Chan Boon-Hiong and Hasan Rauf discuss Asia’s industry outlook at the Malaysia Industry Forum.
In August, market players from the buy-side, sell-side and custodian community joined DTCC at its annual Malaysia Industry Forum in Kuala Lumpur, Malaysia, to discuss industry trends and developments in the financial services sector.
The event’s theme, “Re-imagining Malaysia’s Financial Services Industry in an Era of Digital Disruption” served as a launch pad for DTCC Head of Business Development for Asia Pacific, Hasan Rauf’s up close and personal conversation with Chan Boon-Hiong, Global Head of Market Advocacy Securities Services at Deutsche Bank, to gather his views on the industry outlook.
HR: As markets in South East Asia have been evolving with local firms diversifying their investment strategies to go cross border, what are the trends that Deutsche Bank are seeing in regional markets?
CBH: Market trends are driving buy-side, sell-side and custodian firms to rethink their operating model and engage in continual business innovation to reduce operational risk and increase operational efficiency. At Deutsche Bank, we see a huge focus on outsourcing to handle certain operational issues, freeing up resources to focus on core business activities. Aside from greater interest on ETF funds, robo-advisors are rapidly gaining traction. The latter has resulted in investors enjoying the convenience of an automated investment experience and reduction in fees charged.
HR: Some markets like India and Indonesia have strict and regulated domestic practices that are not aligned with global standards. As a result, firms doing business in these markets will have to support two operational workflows – domestic and global. How does Deutsche Bank manage these requirements in a fragmented market like Asia?
CBH: As a global firm, Deutsche Bank’s operating model essentially relies on a pool of centralized resources managing various internal processes to remove duplication and enjoy economies of scale. With that said, we must adopt a different strategy for different parts of the world to address local and regional market nuances. This involves leveraging local resources to navigate the complexity of operating in the domestic environment, such as interfacing with local regulators, local central securities depositories and service providers.
HR: A number of Asian markets have reduced their settlement cycles, resulting in lesser time to resolve trade exceptions. Is Asia ready for shorter settlement cycles?
CBH: Moving to shorter settlement cycles will contribute to strengthening the regional financial system by reducing risk and creating greater operational efficiencies, providing investors with greater assurance when trading with overseas counterparties. However, this means that global investors will have less time to settle trades with Asian counterparties due to time zone differences, increasing the risk of delayed or failed trades. More importantly, moving to shorter settlement cycles requires firms to look at process and technology improvements. Failure to make the necessary changes will increase the potential for delayed or failed settlement. As levels of automation vary across Asia, from fully automated front-to-back platforms to manual processing environments, meeting shorter settlement cycles can be challenging in markets that are using manual touchpoints throughout the post-trade process.
HR: How do you see the influence of China in the region and what does this mean for firms operating in Malaysia?
CBH: From the capital market perspective, China is just as important as the U.S. in generating attention and trade volumes. While the Chinese economy had been closed to foreign participants for a long time, the country is loosening currency controls gradually and enabling access to its markets through a series of carefully planned strategic financial reforms. Steps in this direction include the opening of China’s capital markets to international trading through various channels, such as the Stock Connect and Bond Connect Programs, China’s Interbank Bond Market and initiatives like Wholly Foreign-Owned Enterprise (WFOE) to permit greater foreign ownership of enterprises set up in China. As China has the potential to drive the innovation agenda across the region, countries in Asia need to create unique differentiators to achieve competitive advantage.
HR: India is another equally important market in Asia and is attracting a lot of foreign investments. What is Deutsche’s view of opportunities in India?
CBH: At Deutsche Bank, we see three growth pillars in Asia: China, India and ASEAN (which consists of 10 markets that are made up of the Association of South East Asian Nations). China and India each offers different opportunities. Both markets are equally dynamic and firms cannot afford to ignore one for the other. The two markets have been initiating reforms programs to facilitate foreign access and repatriation of capital offshore. While not a monolithic market, ASEAN’s 10-member states is viewed collectively as an economic powerhouse that is poised for growth.
HR: As ASEAN is a fragmented market with countries at different stages of market maturity, how does Deutsche Bank navigate the complex ASEAN landscape considering local nuances and local market practices?
CBH: Deutsche Bank has been operating in six markets in ASEAN for quite some time now with some offices set up more than 40 years ago. We see an onshore presence as key to navigating successfully in these domestic markets as ultimately, it is the in-country resources that help us to grow and expand our presence locally with support from local partners, where required.
HR: What are your thoughts on the growth opportunity for niche investments like Shariah-compliant Funds and sustainability responsibility investments?
CBH: In recent years, there has been a remarkable rise in Environmental, Social and Governance (ESG) investing. For socially responsible market participants, ESG investing offers the opportunity to seek growth and positive returns by re-examining and changing their diversification strategy. Given the interest generated, there needs to be a common standard and governance structure for the industry to abide to ensure that the industry is able to meet legal, regulatory and ethical obligations across jurisdictions and reduce the creation of silos.
HR: Firms are starting to consider outsourcing of non-critical business functions. Are there any changing trends in outsourcing and what are the do you think these firms are trying to achieve?
CBH: The drivers of outsourcing will not change: to achieve greater cost efficiency and gain strategic leverage. In today’s new normal, third parties are expected to have a fully automated infrastructure to support the demands of their clients. Firms, on the other hand, may have taken steps to revamp and automate their internal operations and processes to prepare for outsourcing. The challenge then is for third parties to be equipped with the right tools that can integrate with the client’s environment.
HR: How does Deutsche Bank interpret the concept of outsourcing data from the regulatory perspective?
CBH: Outsourcing may require the transfer of digital and personal data, firms should investigate issues concerning data protection, data security and data privacy. At Deutsche Bank, we comply with all regulatory requirements across the jurisdictions that we operate. This includes fulfilling obligations such as India’s data rules to keep data onshore and Vietnam’s updated cybersecurity laws. Given the increased regulatory scrutiny on outsourcing arrangements, firms should get their ducks in a row before speaking with regulators on specific requirements.
HR: How does Deutsche Bank fulfill regulatory outsourcing obligations across the many markets in which it operates?
CBH: We believe that it is important for firms to understand the implications behind each regulatory obligation in addition to complying. On outsourcing compliance, we review our obligations from various perspectives – product, operations, risk management, business and client management. We need to have the right people with the right expertise in place to manage our various regulatory obligations. We do not underestimate the importance of effective communications and the need to build close working relationships with the home and host regulators.
HR: Where do you see the financial services industry heading in the next 18 months?
CBH: Change will be the only constant in the weeks, months, and years to come. Cutting- edge technology trends will continue to drive the industry forward – with focus on improving operational workflow and system connectivity. This will eventually pave the way for digital disruption to take centerstage.