more challenging one to get through may be the deciding factor. To this end, says Peepels, it is interesting that the US exchanges (NYSE and Nasdaq) “have been making a lot of effort to attract and accommodate companies from overseas to reconsider the United States as the best place to list”.

Following the intense scrutiny of the quality of some listed companies a decade or so ago (notably Enron in 2001), the US tightened up its rules in the mid-2000s with the passing of Sarbanes-Oxley and other measures. This may have intimidated and perhaps even prevented some companies from pursuing US listings. Peepels now sees the US regulatory pendulum as having moved back towards a more balanced and accommodating angle, allowing certain exceptions for foreign and smaller issuers, and promoting a willingness to help firms achieve their listing.

Meanwhile, although a Hong Kong listing still has a certain prestige, as regulatory scrutiny tightens, for many companies, the question is raised as to whether it might be easier to go elsewhere, certainly for companies on the cusp of acceptability or which do not have an obvious connection to the territory. “For those that are not tied to Hong Kong, maybe they will consider exchanges that are a bit more welcoming,” comments Peepels. Indeed, he adds, some Chinese companies that had perhaps given up on listing in the United States and had decided to list in Hong Kong have now shifted back to the US.

NYSE was a big winner in September this year when China-based e-commerce firm Alibaba completed the largest IPO ever, raising nearly $25 billion – surpassing the 2010 record set by the Agricultural Bank of China which raised $22.1 billion in its debut on HKEx. Peepels notes that although there were other reasons informing Alibaba’s choice, it won’t change the impact generated by China’s most successful internet company going to the United States, not Hong Kong. “My guess is that the more technologically sophisticated companies seeking high-tech investors and analysts that understand their businesses are now going to have a long, hard look at the US.” There is of course no suggestion that Hong Kong’s new stricter regulatory regime will see it fall away as a desired listing venue; there will always be local companies that want a listing close to home.

It may seem that Hong Kong regulators are being heavy-handed in their approach; Peepels notes that HKEx often asks more “aggressive” questions about an applicant company’s existing business than would a US exchange. “The US exchanges generally believe that as long as a company is open, honest and fair with the way it describes itself, then investors are free to decide whether or not they like that company,” he says. Hong Kong regulators take a more “parochial” view of commerce and can insist that a company makes certain changes in order to satisfy the exchange’s listing requirements. As an example, where a company has a major shareholder that also invests heavily in one of that company’s core suppliers, the US would require disclosure in the prospectus of related-party transactions. HKEx can require the prospective listing company to exit that relationship or face rejection of its application.

Arguably this strict new regulatory approach may also play into the hands of other exchanges in the region, such as that of Singapore, which has remained on an even regulatory keel. “Its current system works well and it may be anticipating some additional listing candidates because of the approach Hong Kong is taking right now,” Peepels suggests.

Getting the right technology

With Asian businesses constantly dealing with change at a regulatory level, Reval’s Wilson puts the technological case for the software-as-a-service (SaaS) delivery model. “As the vendor, we update the software and every client gets that enhancement immediately,” he explains. “It would be a nightmare working with a client server model in Asia because instead of upgrading hundreds of clients once, it means upgrading them individually.” Arguably this is a problem for the vendor not the corporate, but unless that client has significant weight behind it, it may be lower in the order of service for each roll-out. The third option, maintaining technology in-house, could present a serious challenge for the IT department if the system is distributed across many jurisdictions.

This may not currently be a big issue in Asia as it is a relatively immature market for many vendors, with spreadsheet-based operations still prevalent. But it does seem as though the market is on the cusp of a major sea-change in this respect. “When Asian treasurers decide to go, they tend to want to make the leap to fully automated systems, having a vision of quite a sophisticated system at the end,” comments Wilson.

Keep looking

Working in a regulatory space that is so diverse and seemingly in a constant state of flux means Asia-based treasurers may face challenges that those elsewhere do not, but they also benefit from having a largely solid banking sector that avoided most of the troubles of the financial crisis. However, it is clear that corporates the world over do not have carte blanche to do whatever they want with their own money. In this environment, where a business simultaneously tries to optimise its finances whilst ensuring it is not jeopardising its own core operations it will increase the requirement for strong treasury oversight. Treasurers in Asia have to be ready to tackle whatever comes their way and if that means leaping regulatory hurdles, then so be it!

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