In a previous article,1 we touched upon the tangible efforts undertaken by members of the Association of Southeast Asian Nations (ASEAN)2 to create a single integrated marketplace for listed securities. More recently, two ASEAN jurisdictions have taken tentative steps towards the mutual recognition of ASEAN funds. This DechertOnPoint examines recent developments in Southeast Asia that may bring us closer to an ASEAN-centric approach to the distribution of funds in Asia.
By way of background, in November 2007, ASEAN member states adopted the ASEAN Economic Community Blueprint 2015 (AEC Blueprint), which outlines the goals and timelines of implementing the ASEAN Economic Community (AEC) by 2015. The AEC is anticipated to establish ASEAN as a single market and production base in order to increase ASEAN’s dynamism and competitiveness, with the end goal of economic integration into the global economy. To implement the objectives of the AEC Blueprint, on 9 April 2009, the ASEAN Capital Markets Forum (ACMF) created a framework for the mutual recognition of cross-border offerings of collective investment scheme products (CIS) within ASEAN to non-retail investors, with the intention of making such products available to retail investors once adequate protective measures have been established.
Developments in Thailand
The Thai Securities and Exchange Commission (SEC) announced on 27 June 2012 that it would allow ASEAN CIS to be offered to accredited investors3 by July 2012, with the goal of extending the initiative to retail investors in the later part of 2012. This move, which stems from the ACMF initiative, is intended to promote the cross-border offering of securities in the ASEAN region by allowing products that have been authorized in one ASEAN jurisdiction to be offered in another ASEAN jurisdiction (i.e., Thailand) without the need to apply to the regulator of the second jurisdiction (in this case, the SEC) for approval. The advantages of such a scheme are expected to be two-fold: (i) on the ASEAN-level, driving the ACMF initiative forward; while (ii) locally, providing Thai investors with an alternative to investing in foreign markets, and concurrently developing the Thai mutual fund industry.
The SEC announcement indicates that, in order to qualify, ASEAN CIS offered in Thailand must have similar characteristics to mutual funds which are Thai-domiciled. Qualifying ASEAN CIS could only be offered in Thailand via a selling agent that is a Thai-licensed securities broker that complies with certain specified criteria.4
Has the SEC, with its announcement, now forged ahead of the other ASEAN regulators? In terms of exercising its initiative and putting a framework in place, this would certainly appear to be the case. However, as at the date of this DechertOnPoint, there has been no further clarity as to the SEC’s requirements in relation to such ASEAN CIS, nor have there appeared to be any further developments in establishing the practical arrangements that need to be in place. For instance, it seems that the SEC is agreeable to recognizing other ASEAN members, but whether such jurisdictions will be equally willing to recognize SEC-authorized funds in the absence of a mutual recognition arrangement is uncertain. For true ASEAN economic integration, other ASEAN members will need to be on board in rolling out their own initiatives. Thailand’s fund industry cannot benefit until the rest of ASEAN (or at least the members who are able to participate and contribute) is in agreement with this initiative. Until these issues are addressed, the SEC’s head start might not take Thailand very far ahead of the rest of ASEAN.
Developments in Singapore
Another ASEAN member state, Singapore, has drafted a proposal to develop a mutual recognition framework for retail CIS. In April 2012, the Monetary Authority of Singapore (MAS) circulated the “Consultation on Draft Standard Requirements and Product Restrictions for Mutual Recognition of CIS under ASEAN Capital Markets Reform”. This draft proposal was reviewed by ASEAN capital market regulators and consultation closed on 11 May 2012. There was no period of public consultation.
The draft proposal envisages that qualified CIS authorized and managed in participating ASEAN member jurisdictions may be offered in other participating host jurisdictions by taking advantage of a fast-track process. Nevertheless, such qualified CIS will still need to apply to the regulator of the relevant host jurisdiction for recognition and ASEAN jurisdictions will be required to satisfy certain pre-conditions (these pre-conditions were not elaborated on in the draft proposal) in order to enter into the mutual recognition agreement. The relevant CIS and its operators must also comply with certain proposed requirements.
To be eligible to become a qualified CIS, the MAS has suggested that the requirements set forth in the chart below should apply.5
Click here to see tables.
The MAS draft proposal also deals with the eligibility requirements of the trustee/custodian of the qualified CIS, which include, amongst other provisions: the requirements for the licensing and capital adequacy of the trustee/custodian, its independence from the CIS Operator, the segregation of assets and the delegation of custody functions. Further, the permissible eligible assets in which investments may be made are also stipulated in the draft proposal, as are various limitations to investment. Eligible assets include transferable securities, money market instruments, deposits, units in other CIS and financial derivatives. Securities lending, repurchase transactions and direct lending of monies are activities that are expressly prohibited.
Although the MAS draft proposal goes into greater detail (as compared with the Thai initiative), certain aspects of the draft proposal still beg clarification. For example, while it is understood that such CIS must be authorized and managed in an ASEAN jurisdiction in order to qualify for the distribution scheme, it is not clear whether the qualified CIS must also be domiciled in an ASEAN member state. The MAS draft proposal also suggests that certain pre-conditions will be imposed on ASEAN participants willing to enter into mutual recognition agreements with Singapore; however, the details of such pre-conditions have not yet been furnished. More fundamentally, unlike its Thai counterpart, the MAS has not offered any specific timeline as to the implementation of this draft proposal. Apart from the draft proposal, nothing further has been issued by the MAS. It is not clear, at this stage, how (if at all) non-ASEAN domiciled CIS and non-retail CIS may benefit from this proposal for an ASEAN funds passport.
An ASEAN Funds Passport
It would appear that the development of an ASEAN funds passport still has some way to go. Thailand and Singapore, who have clearly taken the lead thus far, still need to iron out the exact details and mechanisms of their respective initiatives over the coming months. There is currently (as at the time of publication) nothing publicly available on the websites of other ASEAN regulators regarding an ASEAN funds passport. For a truly ASEAN funds passport to become a reality, more concerted effort is required from the rest of ASEAN. Nonetheless, given the different stages of economic and political development among different ASEAN member states, it is unlikely that all of ASEAN will be prepared to take the initial big leap. Aside from Thailand and Singapore, other potential pioneering participants in such a passporting arrangement may include Indonesia and Malaysia.
Asia-Pacific nations such as Hong Kong, Taiwan and Australia, which are outside ASEAN, are likely to monitor these developments with much interest, especially given the recent discussions about establishing a separate Asia Region Funds Passport. From a global perspective, the ASEAN region represents a significant trading bloc with much potential for investment. Given ASEAN’s history of regional cooperation, there is every possibility that an ASEAN funds passport may come to pass. Based on the current two proposals from each of Thailand and Singapore, it appears that non-ASEAN CIS Operators may need to consider establishing a presence within ASEAN, and/or registering the relevant CIS for local distribution in an ASEAN jurisdiction in order to benefit from the accessibility afforded by an ASEAN funds passport.