Offshore fund management in Taiwan is about to change for good, after next month's regulatory reforms.

Taiwan is well-known for its rapid industrialisation during the latter half of the 20th Century, referred to as the “Taiwan Miracle”. But as a dynamic, capitalist, export-driven economy, with an average GDP growth of 8 per cent during the last thirty years, the majority of the country’s offshore fund management industry is still operating in the relative dark ages.

While most of the global cross-border fund industry has moved to automate trades electronically rather than manually processing them, Taiwan, which has by far the highest volume of fund trades in APAC, still communicates its orders through faxes. Aside from the high risk, this is costing the industry an unnecessary estimated US$45 million a year.

This was the message from Calastone, a five-year-old London-based transaction network specialised in funds messaging transactions, allowing fund distributors and fund managers to connect electronically, irrespective of the message format that each party wants to use. The firm was born out of a recognised opportunity that manual order routing could be automated to save time, money and risk. It has 50 staff throughout the world operating in 15 different domiciles. It now has 350 clients - banks, pension funds, independent financial advisors for example - signed up to its network, It automates over one million fund messages per month with average compound message growth of 6.2 per cent per months since November 2008.

To give an idea of its global presence, Calastone covers close to half of all STP transactions in the UK, which is one of the largest fund management markets in the world. The next step? Calastone will be rolling out its services in Thailand in the fourth quarter of this year, swiftly followed by South Korea, Japan, South Africa and Chile.

At a seminar held recently in Taiwan, on the benefits of automating offshore fund transactions, Julien Hammerson, executive chairman of Calastone, gave a brief introduction to the company.

“Calastone is about removing all technical barriers and facilitating automation. It’s all about interoperability and connectivity, irrespective of transport method and message formats used by fund distributors and fund managers or transfer agents. We are making it possible for people to talk electronically whatever system you use, wherever you are,” said Hammerson.

He made the analogy with the world electrical system and a travel adaptor. "You can have your phone, your BlackBerry, your computer and your iPad all plugged in through a single travel adaptor all at once," he said.

He added that demand for fund automation in Taiwan, from global clients, had been impossible to ignore. “About 12 months ago we asked clients in Europe where they needed help. They all said Asia, and the number one priority was Taiwan.”

Taiwan opportunity

And no wonder. Today, 75 per cent of global orders into UCITS cross-border funds are automated. This equates to 18.7 million automated trades per year. But there are still 6.3 million orders that are processed manually each year, according to the EFAMA SWIFT Fund Automation Survey 2011, of which half originate in Taiwan. This makes the cost and risk of dealing with Taiwan extremely high.

It is not that Taiwan is more behind the curve than other countries in Asia, but it has a much higher trade volume. Regulation on cross border mutual fund trading is more relaxed in Taiwan than elsewhere, and as a result mutual funds have traditionally been traded more like stocks than long term funds.

Former Brown Brothers Harriman director, Sebastien Chaker, who was hired in March 2010 with a mandate to grow international business, pointed out that an estimated 85 per cent of Taiwan's fund orders are still processed via fax, through 50 of Taiwan’s 56 distributors. There are only 6 bank distributors in Taiwan that have implemented the SWIFT Funds solution to automate orders into cross-border funds.

Chaker, who is relocating from Luxembourg to Hong Kong in January to support the burgeoning business in Asia, believes Taiwan represents a golden opportunity. The automation of trade in Taiwan is so important, Chaker said, because the average difference between processing a fax versus an electronic deal is about US$15. So those three million faxes sent in Taiwan, confirming and processing mutual fund trades, costs the industry an estimated US$45 million annually.

“This is why all the fund managers and transfer agents are very keen to find a solution to automate transaction in Taiwan. There is also the risk aspect, the scaleability aspect, and many fund managers will see this as enhancing their client’s experience when dealing with their funds. So it is a service case too," Chaker added.

He referred to the concept as "killing the fax". He said:  "'Killing the fax' in mutual fund dealing has been a common and recurrent theme for cross-border fund managers in the last ten years. We believe that the TDCC/Calastone initiative in Taiwan represents the best opportunity to quickly make a significant leap towards this ultimate objective."

Why now?

So why hasn’t Taiwan taken advantage of automation and straight through processing before? There have been various attempts in the last five to eight years to automate Taiwan distributor flows into European Cross-border funds. SWIFT has had some relative successes with six distributors adopting the SWIFT Funds service for funds order routing. Clearstream and Euroclear have had very little success in Taiwan, while in the last two years BBH has also attempted, but with limited success.
 
The main problem with all these initiatives were that distributors in Taiwan either needed to commit a very high fixed investment to adapt their systems to the requirements of European fund managers and transfer agents (SWIFT network, ISO standards), or needed to outsource their dealing, settlement and custody to a global custodian or international clearing securities depository, and therefore pay high dealing costs and custody fees.  Given the low labor costs in Asia in general and in Taiwan in particular, distributor were unable to justify a valid business case for adopting either of these solutions.
 
The difference with Calastone, is that distributors will not have to pay any fees (for example dealing fees or custody fees) for using the Taiwan Depository & Clearing Corporation's service.

In the Calastone model, it is the fund manager that will pay for the automation of transactions since they are ultimately the prime beneficiary of automation. On top of that, Calastone provides all connectivity between the TDCC and all global transfer agents active in Taiwan (currently Calastone has live connectivity with transfer agents accounting for about three quarters of all cross-border flows from Taiwan), therefore fund distributors do not have to bother with adapting to cross-border funds dealing standards. So there will be no variable costs and very limited fixed costs, to adopt automation.

Last month Calastone was given full approval to do business by the Financial Supervisory Commission, Taiwan’s financial watchdog - and has completed and successfully tested its messaging interface with the TDCC. Calastone is the first of its peers to gain this.

From 5 November the TDCC offshore fund service will offer fund distributors, offshore fund managers, master agents and transfer agents the opportunity to automate their transactions and benefit from STP, a move which Calastone believes will revolutionise the marketplace.