With regulation continuing to play a prominent role in Asia over the next five years, China’s Belt and Road initiative is likely to drive increased coordination between the region’s regulators, says a new report from Broadridge and Kapronasia.
Broadridge, in collaboration with Kapronasia, has released a new white paper looking at the key challenges and opportunities for financial markets across Asia.
The paper notes Asia Pacific’s relative outperformance over other regions, with China playing a central role and the financial industry as a whole being a key enabler, providing the “critical liquidity that has helped the region grow”.
Regulation, it says, presents a major challenge to financial institutions. But despite possible roll-backs in US banking regulation (such as with Dodd-Frank), market practitioners believe regulations will continue to be in focus in Asia Pacific. Given the “relatively un-coordinated approach” to regulation across the region, a number of US- and EU-driven regulatory themes will continue to play a prominent role, as Asia seeks to provide an element of global consistency.
For example, the push for OTC derivatives trade reporting and central clearing remains a focus for the region, evident from Australia’s possible shift from end-of-day reporting to a trade-by-trade reporting requirement and Singapore’s mandate for central clearing of OTC derivatives starting 1 October 2018.
Other Western-driven regulations will also have significant impacts on Asia Pacific financial institutions in the coming years:
- FATCA (the US Foreign Account Tax Compliance Act) is requiring banks to have new levels of KYC (know your customer) and understanding of customer funds, where noncompliance means foreign banks may not be able to operate in the US;
- MiFID II could entail data reporting requirements and possible changes to legal entity structures, systems and processes – even for financial institutions in Asia, if they have EU counter-parties, clients or trades; and
- SFTR (the Securities Financing Transaction Regulation) will have new requirements aimed at increasing transparency on the use of repos and securities loans, and on the risks of entering collateral arrangements.
“Ideally, the lack of regulatory coordination in Asia Pacific is something that will change in the future,” the paper says. “The lack of common regulation also means that there is a lot of duplication and regulatory inefficiencies across markets for multi-national corporates.”
The paper argues that the consolidation of regulation – including more standardised reporting and compliance requirements – may potentially be driven by China’s Belt and Road Initiative, designed to increase investment across a number of Asia Pacific countries.
In addition, the paper notes, a common trend of change at Asia Pacific financial institutions is to leverage new technologies to cope with inefficiencies and other challenges, such as those related to legacy infrastructure. These include the application of technologies such as DLT (distributed ledger technology) and AI (artificial intelligence) in operational processes to lower cost and increase efficiency.
“Although there are significant challenges for financial institutions,” the paper concludes, “with the correct strategy and approach there are also many, many opportunities.”