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Cross Border Investments A Fad or a Necessity

By DTCC Connection Staff | July 15, 2019

Turning User Feedback Into Improved Market Insights
l to r: Dol Watanasri, Michael Reed and Somruthai Srikanchana.

Against a backdrop of tremendous economic progress, Thailand’s business climate continues to be positive and welcoming to foreign investment. While local laws still need some tweaking to generate greater foreign interest, Nigel Gnoh, Associate Director – Business Development for South East Asia, DTCC, kicked off the panel discussion at the recent Thailand Industry Forum organized jointly by DTCC and the Stock Exchange of Thailand (SET) by asking for views on investment opportunities within and outside Thailand.

The panel, Going Global – Expanding, Diversifying and Connecting Abroad, featured senior representatives from the buy-side, sell-side and custodian community, engaged in a stimulating discussion covering Thailand’s capital markets, diversification and cross-border regulations.

As the first country among the Association of South East Asia Nations to move to T+2 settlement cycle, this is viewed as a significant market development for Thailand in its on-going drive to further develop its capital markets which has been growing steadily over the past decade, according to Viravate Vongkitbuncha, Head of Securities Services from Citi.

Owing to positive performance of Thailand’s capital markets, Dr. Thanavut Pornrojnangkool, Chief Investment Officer, Bangkok Capital Asset Management (BCAP), mentioned that local investors have been less inclined to consider offshore investments. “From the buy-side perspective, this scenario may change in the next few years as the opportunities to diversify abroad increase,” he said.

Somruthai Srikanchana, Head of Securities Services, Standard Chartered Bank, added that diversification is key to ensuring growth as reports have indicated that the return on investments from overseas endeavors has been favorable.

All panelists concurred that investing overseas is no longer a fad, but a necessity to diversify assets portfolio and spread concentration risks. According to Michael Reed, Chief Executive Officer of Manulife Asset Management (Thailand), the factors that will affect the choice of countries to invest include a stable political environment, a well-functioning market infrastructure and the demographic mix of the population.

Addressing Local Requirements

Vongkitbuncha cautioned the need for asset managers to understand the regulatory framework, taxes and nuances of the foreign country concerned as no two countries have the same legal and financial systems.

“It is important for custodial service providers to have vital information readily available for asset managers,” Srikanchana said. “Such information includes account opening requirements, settlement practice and the cultural aspects of doing business in that country.”

Reed agreed with the need to be cognizant of cultural issues. He cited the operational control environment required by the distributors, expected by the investors and mandated by the regulators in Japan, where zero error is the norm. Operating in a zero-tolerance environment will thus require an extremely robust operational system to prevent any errors from happening.

Citing the experience of BCAP, where close to a thousand trades are settled daily with overseas counterparties, Dr. Pornrojnangkool remarked that due to language and time zone differences, it was extremely challenging for the firm’s operations team to process and settle trades on time. This resulted in BCAP turning to DTCC for a solution to process its cross-border trades. BCAP is the first domestic investment manager in Thailand to adopt DTCC’s CTMTM, a global platform for the central matching of cross-border and domestic transactions that enables the firm to significantly improve its post-trade processes. BCAP’s automated post-trade environment will eventually extend to include the management of standing settlement instructions within DTCC’s ALERT® database and the automated transmission of settlement notification to its custodians.

Managing Regulatory Obligations

As in-country regulatory initiatives will affect the ability to attract foreign investments to Thailand and going abroad in the case of domestic investors, Vongkitbuncha commented that he has seen marked progress in Thailand to support cross-border in and out trades.

“Today, almost any retail investor can invest in off-shore products with much greater ease and access,” he said. “Years ago, the privilege to go overseas was restricted to high-networth individuals and institutional investors.”

While it is relatively easier for retail investors to invest overseas under the Bank of Thailand and the Securities and Commission Exchange of Thailand policy measures to protect the interest of retail investors, retail investors could consider investment products like mutual funds and private funds, leaving the professional money managers to manage the risk exposure of going overseas.

To attract more foreign participation in Thailand’s capital markets, Reed said he would welcome revision to Thailand’s existing rules and regulations – as they are often contradictory, restrictive and prescriptive due to the involvement of numerous regulators who don’t talk to each other and often have contradictory policies and expected outcomes.

Dr. Pornrojnangkool ended the discussion on this topic by highlighting that SET’s digital transformation initiative is poised to be the biggest leap forward in generating more investment opportunities within and outside Thailand.

“As SET’s FundConnext mutual fund platform will eventually connect the Thai investment fund market to global investors, there will be opportunities for foreign investors to market their products and services to market players in Thailand,” Dr. Pornrojnangkool said, adding that additional tweaking of the local tax system is required to extend the country’s reach to more foreign investors.

Managing Change in Emerging Markets - Pataravasee Suvarnsorn and Nellie Dagdag

Achieving Greater Scalability

As Thailand strives to provide a conducive investment environment for local and global investors, firms may soon have to decide whether to insource or outsource middle- and back-office processing to reduce costs and achieve greater scalability.

“From the custodian’s point of view, we look at streamlining processes either internally or externally in order to provide better and more efficient service,” Srikanchana said. “The benefits derived from automation and straight through processing will eventually be passed on to the end clients in terms of more value-add service at no additional cost.”

Dr. Pornrojnangkool pointed out that outsourcing is about leveraging the latest technology from a third party. Often, the outsourcing firms have more efficient processes that require less manpower to complete a task than if it was handled in-house.

As scalability equals automation, Vongkitbuncha stated that outsourcing is a key part of the equation.

“A business should focus on the core business functions, leaving the outsourcer to look after essential but non-core business functions,” he noted. However, he emphasized that outsourcing does not absolve a firm from any liability. The firm is still very much part of the operations process that is being outsourced.

Gazing Into the Future

Srikanchana noted she would like to see more focus on automating and streamlining operations processes. Firms could save cost by utilizing SET’s common platform to be rolled out as part of its digital transformation initiative – to manage their operations processes instead of reinventing the wheel.

Reed is expecting enactment of the mandatory provident fund legislation in one or two years from now. “This will have a massive effect on Thailand’s capital markets as billions of dollars will be available for investment locally and abroad,” he said.

In Vongkitbuncha’s opinion, it is important that we leverage technology to deliver the greatest value to our clients, comply with regulatory obligations and protect ourselves from cyber threats. Recognizing the importance of technology, Dol Watanasri, Head of Securities, Deutsche Bank, is placing his bet on digital assets – specifically distributed ledger technology – as the next fixture that will transform the way we do business. He explained, “Global assets could be tokenized on the DLT engine and made available to local exchanges. The Bank of Thailand has already moved forward with this concept with its Project Inthanon where we may soon see the issuance of stable coin and digital bond.”

Dr. Pornrojnangkool is anticipating massive deregulation in the asset management industry where there will be an invasion of foreign firms investing or acquiring local firms in Thailand.

“As new products are being introduced and extensive changes expected to happen within the industry, market players who are now dominating the market may not be able to retain their leadership status in the future,” he said. “Forward-looking firms, quick to capitalize on the latest trends and technology to stay ahead of the competition, will be the eventual winners.”

In summarizing the event, Dr. Pakorn Peetathawatchai, President, SET, commented: “The forum is an excellent platform for market participants to gain insights on the capital market landscape in Thailand and understand the importance of streamlining, standardizing and automating operational processes as they prepare for business growth. It is heartening to note that the attendees were extremely enthusiastic about SET’s digital infrastructure platform, particularly the convenience it would bring to investors as they expand their investment forays.”