Catching the wave or making waves?
International regulatory reform and enforcement trends continue to drive developments in Asia. Changes in the UK, EU and the U.S. are influential. However, it is clear that increased confidence and economic power in the region are ensuring that local developments have a distinct Asian flavour. That trend looks likely to continue.
PRC regulators have continued their efforts to build a multi-tiered capital market which creates many opportunities: high yield bonds are set to debut on the stock exchanges, closely following their cousins on the inter-bank market; securitisation is coming back to the market; foreign asset managers will gain greater access to the securities market due to a lowered bar on qualification of QFIIs or increased foreign stakes in local securities JVs; and regulation of private funds is on the horizon.
The extraterritorial effect of foreign regulations such as The Dodd-Frank Act has started to gain attention and move up the regulatory agenda. The Shanghai Clearing House is poised to clear IRSs by the end of the year. Client clearing is also being considered. Many ask whether this is just a little too fast. But the experimenting mood is likely to last for the foreseeable future, testing the resources and commitment of (especially) foreign market players in China.
Notwithstanding the slowdown in growth of the PRC economy, we continue to see the rising presence of China in the global financial sector and the perceived appetite of Chinese financial institutions (including most recently China Construction Bank) for investments in “Western” and other regional regulated markets. Doing so is not without risk, given the obvious need for foreign investors to familiarise themselves and act in accordance with local regulatory requirements. Recent regulatory action by the UK Financial Services Authority along these lines clearly demonstrates that there is a potential regulatory and reputational cost for foreign investors, as well as personal cost for their management.
Meanwhile, in Hong Kong, the need to maintain its position as a major international financial centre continues to drive regulatory change. Authorities have sought to increase cooperation with the Mainland on the big economic issues such as harnessing the power of RMB, whilst trying to ensure market infrastructure is “fit for purpose”.
That is being done at various levels, including at macro scale in terms of the establishment of a central clearer for OTC derivatives in line with international expectations. At a no less important level in terms of market infrastructure, there have been moves to clean up the IPO market by the proposed introduction of tighter controls over sponsors, increased market transparency by forcing listed companies to publish price sensitive information as soon as possible on pain of criminal penalty, and the Securities and Futures Commission consulting on electronic trading regulation to take into account the increasing importance of technology in the markets. On top of that, the Hong Kong Monetary Authority has announced that it will interview, where appropriate, prospective directors, chief executives, or other high ranking officers to assess first hand the candidate’s skills, knowledge and understanding of the authorised firm’s business, together with key regulatory and supervisory requirements, including risk management practices, capital adequacy and liquidity.
Indications of a possible overhaul of remuneration and incentive structures within financial institutions, which can incentivise mis-selling, fit snugly within the international pronouncements and developments on these issues.
Similar developments are evident in other major financial centres in Asia, including Singapore, Australia and Japan.
All of this points to a firm commitment on the part of Asian regimes and regulators to participate fully in the global markets and act as a counterbalance to the Old World. Fragmentation of Asia is an impediment to this in terms of creating a single regional voice, but even that is starting to be debated. The rise of jurisdictions such as Vietnam and Myanmar add further weight to this argument.
The key issues as regards the tides and currents of market infrastructure, corporate governance, vigorous policing of the markets and the integration of local requirements into international reforms remain. For market players, the practical difficulties of domestic compliance coupled with factoring in international extra-territorial compliance and competitiveness cannot be underplayed.