Tech, Mutual Recognition Scheme Spearhead BBH's Asia Push

The last few years have seen BBH ramp up its activities in Asia, from opening a dedicated foreign exchange (FX) trading desk for local currencies, to building out a securities-lending program to match the "higher conviction" hedge funds have shown in their view toward listed Chinese companies in recent years, thanks to an increase in special situations opportunities, and the Hong Kong Monetary Authority (HKMA), dealers, and industry associations' encouragement of more sec lending and repo liquidity in the reigon.

But above all, the firm  has been building out its transfer agency (TA) functions to meet Asia's burgeoning demand for fund administration. "It's just a pocket of the market that hasn't matured as much as core securities processing, so this is about breaking new ground," Rosensweig tells Buy-Side Technology.

"We have worked closely with Taiwan's central depository (TDCC), Swift, and regulatory authorities to automate Taiwan fund flows, which are especially important because, at around $90 billion in assets, Taiwan accounts for the highest trade volume for UCITS products globally. Taiwanese retail investors tend to have a trading mentality, but transfer agency was 100 percent manual making the operational processes a risky burden. When a Taiwanese investor would buy into a fund, a fax would go out which would need to be manually entered by the TA.  In turn, the confirm would come back the next day which would need to be manually processed by the distributor Bank. Prior to automation, investors were really flying blind, but now get timely access to information.”

Mainland Next
It is a playbook BBH is ready to reuse—this time for an opportunity that is potentially much bigger. The bank only focuses on cross-border transactions, out of deference to some of its custodial clients, and until now, the domestic market for funds administered in Hong Kong was relatively small at about 7.5 million people. Much is made of Asia's fragmentation and the need to assess opportunities by specific jurisdiction. But on one front, that is about to change in a big way.

"Mutual recognition for funds [with Mainland China] is a really exciting development," Rosensweig says. "Obviously, the target population expands up to 1.3 billion people, with growth scenarios for new funds invested here ranging over five years from around $146 billion at the lower end to highest growth of $598 billion. There are a lot unknowns, of course, around Chinese appetite for global investment into mutual funds, but with a great deal of Chinese assets currently stored up in bank deposits, our view is that it's inevitable the wealth will grow faster than that domestic markets can support, both in terms of outright investment, and diversification."

As a result, he projects that a potential scale-up will likely require a doubling of the bank's staff in both Hong Kong and Beijing, as well as more dedicated eyes in BBH's US, Poland, and India-based operations centers. The objective, though, is to use automation to grow that business without really ramping up on staff, and in particular that means honing BBH's fund services platform, along with Infomediary, to build a bridge.

"We are developing a Chinese language user interface showing which funds are available through mutual recognition, making it easier for the buy side to invest and for the sell side to distribute. There are also complexities that our teams working with Chinese asset managers and banks are running across: Right now in China, client details are typically passed through at an underlying client level, but the way it works cross-border, if a bank in Taiwan [e.g. Cathay or E.Sun] is distributing funds, it is the bank's name—not the client's—on the account. So in this case, there is a capacity implication, in that it potentially requires know-your-customer (KYC) and anti-money laundering (AML) documentation on millions of people. So, somehow between those two realms there needs to be a many-to-one mechanism aggregating those accounts on the mainland side, with omnibus level data flowing offshore in the other direction. Without that, things are untenable from a compliance standpoint, as well as operationally."

Bottom Line
Facing these types of regional challenges with a tech-first blueprint is just the latest indication, then, that BBH's financial services—many of them intricate mechanisms—and the technology behind them are beginning to converge.

"You see it with our private banking clients here, which are realizing that their own clients' expectations in Asia are very different," Rosensweig says. "In Europe, it's a discretionary account where the bank decides on investments, a nice neat model. In Asia, this is primarily first-generation wealth who want to have multiple private banking relationships, getting different product ideas to play off each other, and it's execution-only. It's a much larger universe of funds that private banks have to deal with and that puts tremendous operational pressure on them." BBH is helping to relieve that pressure, which in part explains the trend of adopting some self-service models on the technology side.

"We've built out many of our platforms now to be multi-tenant, and from my perspective, it's been great to see Infomediary grow over the past 12 years," he says. "There has been a convergence of financial and technology services such that what clients are really buying from us isn't just custody and settlement related services, or business functions discrete from IT.  Now, it's all one or they can elect to source technology-only solutions—and that is a fundamental change."