Asifma: Asia's 2014 regulatory outlook

Author: Ashley Lee | Published: 30 Oct 2013
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Mutual recognition, stronger capital markets, and extraterritoriality are at the heart of the region’s growth prospects

Mark Austen, Asifma
The Asia Securities Industry and Financial Markets Association (Asifma) has grown rapidly over the past 12 months. Its CEO Mark Austen speaks with IFLR about the Association's plans for 2014, how global regulatory initiatives will affect Asia, and why regulators must start trusting one another.

How have Asifma's goals developed as it has grown and how is it planning to expand?

Our goal is still the same: we're focusing on developing Asia's capital markets to encourage economic growth in the region. Throughout our expansion phase, that hasn't changed or wavered.

The only difference is that we've added equities and foreign exchange to the fixed income piece, and have also emphasised compliance, post-trade issues, and better connecting Asia with what's happening globally as part of regulatory reform.

Originally, we've been a predominantly sell-side organisation. We have the global and regional banks on board as well as market infrastructure players such as law firms and credit rating agencies. But we're in the process of launching a buy-side division to further strengthen our organisation and communicate with regulators both from the intermediaries' and the investors' point of view. That should also strengthen our message to the regulatory community across the region, as we can then represent the views of most institutional market participants.

What are some of Asifma's existing initiatives, and what should we expect from the Association in the coming year?

"One size doesn’t fit all in terms of regulatory reform"

A major initiative is the launch of our capital markets white paper for Asia, which will set out our views on what needs to develop in the region's capital markets to support economic growth, particularly as Asia moves from an export-dominated economy to one more focused on domestic consumption. That's already happening throughout much of the region, including China. And developed capital markets are needed to further that transition.

We expect that to accelerate because many western economies are shrinking – they're certainly not growing – and if Asia wants to continue to grow, there needs to be more focus on domestic consumption and greater intra-regional trade that will require deeper capital markets.

From a global point of view, there are a number of developments that are extremely important to Asia. We've focused on extraterritorial regulations such as the US' Dodd-Frank Act and European Market Infrastructure Regulations (Emir), and how aspects of them can negatively affect the development of Asian capital markets, as well as the liquidity available in Asia.

We've encouraged greater cooperation among Asian regulators and have encouraged them to speak more loudly to protect their own sovereign interests.

"Unless regulators start trusting each other, these global systems can’t work"

In addition, we've been looking at global regulations that have come out of the Basel Committee, Financial Stability Board (FSB), and G20. The bulk of those regulations has been in response to a global financial crisis that really happened in mature economies in the west. One size doesn't fit all in terms of regulatory reform on a global basis. A lot of the complex products that caused the crisis and that are now being heavily regulated in the west haven't really developed in Asia.

Our view is: why should we put in place a Rolls Royce regime when a Honda will do? If Asia is to follow regulation that was effectively designed in the west, it will have a negative effect on the development of the market. Regulations need to match the risk involved. Underdeveloped markets do not pose the same risks. Asian regulators need to undertake a cost benefit analysis vis à-vis global reforms and determine whether these standards are fit for purpose in their market.

Mutual recognition and substituted compliance are tied to global standards as well as extraterritorial regulations. Ultimately regulators need to start trusting each other more, and accepting that the standards and practices in another jurisdiction are equal to their own. We live in a global economy, and we anticipate this globalisation to continue. This process has brought great benefits to economies and individuals including those within Asia. We should be careful to not undo it by putting up barriers to cross-border investment or creating additional costly regulatory burdens.

Therefore, the banking sector and financial markets must be globally integrated. Regulators should not re-regulate matters that are already being properly regulated by other countries. We are encouraged that Asian regulators such as the Hong Kong Securities & Futures Commission's Ashley Alder, and the chair of Iosco's [International Organization of Securities Commissions] cross-border regulation task force will focus on this going forward.

"Why should we put in place a Rolls Royce regime when a Honda will do?"

In some ways, I must say that trusting each other is a big ask. Regulators aren't paid to take on risk, and in this world right now, they're especially risk averse as the political fallout from getting it wrong can be immense. But in reality, unless they start trusting each other, these global systems can't work. There is no global government – each of these regulations must be implemented in each jurisdiction – and they must accept working side by side for the mutual benefit of their financial markets and economies.

With the addition of the buy-side, issues such as mutual recognition and passporting will become an even bigger focus for Asifma. We want to see investors having the opportunity to invest in many different products around the region, free from unnecessary barriers and regulations that hinder their ability to do so. This will be highlighted in our capital markets white paper. Increasingly we live in a global village in which retail and institutional investors will continue to demand access to foreign markets to improve their returns. We need to encourage these flows and match them with real long-term investment needs in such things as infrastructure and social safety nets in the various Asian economies.

National markets on their own are generally not able to develop the liquidity and depth of a regional market. Therefore, Asia will need to develop more regionalised platforms going forward, otherwise it is always going to be at a disadvantage to the deeper, more liquid markets of the western economies. As Asia bridges the GDP gap with the mature economies, the problems and costs related to fragmented markets will play an even greater role in slowing down growth. Greater cooperation is obviously a challenge and comes with risks, but standing still is possibly an even greater risk. We expect the competition to attract capital to be greater than ever in the future. Those markets that are open, liquid, transparent and stable for all investors are the ones likely to attract the long-term investment that all economies crave.

Which upcoming regulatory developments are the biggest threats to the global financial markets?

From a global point of view, one of the big issues is the leverage ratio coming out of the Financial Stability Board and Basel. We're concerned about how it is calibrated at the moment: it invites negative consequences by encouraging banks to take more risk. For example, it will drive up the cost of funding for governments as banks will be unable to net securities transactions in the repo market. Banks will have an incentive to hold higher risk assets to enable them to earn an adequate return on higher levels of required capital.

"We’re in the process of launching a buy-side division"

We don't disagree with the leverage ratio in principle and there is a need for a simple, non-risk based leverage ratio to serve as a 'backstop' to risk-based capital requirements. But we believe the current proposal, unless modified, could have adverse consequences and would work at cross purposes with other important post-crisis financial reforms.

We're also not sure if we're out of the woods in the eurozone yet, although the situation has improved and funding for governments is nowhere near as high as it was a year or so ago. I'm not saying that there's going to be another crisis, but it's something that we're constantly monitoring. If it were to blow up, it would have a huge impact on Asia as Europe is an enormous export market for most Asian countries.

Another development that's been well-documented is the US's tapering of quantitative easing. We saw what happened earlier this year to Asian markets when tapering was a threat. That's something that's still on the cards and will likely happen. We'll be watching its fallout on the Asian markets, and are hopeful that it will encourage Asian economies to reform their capital markets and undertake structural reforms. Quite honestly, we have not seen a rebalancing in Asia among investors away from more volatile high yield assets to more stable low yield high-grade assets. The scare earlier this year has not had the desired impact. So stay tuned when tapering begins to happen.

Asifma is supporting IFLR's Asia Capital Markets Forum, which will be held on November 27 at Hong Kong's Conrad Hotel. Asifma will also be holding its annual conference from November 19-20 in Hong Kong.