By Alexander Jones – alexander.jones@internationalbanker.com
The idea of setting up a pan-Asian framework facilitating funds trading across national borders was first suggested by the Australian Financial Centre Forum in 2010 and has since then gained considerable traction. The latest milestone in the initiative was the release of a consultation paper in May that details the arrangements stipulated in the proposed framework and seeks to probe public opinion on the matter. The working group for the passport, including Australia, New Zealand, Thailand, Singapore and South Korea, has been very active in promoting the potential benefits of the funds passport, but it seems that skepticism remains a major challenge.
The basis for the passport was the fact that the cross-border-managed-funds trade in the APEC region is a difficult business, given the variety of national legislations that are in effect barriers to international investment-fund activity in Asia-Pacific. Seen to come into effect in two years, the funds passport will offer market-players in participating economies a much more streamlined regulatory procedure when they market their products in another participating country. What’s more, it is the ambition of the passport’s founders to extend the regime to trade with Europe as well. In short, the funds passport aims to encourage a more integrated regional financial market, paralleling developments in Europe, where the Alternative Investment Fund Managers Directive aims to establish a similar integrated framework overlaying national legislations.
Deepening capital markets, facilitating cross-border trade in financial instruments, overcoming bureaucratic limitations together sound like a noble cause but, it seems, the advancement of this cause is meeting with insufficient interest, says a report by the Financial Times. According to analysts from the Asia-Pacific region, there are a number of difficulties that a passport regime is currently unable to overcome. These include the Australian tax regime, which discourages local investors from trading across borders, and the fact that unlike Europe, APEC countries use different currencies. The tax issue in Australia is important, since it is the biggest member of the passport initiative to date. As for the different currencies, they become an issue in view of the costs associated with the issuance of various financial instruments in this or that market. FT author Kylie Wong says there just isn’t enough interest in such a passport, citing an older agreement between Australia and Hong Kong that concerned the mutual recognition of the two countries’ funds. Since it came into effect in 2008, the agreement has failed to lead to the launch of any new products that would benefit from it. An additional, and potentially bigger, problem is the absence of China in the scheme. Unlike Thailand and the Philippines, which analysts consider too small to be attractive for investors, China is the region’s biggest market, and if it joins the passport, the scheme will have greater chances of success.
Meanwhile, the six current participants in the initiative – the sixth being the Philippines, which joined with Thailand this year – are optimistic. According to John Brogden, CEO of Australia’s Financial Services Council, the opportunities for those who join the passport are enormous, given statistics that state that although Asia has 60 percent of the world’s population, it accounts for only 12 percent of the global funds under management. What’s more, according to BNP Paribas Securities’ Asia-Pacific head, Lawrence Au, a passporting regime would benefit national regulators as it will help them pull in the reins of UCITS (Undertakings for Collective Investment in Transferable Securities) frameworks on local markets that have been multiplying and evolving faster than watchdogs can cope with. A regional investment-funds passport is an undertaking that will be of benefit to all stakeholders; it seems that the main issue is that of the number and size of participants. It’s very likely that if China joins the scheme, a lot of the current skepticism will subside.