Risk management in APAC: how the buy-side is embracing best practice
How the buy-side is embracing best practices in operations and risk management in Asia Pacific
A report by PwC entitled ‘Asset and Wealth Management 2025'1 published in January of this year, estimates that the wealth and asset management industry in Asia Pacific will double to USD29.6 trillion by 2025. This projected growth is a result of the increasing wealth of mass affluent and high net worth individuals in the Asia Pacific region, creating real growth prospects for asset managers.
The asset management industry in Asia Pacific is not only experiencing growth, it is also maturing across several areas, including adoption of best practices, automation and streamlining of operational processes, as well as diversification in asset allocation. End-clients, such as pension funds, are not only focused on earnings, but are demanding greater transparency into the steps taken to achieve returns.
Further, as the Asia asset management industry grows, so does the search for alpha, particularly in Asia Pacific, where there is a growing allocation to offshore assets as domestic markets are saturated and assets continue to accumulate. This geographical diversification of investments has resulted in funds with a larger exposure to currency settlement risk, while the allocation to offshore assets is increasing across pension funds, as well as among insurers in the region.
“As the asset management industry in Asia Pacific continues to grow, so will the imperative for the sector to demonstrate best practices.”
Alongside this growth and pursuit of alpha, larger asset managers are bringing FX trading in-house, to reduce costs and demonstrate best execution—a trend that is further driving the need to reduce settlement risk among this community. As a result, asset managers are reviewing existing middle and back-office processes to identify where best practices can be implemented to increase efficiency and reduce cost.
For asset management firms, risk reduction through efficient post-trade processing has a direct impact on the performance of their investment portfolios, as every marginal opportunity for savings delivers to the bottom line. Asset owners, especially pension funds, are focused on returns and in the current environment, wherein it is not easy to differentiate performance and returns, asset managers are even more fixated on operational efficiency and cost savings. In addition to fund performance, asset owners - partly a result of the evolving regulatory environment - are increasingly focused on principles such as governance and controls, protection of stakeholder interests, and safeguarding of assets. This means that when a buy-side firm can provide evidence that these principles are being adhered to - through excellence in operations and risk management such as, the adoption of a PvP settlement service to mitigate FX settlement risk - it satisfies the requirements of its clients as well as obligations to the relevant regulators.
The FX Global Code (the “Code”), is another driver for greater transparency and best practices in operations among the buy-side. Not only does the Code advocate best practice in all FX operations, Principle 50 specifically states that market participants should measure and monitor their settlement risk and seek to mitigate that risk wherever possible. In Asia Pacific, several jurisdictions, such as Hong Kong and Singapore, have directly endorsed and implemented the Code into local rule books and codes, and Japan has replaced its local code of conduct with the Code, supplementing it with local guidance to address unique practices in the Tokyo market2. As a result, the adoption of the Code has been widespread and motivational, driving a push for improved operational efficiency and risk mitigation. CLS maintains a public register of Statements of Commitment to the Code3, which provides a comprehensive view of market participants’ ever-growing commitment to good practices.
At CLS, we are certainly seeing prioritization of operational best practices as a major trend among asset management firms in the area of FX. In particular, we have seen buy-side firms become more aware of the risks associated with FX settlement in recent years. They are choosing to become increasingly involved in how they manage those risks. This trend is supported by CLS growth figures in Asia Pacific, where the average daily gross value settled by third parties (non-member banks, asset managers, corporates, funds and non-bank financial institutions) has increased by 36%, with funds making up the second largest proportion of third-party FX submissions in the region at 29% in 2018.
As the asset management industry in Asia Pacific continues to grow, so will the imperative for the sector to demonstrate best practices in the middle and back office due to drivers such as: demand from end investors; the need for cost efficiencies; global initiatives such as the Code; and in some markets, peer influence. The adoption of best practices in operations and risk management should, in turn, attract greater investment in the asset management industry in Asia, thereby further fueling the region’s overall growth.
1. PWC, Asset and Wealth Management 2025 (2019)2. Tokyo Foreign Exchange Market Committee, Local Standards in Tokyo FX Market: Supplementary provisions to the FX Global Code (2017 Edition); 3. CLS, Public register of Statement of Commitment to the FX Global Code