Bankable Insights_The Custodian Edition_August 2021_A focus on footprint
Bankable Insights – The Custodian Edition: A collection of the latest insights and perspectives on topics of relevance to the focus on footprints
*Bankable Insights* The Custodian Edition
A focus on footprint
Welcome to this edition of The Custodian. This period marks one year since the formation of our Financing and Securities Services (FSS) business. While certainly a challenging time for such a change, we are proud to have shown resilience in adapting to the altered state of working that our whole industry continues to face.
Global economic recovery remains uneven. With countries across the world continuing to move in and out of lockdown, it’s clear that we must hold strong, keep adapting, and drive the opportunities that are available to us.
We’re increasingly seeing strategic – yet virtual – conversations happening amongst and with our clients across the world. Specifically, there is renewed appetite for investment in markets across our footprint. Asia, Africa and the Middle East are home to the markets with the greatest growth potential in the world; COVID-19 has not altered this fact. And now, bolstered by both adapted ways of working and mindsets, many clients are ready to explore these prospects once again.
In this edition, we delve into some of these opportunities, which are transpiring despite – and sometimes because of – COVID-19. India and its capital markets is one encouraging example, especially given the pandemic turmoil that has unfolded there. In India: Returning back to strength, we explore the country’s resilience, and the fundamentals that continue to make it an attractive investment location for foreign institutions.
Shifting to North Asia, Taiwan is doing double duty. Its economy fared well in 2020 – especially in contrast to its neighbours – and we expect even better in 2021. Yet beyond the resulting domestic investment prospects, Taiwan also offers institutional investors access to the region more broadly. Find out more in Why Taiwan’s markets offer global investors a gateway to Asia.
Over in East Africa, rapid developments in digitalisation and market reforms – coupled with resilient economic growth – are presenting previously-inaccessible opportunities for institutional investors. Read Driving flows into East Africa to learn why the region’s capital markets are getting so much attention.
Beyond the geographical highlights, our clients are exploring booming asset classes. Transition finance and blended finance offer increasingly promising yield, as well as of course supporting a goal we must all get behind – the move to net zero. Explore a regional view on this in Financing the energy transition in the Middle East.
And finally, Islamic finance asset classes are also experiencing increased demand. In Supporting Islamic finance: How custodians are facilitating the market’s growth, we discuss the evolution of custodian banks in the space, and how this is encouraging the market-share growth of Shariah-compliant products.
We hope you enjoy these reads. And we remain hopeful that we can continue this dialogue in person before too long.
Co-head, Financing and Securities Services
Supporting Islamic finance:
How custodians are facilitating the market’s growth
Supporting Islamic finance:
How custodians are facilitating the market’s growth
Head of Group Fiduciary & Fund Services and Global Islamic Champion, Financing and Securities Services
Head of Group Islamic Products
As demand for Shariah-compliant investment products and services grows, leading custodian banks are building innovative solutions to cater for the diverse requirements of Islamic financial institutions.
Now a $2.4 trillion market, Islamic finance is forecast to recover this year after suffering from a COVID-19 induced stagnation. According to RAM, Sukuk transactions reached $$152.6 billion in 2020, a significant increase from 2015 when issuances totalled $59 billion.1 Fuelling demand for these products are a combination of Islamic banks together with Shariah-compliant sovereign wealth funds [SWFs]; asset management companies; pension funds and family offices. In addition, a handful of global custodians and broker-dealers, whose own underlying clients comprise of major Islamic investors and institutional clients, are asking their sub-custodians to develop Shariah-compliant services as well, forcing providers to take note.
Navigating Islamic securities services
So what exactly do these Shariah-compliant services look like? Put simply, Islamic Securities Services broadly mirror the traditional model in that providers offer solutions such as custody; fund accounting; transfer agency; performance reporting; cash management; and foreign exchange services. The fundamental difference is that all of these services need to comply with Shariah principles. Hence along with ensuring that the basic fundamentals are incorporated in the construct of these products they also need to ensure their offerings are certified as compliant, by a body authorised to do so.
In the case of Standard Chartered, it has a full-fledged Islamic bank within its ranks whereby there are teams of experts working on product management, operations, risk, controls, legal and compliance aspects. More importantly its Islamic Securities Services business is underpinned by Fatwas (certifications) which are issued by a permanent and an independent Shariah board, comprised of leading international scholars.
In markets like the UAE, Pakistan, Malaysia and Brunei, it is a regulatory requirement to have locally appointed Shariah boards in place to oversee business activities. Client agreements must be compliant with Islamic law. For instance, all contractual documents that the bank’s Islamic Securities Services arm signs with clients must be approved by a Global Shariah Supervisory Committee. The channels through which these services are provided and the linked reporting suites need to comply too.
Operating under Shariah law means the Islamic securities services model needs to fulfil a different set of requirements. For example, usury, which could be loosely translated as interest taking or giving, is forbidden. Traditional custody relationships envisage a cash link where these cash accounts provide interest; hence this solution can’t be used under an Islamic offering. Therefore service providers need to identify partners who can offer profit bearing cash solutions instead of interest bearing accounts.
In order to generate revenues off deposits, providers such as Standard Chartered utilise structures (called “commodity murabaha”) where there is a purchase and sale of select Shariah-compliant commodities (e.g. precious metals such as Platinum and Palladium) on an overnight basis. Profits are generated on the back of these secured trades and shared with the clients.
Islamic accounts also need to be clearly identifiable and Islamic and conventional assets can’t be co-mingled. Standard Chartered has implemented a fully segregated Islamic booking method that satisfies and is in line with these guidelines. Although quite complex logistically, custodians can also vet whether or not an Islamic institution is buying Shariah-compliant securities overseas.
From a fund accounting perspective, Standard Chartered leverages the AAOIFI (Auditing Organisation for Islamic Financial Institutions) accounting standards for Shariah-compliant entities, in addition to the traditional IFRS (International Financial Reporting Standard) and IAS (International Accounting Standard) models. It can also facilitate Shariah-compliant reporting and performance measurement on behalf of Islamic funds. This ultimately enables the bank to support Islamic institutions with their investment activities.
Network managers get to grips with Islamic finance
While Shariah-compliant financial solutions have been available for the last 50 + years, they have only picked up real traction, within the institutional market, relatively recently. Amid pressure from certain Middle Eastern and Asian SWFs and central banks, network managers at global custodians and broker dealers are starting to scrutinise the Islamic securities services capabilities of their underlying sub-custodians, and validate that these offerings are compatible with the Shariah mandates of their own clients. In terms of operational due diligence, this may require a network manager to ascertain whether a sub-custodian has a permanent Shariah board or committee in place, or if they are using a more ad-hoc solution. In addition, network managers will also need to ensure Shariah-assets and cash are fully segregated and that cash management practices at their sub-custodians comply with Islamic guidelines. For a number of network managers, Islamic finance will be a new concept. In order to overcome any lingering uncertainties or confusion, sub-custodians should educate network managers about Islamic finance and how it works.
Although some network managers may be unfamiliar with elements of Islamic securities services, the fundamentals are still the same. Take counter-party and operational risk, for example. Some markets will have their own domestic, standalone Islamic banks, who can provide local custody solutions. However, network managers do still have a fiduciary obligation and must ensure that client assets are fully protected at all times and held with institutions that come up to their appointment criteria. It is crucial therefore that they only work with providers which have strong risk management practices in place together with an excellent credit rating and robust balance sheet strength. At the same time, they should also only work with partners that comprehensively cover the complete ecosystem of their securities services, FX and cash related requirements.
Shariah-compliant finance is a rapidly expanding market, and the securities services industry is launching exciting new solutions and products in response. Similarly, network managers are also having to familiarise themselves with the intricacies of Islamic finance so that they can meet the requirements of some of their larger, Islamic institutional clients. By embracing Shariah-compliant financial solutions, the industry will be able to expand its market share across the wider Islamic world.
How the Middle East is showing the way on
How the Middle East is showing the way on energy transition
Financial instruments linked to sustainability goals are helping drive the Middle East’s energy transition.
The Middle East, long a byword for hydrocarbon production and wealth, has a key role to play in the global transition to a carbon-neutral future. Some of the economies built on extracting and processing fossil fuels have to transform by pivoting to renewables and other clean forms of energy, with companies and governments offering support and investment.
Government initiatives are bolstering the transition: the UAE Energy Plan for 2050 targets a mix of renewable, nuclear and clean energy sources and the Government aims to spend around USD160 billion to attain its goals. Saudi Arabia is also investing in becoming carbon neutral1 and wants to derive 100% of its energy consumption from renewables (including natural gas) as well as 50% of its production as part of its Vision 2030.
While both new and traditional industries in the region realise the imperative to change, every company is at a different point in their journey, but some businesses in the Middle East are leading the way.
These economies and their companies are adapting extremely swiftly and are ahead of many other regions in terms of the overall transition phase. We are seeing a lot of initiative from the governments of UAE and Saudi Arabia in supporting the energy transition, and some of their large companies in carbon-intensive sectors are already using innovative instruments to reduce or offset their emissions. This is a great opportunity for global investors to help the energy transition in the Middle East.
Managing Director, Head of Financial Markets MENAP, Standard Chartered
Often, the markets and sectors that require the most financing to achieve their goals are the ones left out of green finance because they are deemed too traditional.
Understanding the urgency
The Middle East’s transformations, partly driven by global initiatives to tackle climate change and greenhouse gas emissions, will be a litmus test of how well the world is set to meet broader sustainability targets. And they offer opportunities for investors willing to go along on the journey to a greener future.
Across the region, nations and companies are taking up the baton, understanding the urgency to transition2, the requirements from the international community and investors and the advantages of embracing the shift at a relatively early stage.
Investing in the future requires substantial capital, and this is evolving as the theme of transition moves up the agenda. While support and investor demand is there, there are also signs that more needs to be unlocked, with finance cited as a challenge by 80 per cent of executives in the region, in Standard Chartered’s Zeronomics survey, more than the global average of 67 per cent.
Transition financing for companies
To help accelerate the transition to net zero, Standard Chartered has made a commitment to financing in its Transition Finance Imperative, to help clients transition while addressing their specific challenges. It acknowledges the stage that oil and gas is at, and the need to act, while also recognising that the sector remains a critical enabler of economic development and employment.
Companies linked closely to the production or use of fossil fuels have started to embrace the change, assisted by innovative green capital-raising programmes. The United Arab Emirates’ national airline Etihad sold a USD600 million sustainability-linked sukuk3 – a sharia-compliant financial instrument similar to a bond – last year through Standard Chartered, the first-ever issuance of such a security.
An airline securing a loan hinged on a detailed international verification of its sustainability credentials and a link to the United Nations’ Sustainable Development Goals shows how far the region has come as a hub for sustainable expertise and financing.
Etihad is also the first airline in the Middle East to launch a self-funded carbon offset scheme, by signing up to the Carbon Offsetting Scheme for International Aviation (CORSIA).
Accelerating green finance
For companies that are further along the pathway, momentum is gathering, with green sukuks and other instruments attracting a wall of money. Green bonds are those that are used for environmental or climate-oriented projects. The market is expanding, having already grown4 to more than USD225 billion raised in 2019, from just USD 807 million in 2007.
Recent deals in the Middle East show very strong investor demand. Saudi Arabia witnessed a green financing first with the sale by Saudi Electricity Company5 of USD1.3 billion of Islamic bonds. Underscoring the strength of investor demand for such securities, the deal’s orderbook closed at USD 4.7 billion.
Standard Chartered was part of a group of banks that came together to finance a loan agreement for around USD900 million for Dubai Waste Management Company6 to build a waste-to-energy plant in Warsan.
And sovereigns are also getting into green finance, with Egypt pulling in orders7 for nearly five times the USD750 million size of the Middle East and North Africa’s first sovereign green bond.
Impetus is increasing yet more needs to be done
All this is just for starters. Across the region, solar, wind and nuclear energy projects are already underway.
But the changes aren’t just to the way companies finance their capital structures. Many have also put in place corporate8 policies and restructured their operations to meet the “G” part of the ESG equation – governance. Critical infrastructure such as port facilities are being built to the highest sustainability standards in the region. Developments in green hydrogen are also being considered as important accelerators for the region’s energy transition.
As the region prioritises energy transition, and with businesses and consumers more focused on ESG, an inclusive approach to energy policy and investment decisions is vital. This will help bring more sustainable financing from capital market investors and regional and global issuers, that can help to support the region to achieve its energy transition goals.
India: Returning back to strength
India: Returning back to strength
Why India’s domestic capital markets continue to be an attractive investment for foreign institutions.
India may be seriously struggling under the weight of COVID-19, but its domestic capital markets continue to be an attractive investment destination for foreign institutions. Supported by its recent positive market reforms, experts are confident that India will make a robust recovery moving forward.
Navigating through a crisis
COVID-19 has devastated India although there are early indications that infections are starting to decline. Despite this gradual levelling-off, Anubhuti Sahay, Head of South Asia Economic Research at Standard Chartered Bank, stressed COVID-19 cases were still incredibly high in the country, hovering at three times the peak witnessed in September 2020. While India is projected to see its GDP (gross domestic product) growth contract by roughly 7.3% in 2021, Sahay anticipated there will be a 10.2% rebound in 2022.
India is facing a number of headwinds though. For example, Sahay was bearish about the Rupee over the medium-term warning it could be negatively impacted by an increase in oil prices. Similarly, other risks beyond just COVID-19 could derail the country’s growth - namely rising inflation; hardening bond yields; excessive government debt; and limited manoeuvring room to implement a fiscal stimulus. Despite these challenges, Jigar Shah, CEO at Maybank Kim Eng, said there were a number of bottom-up stock-picking opportunities available for investors in a variety of diverse sectors including software, telecommunications, cement, tractors and private banks. In particular, he said that software and telecommunications had been among two of the very few sectors to benefit from the pandemic. Overall, fears about overheating equity markets – especially in the US – together with the unprecedented low interest rates – are forcing investors to seek out returns elsewhere, in what could benefit India.
The economic recovery from the first wave was much better than what many people expected. Even though the second wave has been more intense, the economy is holding up better. Any recovery will be contingent on the vaccination drive being successful too. Right now, 4% of the population has been inoculated, and it is expected that 60% of all adults will be vaccinated by next March. The Reserve Bank of India (RBI) is also likely to keep monetary conditions loose so as to nurture growth momentum once COVID-19 infections start to flatten out.
Head of South Asia Economic Research,
Reforms pay dividends for India
A market that was historically very difficult to access, India has since opened up to foreign investors following the introduction of the FPI (foreign portfolio investors) regulations. Under the original liberalising measures, foreign institutions – depending on their nature – were designated as either Category 1, 2 or 3 investors. The number of FPI categories has since been rationalised by the Securities and Exchange Board of India (SEBI) from three to two, making it easier for foreign institutions to participate in the country’s domestic market.
The main differences between Category 1 and Category 2 FPIs are that the former tend to be subject to greater regulations and are based in FATF (Financial Action Task Force) jurisdictions. They are also probably safer from a risk perspective too. Category 1 investors typically comprised of government institutions (e.g. central banks, sovereign wealth funds, multilateral institutions); banks, broker-dealers, swap dealers, pension funds, insurance/re-insurance companies and asset managers. Meanwhile, Category 2 investors will include endowments, corporates, family offices, individuals, private banks and unregulated fund managers.
Director, Sales, Financing and Securities Services,
Additionally, Category 2 investors face tighter limits in terms of their holdings of stock derivatives. Under the rules, Category 2 investors are subject to 10% market-wide position limits on stock derivatives, compared to 20% for Category 1 entities. Although FPIs in non-FATF markets could not avail themselves of the Category 1 designation, SEBI recently made an exemption for FPIs located in Mauritius and the UAE in what is further evidence of the country’s flexibility and determination to attract inward flows. These reforms have been vital in helping attract capital to India.
Director, Sales, Financing and Securities Services,
India has made huge strides by making it simpler for foreign investors to trade in the local market. For instance, know-your-client (KYC) rules for Category 1 FPIs have been streamlined, while restrictions on issuing and subscribing to offshore derivative instruments (ODIs) such as p-notes were also lifted. However, these provisions do not apply for Category 2 FPIs.
Owing to the country’s positive return potential and impressive market reforms, FPI flows into Indian equities have been strong. Data shows FPI exposures to domestic equities grew by $105 billion between September 2020 and March 2021, bringing total holdings up to $555 billion.1 This puts India in a strong position relative to other emerging markets, a number of whom have suffered pandemic-induced foreign investor withdrawals.
1 The Times of India (April 21, 2021) FPIs stock holding value soars by $105 billion in September-March - report
Understanding India’s intricacies
In order to maximise success and navigate risks seamlessly in countries such as India, institutions need to work with strong providers who understand the intricacies and dynamics of the local market. Having integrated the prime services business with its custody arm back in 2019, Standard Chartered is in an excellent position to support institutional clients’ bespoke requirements by providing them with a consolidated offering incorporating custody and post-trade together with portfolio risk management and prime financing.
Global markets have performed strongly, and India is no exception. We saw a number of new investors – 9 million in total – register in India over the last 10- 12 months which is phenomenal.
Chief Business Officer,
National Stock Exchange of India Ltd
This Joint Venture between prime services and our custody network means we now have a single product offering, which is great news for clients and ourselves internally.
Executive Director, Prime Services Sales,
Why Taiwan’s markets offer global investors a gateway to Asia
Why Taiwan’s markets offer global investors a gateway to Asia
Taiwan is likely to be a bright spot of the Asian economy in 2021. Not only are its domestic growth prospects good, but its capital markets are a gateway to the wider Asian economy, affording institutional investors exposure to other regional economies that are likely to post strong COVID-19 recoveries.
Taiwan’s pandemic resilience
Taiwan has navigated COVID-19 better than most1. Its rapid response to the pandemic, conditioned by its experience of the 2003 SARS outbreak, allowed life to continue mostly as normal through 2020. Taiwan’s COVID vaccination roll-out began in March, and the government has secured 20 million vaccine doses, with another 10 million in the pipeline.
1 Shih-Chung Chen, 2021, "Taiwan’s experience in fighting COVID-19", Nature, 26 March
Taiwan’s economic data reflect this performance. It posted GDP growth of 3.11 per cent last year, even as some nearby economies saw sharp recessions, and Standard Chartered forecasts an even stronger performance in 2021, at 4.4 per cent. Exports are one reason for this optimism. The pandemic has supported a surge in demand for electronics, due to a rapid shift to digital working, commerce and entertainment, and this tech cycle is still going strong. This should support Taiwan’s growth in the first half of this year at least, given its importance to electronics supply chains.
Moreover, the US and China, which are also projected to achieve strong growth rates, make up half of Taiwan’s exports. Domestically, consumer demand should also be supported by positivity surrounding the pandemic recovery. Unemployment is back down below 4 per cent, and consumer confidence is high2.
There are some downside risks. Overseas buyers have stockpiled inventory for fear of further lockdowns, which may potentially reduce demand from Taiwan as they unwind these. A drought before the rainy season could impact the production of semiconductors if the government cuts water supplies to companies3. New laws to cool the housing market may dampen growth, as might the fallout of further US restrictions on trade with China. Nevertheless, Taiwan is likely to be one of the bright spots of growth in Asia in 2021, and an attractive destination for foreign institutional investors (FINIs).
2 Crystal Hsu, 2021, "Consumer confidence highest in a year", Taipei Times, 30 March
3 Debby Wu and Cindy Wang, 2021, "Taiwan Cuts Water Supply for Chipmakers as Drought Threatens to Dry Up Reserves", Bloomberg, 24 March
The reasons for FINIs to choose Taiwan go beyond its strong macro fundamentals. It has one of the most active securities markets in the Asia-Pacific, with 944 companies listed on the TWSE as of June 2020, with a market capitalisation of more than $1.19 trillion – equivalent 193% of Taiwan’s GDP - and an overall market P/E ratio of 19.73. In the first half of 2020, the concentrated market trading value was more than USD6 billion, with a market turnover rate of 55.47%.
Taiwan is basically the only exchange in the world where FINIs can access and hedge essentially all of Asia in US dollars and in accordance with US regulations, noted webinar on 8 April. We’re in the unique position of having product coverage across all major Asian economies, such as China, India, Japan, Taiwan and Southeast Asian countries. We cover 99 per cent of Asian GDP with our products.
Head of Project Management for Equities,
Lin noted that following a period of rapid recent growth, 30 per cent of all activity on SGX’s FTSE Taiwan Index futures is now traded overnight by US and European investors. Its popularity is explained in part by how easy Taiwan makes it to comply with US regulations. For instance, the FTSE Taiwan RIC Capped Index, which underlies the SGX futures contract and which offers well-diversified exposure to the Taiwanese economy, is designed to meet the Regulated Investment Company (RIC) concentration requirements for US-registered funds, with semi-annual reviews to limit concentration in any one security4.
4 SGX, 2020, "SGX FTSE Taiwan Index Futures contract trading exceeds US$1.5 billion during launch week".
A guide to Taiwan’s markets
Experienced local partners can ease FINIs’ access to Taiwan’s markets. The first step is to appoint a custodian bank to register with the Taiwan Stock Exchange, which normally takes one business day. Standard Chartered is the leading custodian bank for FINIs in Taiwan, with 28 per cent market share.
After registering and obtaining an investment ID from the stock exchange, the FINI can proceed with account-opening in its registered name. This includes opening segregated securities and Taiwan dollar cash accounts with its custodian bank and opening a segregated depository account with a depository through its appointed custodian bank. FINIs can also then open a securities trading account with their local brokers, which takes between three and seven days depending on the brokers’ KYC process. While the process is still paper based, Standard Chartered is working with the local financial infrastructures to drive digitisation and speed up the market entrance process.
Taiwan’s government requires FINIs to invest 70 per cent in equity instruments, and no more than 30 per cent in non-equity instruments. As a custodian, Standard Chartered helps clients monitor their daily investments and notifies them via email when they come close to the upper limit of this ratio, which is calculated on a net inward capital remittance basis.
Once registered, FINIs in Taiwan can invest in a wide variety of assets, including equities, fixed income, exchange-traded funds, mutual funds, money market instruments, exchange-traded notes, asset-backed securities and derivatives. FINIs are also allowed to participate in securities- borrowing and lending. Standard Chartered is the first in the market to co-create digital start-of-day securities position reporting with the Taiwan Depository to assist FINIs with investment risk management prior to stock market opening.
This flexibility and range of assets, coupled with the optimism surrounding its domestic economy and those of its key trading partners, makes Taiwan an attractive destination for FINIs in 2021. It is an optimism that Standard Chartered shares. Asia’s seventh-largest economy is well placed to help Asia recover from the shocks of 2020, while rewarding global investors seeking to participate in that recovery.
Driving flows into East Africa
Driving flows into East Africa
After an exacting year, East African capital markets are once again on the radars of institutional investors as their economies show remarkable resilience to the pandemic.
Kenya, for example, is expected to see GDP growth of 6.4% this year, while Uganda’s economy is forecast to expand by 4.93%. In Tanzania, experts anticipate the country’s GDP will increase anywhere between 3% and 5.3%. Gideon Chokah, Head of Securities Services and Investors and Intermediaries for Kenya and East Africa at Standard Chartered, outlines how inflows into these three East African countries are being facilitated through a combination of prudent regulatory reforms; the launch of new financial products and a market-wide willingness to embrace digitalisation.
Acting fast in a crisis
The actions of East African regulators and financial market infrastructures (FMIs) during the peak of the pandemic have won plaudits from global investors. In order to mitigate market disruption, regulators and FMIs in the region worked tirelessly to digitalise activities such as account openings and corporate actions. The changes have also made it easier for investors to participate in the local markets, in what should result in further inflows over the next few years.
Custodian banks and investors have urged local regulators to retain these digital processes, citing the operational efficiencies which they bring.
With the imposition of remote working, market participants were forced to adapt quickly, and they did so. The authorities also had to address and update legacy rules. For example, Kenyan legislation stated that AGMs must be held physically. COVID-19 meant that new rules had to be introduced in Kenya to facilitate remote AGMs and voting.
Head of Securities Services & Investors and Intermediaries,
Kenya & East Africa, Standard Chartered
Give the investors what they want
Inflows into East Africa are also being enabled through the development and launch of new investment products, a move which is helping to generate deeper regional liquidity. Kenya, for example, has introduced Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), derivatives and green bonds, as it looks to attract more foreign investment. Despite COVID-19 causing unprecedented disruption, Chokah said Kenya’s regulator – the Capital Markets Authority – was still committed to launching new investment tools such as securities lending, securities borrowing and short-selling. These products are critical in ensuring proper price discovery and shoring up liquidity, he continued. FOREX markets in Kenya, Uganda and Tanzania were also liberalised relatively recently making it easier for foreign investors to repatriate funds. Unlike other major African markets, Chokah noted that these countries did not impose FX controls during the pandemic. Investor flows into East Africa will continue to rise as a wider and more diverse range of products comes to market.
The stakes are high for regional consolidation
Reforms designed to promote deeper regional consolidation are likely to usher in greater inflows, and with it liquidity, according to Chokah. While it is true that previous efforts to integrate East Africa’s capital markets were not particularly successful, Chokah said progress around the Africa Exchanges Linkage Project (AELP) - was making better headway, having faced minor delays at the beginning of the pandemic. The AELP is an initiative comprising of the Nairobi Stock Exchange, the Nigerian Stock Exchange, the Egyptian Exchange, the Casablanca Stock Exchange, the Stock Exchange of Mauritius and the BRVM of eight West African markets, and aims to support easier cross-border trading, listing and settlement across these FMIs. The AELP should help further accelerate inflows into the region.
Outperforming in a crisis
Initially, East African markets were widely considered to be incredibly vulnerable to the COVID-19 turmoil but the region has recuperated much faster than many people would have expected.
In post-trade circles, East African countries digitalised their archaic manual processes quickly, helping to minimise disruption for global investors. At the same time, efforts to improve market liquidity - through the development of new investment products and regional FMI connectivity channels - are gathering momentum. By pursuing these bold initiatives, inflows from foreign investors into African capital markets will continue to accumulate in the months and years ahead.
Trusted Networks: How custodians are collaborating with fin-techs and clients to accelerate change
Trusted Networks: How custodians are collaborating with fin-techs and clients to accelerate change
Ongoing margin pressure – together with intense competition for asset gathering – are taking their collective toll on global custodians. Adapting to COVID-19 has also incurred major costs at these firms. In response, sub-custodians are working with fin-techs and their own clients to help generate operational efficiencies.
Innovative solutions emerge from fin-tech partnerships
Custodians have been monitoring developments at emerging technology providers for some time now, and the synergies between them are obvious to see. Whereas custodian banks are well capitalised, resource-heavy, subject to prudential regulation and brimming with years of experience, fin-techs are often agile, innovative and bring a different perspective to problem solving. By collaborating with best-in-class fin-techs - which offer compelling solutions that address real – as opposed to imagined – industry challenges - custodians will be in a strong position to support their clients. However, onboarding fin-techs does carry risk, so it is vital custodians undertake extensive due diligence on their partners. While this can be a time-consuming exercise, it is vital to ensure that fin-tech providers meet the highest standards.
Many fin-tech partnerships are enabling custodians to develop solutions that help clients either identify potential investment opportunities or obtain much-needed operational benefits. Standard Chartered’s internal technology team, for example, is currently working on two proof of concepts (POCs) with an external fin-tech to enhance its client newsflash service. Right now, client service teams scan market websites on an intra-daily basis to acquire critical local market information from regulators, central banks, stock exchanges and central securities depositories (CSDs), which is then shared with clients in the form of newsflashes. However, the process of scanning for this information is manual and labour intensive. In order to remedy this, the POCs are assessing whether it is viable to auto-scan market sources for information, creating auto alerts based on key words and then identifying if these need to be turned into newsflashes. The fin-tech provider is also building an artificial intelligence solution so that it can monitor announcements more effectively and determine if these need to be incorporated into newsflashes. In addition to driving efficiencies at Standard Chartered - this AI tool could potentially help clients access more accurate and relevant market data.
Teaming up with clients to create solutions
While banks are working closely with fin-techs to strengthen their product suites, many are also co-creating solutions with clients. Standard Chartered has regular dialogues with clients about how it can improve its service offering. For instance, a major global custodian – which uses Standard Chartered in multiple markets - wanted to reduce the number of queries it received from end clients by providing enhanced settlement narratives, including tailored responses that cannot be carried out by using SWIFT MT548. In order to meet the client’s request, Standard Chartered enriched its core settlement platform to allow for the semi-automated capture of enhanced narratives. The information was then relayed to the client via a dedicated channel – XML over MQ. This allowed the custodian’s end clients to self-serve and receive better quality and timely information - leading to an 85% drop-off in queries.
In another instance, a global custodian told Standard Chartered that it wanted to augment its own end client experiences by providing reduced latency and improving its transparency and responsiveness. Standard Chartered conducted a POC in South Africa, whereby it tailored its transaction status API (application programming interface) to include six additional data fields such as market reference and enhanced status information. Through a push API, the data was relayed to the client. The time between the CSD update; processing at Standard Chartered; right through to receipt by the end client took less than 7 seconds for both the API and SWIFT, suggesting latency is no longer an issue. With this added data, the custodian can now resolve over 60% of client queries without needing to reach out to Standard Chartered-an outcome which has had a positive impact on the overall user experience.
Improving the client experience
Fin-tech partnerships and close working relationships with clients are enabling custodians to innovate and deliver solutions which provide a value add. At a time when clients are facing mounting operational complexities and escalating costs, custodians are providing technology solutions that are helping mitigate some of these challenges. Through these intelligent and thoughtful partnerships, custodians can help their clients realise investment opportunities together with operational benefits.