The Custodian Issue 4 by Standard Chartered

Transaction Banking Securities Services

THE CUSTODIAN Thought Leadership on all facets of Securities Services

The US eyes India

Spotlight on Zimbabwe

Change is coming, ready or not

China access: Continuing with confidence

•

OCTOBER 2018 • VOL 4

THE CUSTODIAN OCTOBER 2018

Regulatory updates

Country profile

Regulatory outlook

Market access

THE CUSTODIAN OCTOBER 2018

In this issue

Change is coming, ready or not

The US eyes India

10 Spotlight on Zimbabwe

16 China access: Continuing with confidence

THE CUSTODIAN OCTOBER 2018

Introduction The more I learn, read and write about innovation, the greater the desire to understand more. This is not new; it can be traced back to when I first read 1984 by George Orwell, which at the time seemed more like a surreal fiction than something that we needed to concern ourselves about.

We recently published our second white paper on financial technology, within which we explored regulatory impact and initiatives in Securities Services, of which there are many. What became apparent during the research for this white paper was the extent of the innovation developments since the first distributed earlier this year. The level and types of innovation continue to expand and akin to the level of contemplation the novel 1984 encouraged with its futuristic concepts. It does make us wonder what we will be considering in fintech white papers five years from now. Recent regulatory developments in India’s futures market is the feature article in this edition. The India story is on the cusp of taking over China for economic glory.

Indeed, in 2018, its economy is set to overtake China’s in terms of GDP growth. India continues to be a leading player, a focus point for investment strategy of many clients, and maintains its dominance as a key jurisdiction that is rigorously assessed and critiqued by economists all over the world. Prime Minister Narendra Modi seems to be working to craft a positive India reputation for the foreign audience. With this backdrop, we have considered India from our US-investor perspective and discuss the recent developments – namely the Commodity Futures Trading Commission (CFTC) providing US investors with access to India’s futures market – and have provided our insights as to what this may mean for US investors. Also in this edition, we have included our assessment of developments in China and

a forecast of what we expect the next regulatory instalment to be there – as well as a new Country Profile section, this quarter featuring Zimbabwe. We continue to listen to what makes a difference for our clients; we have thus recreated and updated our Regulatory Wheel – a feature we plan to update regularly. Given the positive feedback we received the last time we produced this wheel, we have updated with further analysis on what the next 12 months may have in store for our industry from a regulatory perspective. We look forward to discussing the details of this with you. I have also shared my caricature below from The Network Forum Annual Meeting in Vienna, as noted by Julia McKenny in her conclusion. Thank you for your continued support.

Margaret Harwood-Jones Global Head Securities Services Transaction Banking

THE CUSTODIAN OCTOBER 2018

The US eyes India To date, 2018 has been a year of progressive changes for the India market. In addition to robust market performance – with the National Stock Exchange (NSE) of India’s Nifty Index reaching a record high at the end of August – there have recently been various developments that are set to ease market-access requirements and drive greater foreign portfolio investor (FPI) participation. Here, we have summarised the material developments, and provide our thoughts and insights on what this will mean for investors – particularly in the United States.

What are the changes? 1. Expanding derivatives access On 17 May, the US Commodity Futures Trading Commission (CFTC) issued a ‘Part 30 exemption1’ to NSE, effectively opening the Indian futures market up to US investors. The exemption will allow NSE and BSE members to accept USinvestor funds directly for trading futures and options contracts on the exchange, without having to register with the CFTC as a futures commission merchant. The benefit for investors? It will now certainly be easier for US investors to tap into India’s equityderivatives market – thanks to the removal of the previous limitations on US persons trading single stock futures. We anticipate select US-based investors who were previously unable to access these markets will now consider setting

up FPI entities to invest directly into India. Foreign portfolio investors can now hedge a significantly larger amount of Indian rupee (INR) exposure in the currency segment onshore (USD100 million, increased from the previous USD15 million per exchange). Further, the CFTC has recognised NSE futures as providing a comparable level of customer protection to US investors – thus paving the way for simplified transitioning of custody and clearing between custodians. These initiatives come at an opportune time; US hedge funds have been struggling to find the best avenue to invest in Indian futures and options (particularly after the enforcement of regulatory restrictions last year on taking equity derivative positions in India through offshore derivative instruments [ODIs]).

www.cftc.gov/PressRoom/PressReleases/7727-18

www.nseindia.com/circulars/circular.htm

https://www.sebi.gov.in/media/press-releases/mar-2018/sebi-board-meeting_38473.html

2. Physical settlement for equities derivatives The Securities and Exchange Board of India (SEBI) also recently introduced the following changes to further develop the derivatives market and to better align the associated risk management system2: • Physical settlement: Two decades after it first introduced equity derivatives in India, SEBI has announced the introduction of a ‘physical settlement’ for the segment, with effect from 26 July 20183. The regulator began public consultations last year with respect to making physical settlement mandatory for equity derivatives to curb excessive speculation, noting that the turnover in equity derivatives was more than 15 times that of cash market and stock futures, and options contracts were cashsettled. From a risk management perspective, this has been seen

Regulatory updates

Country profile

Regulatory outlook

MarketTHE access

CUSTODIAN OCTOBER 2018

“NSE is the first Indian stock exchange to receive Part 30 exemption Order from Commodity Futures Trading Commission (CFTC) under CFTC Regulation. This is a significant development and big positive for the development Indian Capital market. The order allows NSE’s members to directly accept US customer orders to trade in Nifty futures contracts. With this, we expect increase in FPI registrations into India and more participation from US clients. While the CFTC exemption is for Nifty futures, NSE is now also authorised to offer security futures products whether on single securities or narrow-based indices (Bank Nifty, Nifty IT, Nifty Infra and Nifty CPSE) to US based clients. We hope this will increase the depth of our products leading to tighter spreads and better liquidity.” Ravi Varanasi Chief Business Development Head (FIG Head) at NSE

THE CUSTODIAN OCTOBER 2018

as a positive move, as it removes the volatility and allows asset managers to manage and implement strategies with greater certainty – and in doing so, also creates a more robust settlement system. • Phased settlement: SEBI has made physical settlement of stock derivatives mandatory in a phased or calibrated manner. Stocks that are currently in derivatives but fail to meet any of the enhanced criteria will be physically settled going forward. However, such stocks would exit the derivative segment if they fail to meet any of the enhanced criteria within one year or fail to meet any of the existing criteria for a continuous period of three months. 3. Longer trading hours SEBI is also adopting greater flexibility around trading times by extending equity derivatives trading on domestic stock exchanges till 11.55pm. This extension is obviously a welcomed enhancement for European and US investors, and is sure to attract a higher volume of offshore investors dealing in India-listed products. Additionally, the extended timing provides greater alignment with commodity markets – amid implementation of universal exchanges – which function until 11.55pm. Extended trading hours will give investors an opportunity to hedge market risks beyond the traditional cash market hours. The extended timings are likely to be

applied from 1 October 2018, and we expect SEBI will announce the associated operational requirements for the extension of equities derivatives trading soon.

trade tensions and populist policy initiatives such as hikes in minimum support prices for food crops) and expect a gradual GDP recovery to 7.2 per cent to be likely in FY19.

4. Introduction of the Common Application Form (CAF) for FPI registration

On balance, it is perhaps no surprise that investors are optimistic in the medium term yet waiting to see what the broader market does to combat issues such as those highlighted above.

On 21 August 2018, the Government of India introduced the Common Application Form (CAF) for FPI registration, another measure to drive the simplification of FPI registration/onboarding documentation. The CAF is a single document and obviates the previous protracted approach of providing the same information to various regulators and authorities.

So many changes – all bells and whistles? With the revised cut-off times, physical settlement, lower volatility (at present) and a constructive economic forecast, this is a good time to consider investments into Indian markets. Yet, while feedback from our clients is mostly positive, there are still creases to be ironed out. For example, there are still issues with respect to know-yourcustomer (KYC) requirements in terms of beneficial ownership for FPI registrations, and there are also the looming elections and a question mark as to what the next government will bring to the table. We are optimistic on India’s economic outlook – while being mindful of risks (such as rising oil prices, escalating global

Conclusion The recent changes have been heralded as driving increased liquidity, decreasing volatility and bringing greater simplicity to the derivatives market. These elements also bring more robustness and predictability, elements that foreign investors seek as part of their strategy development. As one of the few banks that has custody, futures and options clearing under the same legal entity; we can help make the overall process for foreign investors looking to India easier to navigate. The continuous government desire to implement efficiencies coupled with the ongoing engagement of infrastructure and the regulators with the investor community is reflected in this progress – and has received a welcomed round of applause from the US investor community.

THE CUSTODIAN OCTOBER 2018 Regulatory updates

Country profile

Regulatory outlook

Market access

Spotlight on Zimbabwe Zimbabwe is a country in the midst of change, contemplating next steps following the general election at the end of July. Its complex geo-political framework requires investors to be prudent when assessing the risk-reward investment profile. Our view – current highs and lows: • A market consultation earlier in 2018 called for interested capital market participants to critique and suggest changes to the securities law in Zimbabwe. This was viewed as positive and progressive by market and industry associations, and their feedback encouraging. Amendments proposed to the Securities Act in 2017 were also accepted earlier this year and will be enacted along with the overall securities law consultative changes. • It’s unfortunate that the proposed ‘Zimbabwe Portfolio Investment Fund’ has not yet been implemented; we continue to request more details. The fund, which we consider as positive for the market, is aimed at ring fencing portfolio flows given foreign exchange shortages which have impacted the repatriation of sales and dividend proceeds.

The Standard Chartered Securities Services Team in Zimbabwe 10

• Market development remains hindered by many legacy processes, an example being straight-through processing not being supported between market participants, resulting in manual transaction processing and enhanced risks.

Our view – future highs and lows: • In the post-election environment, we are optimistic that the advocacy that we have undertaken will start to take hold, and regulatory amendments adopted. This will lead to a more robust infrastructure and hopefully boost investor confidence. • The Zimbabwean economy faces real challenges following the election. Improved international perceptions of political credibility

will be central to increased multilateral and bilateral engagement. Any details of potential currency-regime reform will also be a focal point in the coming year.

Supporting clients in Zimbabwe As a domestic custodian, we have a multifunctional role: we manage and assist the development of onshore infrastructure, while adhering to the various local regulatory requirements and market processing nuances. We are cognisant of both our domestic and foreign client needs – 30 per cent of our assets under management in Zimbabwe are from foreign investors.

THE CUSTODIAN OCTOBER 2018

The Zimbabwe market in numbers

T+0

Three

for T-Bills

regulators governing the securities services business – Reserve Bank of Zimbabwe (RBZ) and Securities, Exchange Commission of Zimbabwe (SECZIM) and the CDCL provides oversight

0.25%

stamp duty on purchase of securities

withholding tax (on buy only)

Four

T+3

major currencies (USD, ZAR, EUR and GBP) with the USD dominating as the base currency in multi-currency market

for Zimbabwe Stock Exchange (ZSE) listed equities

One

Two

central depository – Chengetedzai Depository Company Limited (CDCL)

exchanges – ZSE and Financial Securities Exchange (FINSEC)

THE CUSTODIAN OCTOBER 2018 Regulatory updates

Country profile

Regulatory outlook

Market access

Change is coming, ready or not Regulatory change – and the extent of it necessitating repapering, operational modifications and business model deviations – remains one of the hottest topics in our industry right now. The volume and scope is nothing short of exhausting for most. With this in mind, the diagram on the next page was designed to give you a quick, digestible overview of the key changes we believe you will need to be considering in the post-trade space. There is far too much to go into detail here – however we encourage you to reach out to us thecustodian@sc.com to discuss any of these items. To get you started, here are some of our key thoughts and highlights:

Securities Finance Transaction Reporting, Central Securities Depository Regulation (CSDR), Share Holder Rights Directive and the UCITS V/AIF reforms and amendments

CSDR is being labelled the ‘biggest regulatory change since MiFID II’ in terms of complexity and scope. If we as an industry can assess and agree the basic principles and themes of these (and other future) regulations, our repapering efforts and requirements will be simplified and hopefully more efficient. The various trade associations are also armed with this objective, and continue to push their advocacy and engagement with the regulators.

Singapore Funds reform – Asia Regional Funds Passport Scheme

We commented on the development of the funds regulation and market access (and the need to keep driving this and related programmes) in the third edition of The Custodian edition. While we have seen minimal development around the programme since then, Singapore have now released the findings of the consultation on the new Variable Capital Company and the draft bill was before Parliament at the end of September.

THE CUSTODIAN OCTOBER 2018

India: Know-your-customer (KYC) guidelines and Foreign Portfolio Investors

SEBI – who we continue to work with and monitor activities of – recently invited public comments on their Interim Report on revised KYC Guidelines for Foreign Portfolio Investors. The consultation raised points on clubbing and as well as recommendations on identification and verification of beneficial owners and a recommendation on the identification of beneficial owners of listed entities. The public consultation was responded to on 17 September 2018, with KYC requirements and the provision of personal information such as birth date, nationality, ID number etc. being noted as being problematic due to data privacy laws. Alternative options were also provided.

Capital market and securities regulation reform continues in Zimbabwe

Amendments to the relevant Acts and regulations have been reviewed, both by the industry as well as by International Organisation of Securities Commission (IOSCO). The amendments, and thereafter implementation process, is now underway. Additionally, the Zimbabwe Portfolio Investment Fund remains a focus point for the Reserve Bank of Zimbabwe, as confirmed in our recent meeting with them on 14 September 2018, and wherein they reiterated an understanding that the delay in implementing the fund is not being viewed favourably by the foreign investor community.

Bond Connect

Outstanding issues are now resolved for UCITS V, with the CCDC announcing it can offer the Cross-Border Interbank Payment System (CIPS) Delivery-versus-Payment (DVP) settlement model, effective on 23 August 2018 and following the PBOC Guidelines Issue No. 150-2018. In late August 2018, China’s State Council also disclosed that there would be a VAT and WHT waiver on bond coupons for three years for foreign investors investing in China’s bond markets.

Global regulatory themes

A few themes are dominating globally, and we don’t believe these will fade any time soon. Cyber security reform (which morphs into data protection and privacy) continues to be a focus with most institutions and companies believing that it is a matter of when, not if. Whether you believe you are in scope of the various regulations or not, a prudent approach would be to adopt common international standards. This theme will not be leaving us any time soon, and we expect there is more to come. Oversight and governance of offshoring and outsourcing is often more complicated than first imagined; if your organisation has not started documenting the arrangements or the subsequent oversight/ monitoring process, we urge you to get started.

Technology

Fintech developments are also dominating the pipeline. Cross-border changes are now afoot in the ASEAN region4 with the ASEAN Financial Innovation Network (AFIN) announcing the launch of the API Exchange (APIX), which has been heralded as the world’s first cross-border openarchitecture platform.

Monetary Authority of Singapore (MAS): http://www.mas.gov.sg/News-and-Publications/Media-Releases/2018/Worlds-First-Cross-Border-OpenArchitecture-Platform-to-Improve-Financial-Inclusion.aspx

SG Con › MAS t Reg sultationo respon for Fulations Paper d to 16 inan o cial to Enhan n PropoJul 2018 Instit c s ution e Reso ed IN lu s in D › Sing tion Reg En raft SEB apor e ime tit Fra I to ies m r e e (In w sp dia or on n C k fo d t om r P o C mo arti ons dit cip ult y D atio ati er n o on iva f Pa tiv Fo pe es rei r o M gn n ar ke t)

SG › Changes to the MAS Act (Cap. 186) to take effect

Int'l › IOSCO Objectives and Principles of Securities Regulation – eff. May 2018

he rt a fo n of FT e c io /C an at L id lic AM gu app to n h tio he c ta t oa ul r in ppr s n to a co ec ed TF es s bas A F i › urit isk t'l c r In se

S on G › M AM L/ L/ TF C ris FT ks Ind ar us isi try ng P fro art m ne HK fin leg rsh ›S an al ip to FC the co ce pe wo cur nsu to rso rki ren ltat de ns ng t S ion liv an gr FC on er d ou Gu pro fin tra ps ide po di de line se ng d UK › s o am s F n A en push CA Co ML dm paym nsulta and ent ent f tion (C CF s P of th raud T e Fin exten18/16) o ancia ding n l Om the juauthoris SG › C e bud rimina r d is sma dictio l Justi n Se ce Re form A rvicen ct 201 8 – eff . end 2 018

EU › CRDV/CRR II* under review, expected implementation in 2019

EU › AMLD 5 – eff. 9 Jul 2018 d an ns be tio 8 to ine c an 01 in l it › S ct 2 ted rex UK ML A men ith B w A ple im

Securities Services Market Advocacy and Regulatory Reform 14 to glossary at the end of the newsletter Refer

HK › Banking (Amendment) Ordinance 2018 came into effect on 1 Mar 2018

IN › Financial Resolution and Deposit Insurance Bill 2017

Int Ba 'l › W Qu nking olfs Gu estio Du berg 22 idanc nnaire Dilig Grou Feb e – e a en p 201 pub nd ce 8 lish ed

ZA › On 21 Aug 2017 the FSR Act, Act 9 of 2017, was assented to by the South African President

IN › The Companies (Amendment) Bill 2016 approved by the lower house of parliament on 27 Jul 2017

CN › Proposal to further ease policies for foreign investors to open A-Shares securities accounts

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on Paper ign ltation re Consu ation of Fo odity to d n ip m respo for Partic dian Com arket M rk In EBI to IN › S ft Framewog Actual to Derivatives y Dra s, Havin modit the Entitie, in the Com on o ts tion able t s a l Marke u c i pl firm reg r a ts ap ent 2 al foemen vestm s o .1 in uir rop eff 20 › P l req nt p 20 EU dentia e e ds lem . S pru ar TR ett eff nd SF d S line a e t s p r S e ali ci al d rn Dis ic un nte nt hn ing – I me c R le Te rt SD ett d po › C19, S an Re U 0 n R E l2 T o Ju SF › U E

Securities markets & investments

for ents uirem tions in reqe transac g r a tiv nm on o C deriva tion T ula ultati Cons ared O Reg g d n ZA › trally cle di an ts cen Len nonion en rs ies t t i r a m la lt e ecu su uir rcu ›S on req d ci ZA C ed – of an pt PI on ce › F tati c a IN en ll m Bi ple A S im tF af Dr › KY

EU › MiFID2/MiFIR (recasting of the existing markets in financial instruments directive) – national implementation occurred on 3 Jan 2018

HK › SFC Financial Resources Rules changes

II* e) M gim SR re d L an RE n II* M sio w us D e R n c BR g is › din er d on ati EUnclu und oti ill (i re eg ast t n l – a SR ly to › B like UK ase 019 ph rly 2 ea

H (Fin K › A anc ML ial I and nstit CF T ( OrdAmendutions)

GH Ind › Fu ust nd ry R Ma efo nag rm em HK ent Co › U ns ni ult t T ati rus on t C b y od en e d2 01 8

IN › Amendment to the Total Expense Ratio for Mutual Funds – eff. 5 Jun 2018

Prudential regulation, recovery & resolution

NG am › C en ap dm ita en l M SG t im ark ›S ple ets Con GX to me La Am s r end ultat espo nte w me ion P nd t d nts o1 a p to t er o 9 Ju h of S e Cle n Pro l 201 GX arin pos 8 -DC g R ed and ules CD P SG › SGX to respond Consultation Paper on Propto 29 Nov 2017 osed Changes to Securities Settlement Fram ework and Service Enhancements

IN › SEBI Rules on Overseas Investment by Alternative Investment Funds/Venture Capital Funds – eff. 3 Jul 2018

Funds

Int'l › IOSCO makes recommendations to improve liquidity risk management for funds – eff. Feb 2018

d an on ng e i n e t tiv tio e ur c ta ark los olle l u m c c s ns g, dis or me Co in n f e › rtis tio nts sch a e ZA dve rm em ent a fo uir m in eq st r ve in

Int'l › Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement – eff. 2021

EU › Money Market Fund Regulation 2017/1131

view

respond to SG › MAS to Feb 2017 its 15 feedback on the Regulatory on Consultation of Venture Capital Treatment Fund Managers

HK › Open-Ended Fund Company (SG S-VACC Equivalent Fund Structure) – eff. 30 Jul 2018

l Markets Re ZM › Capita

SG › MAS fe Cons edback o to respo n ultati n on on its Mar 2 d to of a S Introd 017 uctio -VAC n C Re gime

CN › China Access: Bond Connect and Stock Connect

HK › SFC Circular on Margin Financing Activities Disguised as Investments

ZM › Securities Act 2016 Amendments

E im U pl › U em C en ITS ta V tio R n ev by ie 20 w – im 20 ple As me ia nta › A tio RFP n Q4 ear – 20 ly 18

CN › LDN – CSRC se/SH Connect feedback eks proposed on the by 15 Sep framework 2018

tion nsulta he CA Co nT UK › F CP 18/4 o Market Paper ean Moneyn Europ Regulatio Funds

a for al ion os ut U b rop stri the E › P Di n i s EU nd ve – Fu ecti w 0 Dir vie 02 Re y 2 D b M n IF atio › Aent EU lem p im

THE CUSTODIAN OCTOBER 2018

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TZ › Central Depositories Bill Capital Markets and Commodities Exchanges Act

ZA › Regu OTC De lation rivativ s imp e leme nted ZA › Co Fin Fra nglom ancia me wo erate l rk Sup SG erv isio on › n Dig its MAS J ita un to l A 2 re 0 s d vis 17 po S ory Co nd J G C ul › Se nsu to f rvi lta eed Ja lea 201 MA ce tio b O n rin 5 S s n o ac TC 2 g C to 01 o o r n k D 6 f ns es er C C u p iv o er lta o at ns ta t nd iv u in io t es lta O n o Re tio TC on fee po n o D Ma db rti n eri nd ac ng Ch va a k t Fr an tive ory on its am ge s ew s t an or o th d it k e s

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GH › AML – Combating the Financing of Terrorism and the Proliferation of Weapons of Mass Destruction Guideline

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Payments

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THE CUSTODIAN OCTOBER 2018 Regulatory updates

Country profile

Regulatory outlook

Market access

China access: Continuing with confidence In the 25 years since China began opening its capital markets to the world, the country’s slow and deliberate approach to liberalisation has gradually won the confidence of overseas investors. Beginning with the introduction of B-Shares in 1992, Chinese regulators have introduced several measures easing access to domestic markets for investors worldwide. As confidence about the future of China’s markets has improved along with access, industry stakeholders, including investors, custodians and regulators, are now shifting their focus to practical considerations, and towards shaping a simple and efficient open market ecosystem that serves all investors.

Aiming for clarity and efficiency Based on our research, the three main criteria investors consider for

choosing an investment channel are clarity on rules, funding flexibility, and speed and simplicity in applying for and opening an account5. It’s therefore not surprising that the relatively recent Stock Connect and Bond Connect schemes have been commended for their usability, quickly becoming the preferred means for access and clarity. However, with the proliferation of access schemes (see timeline on the next page), there is a growing sense among overseas

RMB Investors Forum Whitepaper, Standard Chartered Global Research, June 2018

investors that the process of gaining exposure to mainland markets – given the number of available access schemes and the different rules governing them – is becoming more complex, an issue that has become more pressing with the scheduled inclusion of Chinese assets in international benchmark indexes. Determining the right access scheme from a risk management and trading perspective is a challenge.

THE CUSTODIAN OCTOBER 2018

Timeline: China capital markets liberalisation

Shanghai Connect launched; Capital gains tax clarified; RQFII expanded to more cities

2014 China becomes second-largest economy

1996

Yuan becomes convertible on the current account

2016

2010 Launch of QFII scheme; Quota of USD20 billion

Shenzhen Connect launched; RQFII extended to US; QFII, RQFII quotas linked to fund size; stock suspension rules tightened, beneficial ownership clarified

2012 2018

2002

QFII, RQFII quotas expanded, eligibility relaxed

Yuan freed from dollar peg; China becomes fourth-largest economy

China introduces B-Shares allowing investments from foreign investors in Chinese companies

2005

2001 1992

Partial inclusion of A-Shares in MSCI Emerging Markets Index

China joins the World Trade Organisation

First RQFII license awarded to foreign institutional investors; QFII repatriation rules relaxed

Launch of RQFII scheme; Quota of RMB20 billion

2015

2011

2013

RQFII expanded to more cities

Expected launch of London-Shanghai Stock Connect

2017 Relaxation of pre-approval requirements for the creation of index-linked investment vehicles

2019 Chinese RMB-denominated government and policy bank securities to be added in phases to Bloomberg Barclays Global Aggregate Index

Source 1992: https://www.sfc.hk/web/doc/EN/speeches/public/others/speechbook/chapter7.pdf 1996, 2001, 2005: https://www.reuters.com/article/us-china-reforms-chronology-sb/timeline-china-milestones-since-1978-idUKTRE4B711V20081208 2002, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018: https://www.msci.com/www/blog-posts/the-world-comes-to-china/01002067599 2010: https://www.nytimes.com/2010/08/16/business/global/16yuan.html 2018-19: https://money.cnn.com/2018/04/11/investing/shanghai-london-stock-connect/index.html 2019: https://www.bloomberg.com/company/announcements/bloomberg-add-china-bloomberg-barclays-global-aggregate-indices/

China needs a transparent monetary policy and currency management system, and a sizable domestic capital market that’s easily accessible to overseas investors.

This complexity has long caused confusion around withholding tax rules, as investors remain unsure of potential tax liabilities and their ability to repatriate capital gains. At the same time, many global custodian banks are unprepared to provide onshore forex trading under the Bond Connect scheme, which means investors choosing these agents can only conduct forex activities in the offshore renminbi market for now. Another crucial limitation was the lack of a delivery versus payment (DVP) facility in Bond Connect, which forced many foreign funds ready to consider Chinese onshore bonds to stay away. However, this ceased to be a concern beginning August 246, when China introduced the DVP settlement facility for Bond Connect. Only a few days later, Chinese authorities announced a three-year, limited tax break on interest income from investments in onshore bonds

for foreign institutional investors7. This was followed a day later by Bond Connect’s launch of blocktrade allocations, yet another key demand from foreign investors8. With index providers helping expedite reforms by defining conditions and timelines for inclusion – DVP and block-trading were two prerequisites for inclusion in the Bloomberg Barclays Global Aggregate Index9 – Chinese policymakers are sending a strong signal to overseas investors about their commitment to market reforms. In a drive for more clarity and efficiency, we expect China’s regulators to continue to provide enhancements to clearing mechanisms, legal ownership of underlying securities, and capital repatriation. Further clarification is needed on whether the latest tax breaks will be applicable to all bond types and bond-related

transactions such as repos, and it may just be determined that the older programs for qualified institutional investors (QFII, RQFII and CIBM) continue to be sufficient for investment needs.

Near-term challenges The renminbi’s depreciation in recent months10 could impact overseas investors’ appetite for RMB assets while forcing domestic investors to look abroad to hedge risk. Although, as long as the currency’s depreciation does not accelerate, foreign investor confidence is expected to remain unchanged11. On the macroeconomic front, China’s growing debt, which now stands at 299 per cent of GDP up from 171 per cent in 2008, is a major concern, giving rise to fears that such unprecedented credit growth could trigger a crisis, or at the very least, hurt growth12. Mindful of this, Beijing is working

http://www.info.gov.hk/gia/general/201808/24/P2018082400878p.htm

https://www.bloomberg.com/news/articles/2018-08-30/china-plans-tax-cuts-for-foreign-bond-investors-to-aid-growth

http://www.chinabondconnect.com/documents/News2018-08-30EN-Allocation.pdf

https://www.scmp.com/business/money/stock-talk/article/2153626/chinas-central-bank-scrap-barriers-connect-scheme-draw

https://www.scmp.com/comment/insight-opinion/article/2162006/chinas-yuan-sinks-neither-its-central-bank-nor-investors-are

Mosaic – The China view; Standard Chartered Global Research, August 2018

https://www.ft.com/content/0c7ecae2-8cfb-11e8-bb8f-a6a2f7bca546

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to deleverage excessive levels of debt and rein in over-lending as it looks to convert its economy from being export-driven to one led by domestic consumption. Also worthy of a mention is the potential escalation of the ongoing China-US trade war, which could dampen outlook for the Chinese economy and constrict foreign investments continuing to flow into the country.

An inclusive future The long-term outlook remains robust and, frankly, needs to be, given that other developing jurisdictions are competing for foreign investors’ cash and enhancing access channels (see ‘The US eyes India’ in this edition). Investors are enthusiastically accessing China in greater numbers than ever before, even as the access channels undergo improvements to meet the industry’s need for speed, simplicity and clarity13. Sectors such as technology, transportation and consumer services are the new growth drivers14, capitalising on the massive wealth creation being witnessed in local households – predicted to grow by USD10 trillion to USD39 trillion by 202215. Drawn by the promise of growth, and with fresh access to China’s onshore markets following the

partial inclusion this year of A-Shares into the MSCI Emerging Markets Index, overseas investors could bring USD400 billion of equity flows into China over the next 10 years16. China has also seen large investments flow into its government bonds this year, and the expected full inclusion of Chinese bonds into global bond indexes – such as the Bloomberg Barclays Global Aggregate Index, the JP Morgan Government Bond-Emerging Market Index and the Citi World Government Bond Index – is predicted to attract flows worth USD286 billion, with foreign ownership of onshore bonds set to rise to as much as 7 per cent by end-2020, from under 2 per cent in early 201817. Of course, for China domestic considerations remain the primary drivers of improving capital markets flexibility and will dictate the pace of further liberalisation. Intent on deploying the growing wealth of its citizens more efficiently, regulators are taking action. And, following the RMB’s addition to the IMF’s SDR basket in 201618, Beijing has set its sights on the currency’s acceptance as a global reserve currency. However, to achieve this goal, China needs a transparent monetary policy and currency management system, and a sizable domestic capital market that’s easily accessible to overseas investors. Recognising the work

that needs to be done in this regard, the China Securities Regulatory Commission is focused on promoting local capital markets while the People’s Bank of China is keen to reform the interbank market and better position the RMB as a global currency and facilitate RMBdenominated debt instruments. In coming years, as China works to enhance market participation, gain wider acceptance and greater recognition on major world indexes, it is well placed to secure for its markets and currency a position more in line with the country’s stature as the world’s secondlargest economy. This makes it possible to look to a future where overseas investors will eventually enjoy the same access and rights as their domestic counterparts. And while a call for expediency is understandable, it’s important to recognise that progress will be certain, but gradual and iterative.

Tony Chao Managing Director and Head of Securities Services, China

RMB Investors Forum Whitepaper, Standard Chartered Global Research, June 2018

https://www.sc.com/en/grow-your-wealth/seizing-chinas-new-economy-opportunity/

https://www.scmp.com/business/money/stock-talk/article/2120076/household-wealth-china-reach-us39-trillion-2022-says

https://www.scmp.com/business/companies/article/2146084/us400-billion-expected-flow-chinese-stocks-after-msci-inclusion

Standard Chartered Global Research

https://www.imf.org/en/News/Articles/2016/09/30/AM16-PR16440-IMF-Launches-New-SDR-Basket-Including-Chinese-Renminbi

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Conclusion A few things make me nervous. People who don’t know what they don’t know is one of them, but experts who display beads of forehead sweat as they discuss their area of expertise truly make me squirm. In one recent experience in late July, I witnessed a subject matter expert become exasperated as he contemplated the sheer magnitude of regulatory interpretation, implementation and repapering that is due to explode on our doorstep in 2019 and continue into 2020. Our regulatory wheel in this edition will assist you in capturing and monitoring what these requirements will look like. If you don’t yet receive our regular updates on regulations that we are considering in the Securities Services area, please write to thecustodian@sc.com so we can share these with you. The recent Network Forum in Vienna also contemplated the uptick in regulatory pace that

has many of our industry peers flummoxed. My experiences and thoughts – aside from the caricature I had drawn there (see below) – are summarised here:

❯ A notable shift in the acceptance of technology adding value to post-trade compared to last year. A greater curiosity and tolerance exists now, as does a broaderheld belief that the new world within which our business will operate in has arrived. These sentiments were a driving theme – and financial technology in post-trade (APIs efficiently distributing data, safekeeping crypto currencies and debt capital markets issuances using blockchain) is now welcome

❯ A distinct and heightened level of frustration with the extent of repapering requirements currently being negotiated

❯ An overwhelming desire/request (or perhaps a hope) that due diligence will become more streamlined (as per my conclusion in Issue 3.)

Julia McKenny Head of Market Advocacy Securities Services Transaction Banking

Finally, and fabulously, I met a robot recently. It was a first for me, and any residual doubt that I may have had prior about technology creating efficiency in post-trade and financial services more broadly was certainly lost. Clara (whose name has been changed to protect her privacy) did not need a permanent desk or tea break, she had a staff ID, responded to email, complied with the dress code and did not make spelling or grammatical errors. I have for a while now been a proponent for spending time with ethical hackers; now I also encourage the same for robots – if you get the chance, make sure you meet one. This surreal experience will all too soon feel like the new norm in post trade. Thank you for reading and your continued support.

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Notes

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Glossary Markets AE

United Arab Emirates

Kenya

Australia

LDN

London

Bahrain

Nigeria

Botswana

Oman

China

Qatar

Europe

Singapore

Ghana

Shanghai

Hong Kong

Tanzania

India

United Kingdom

Intâ&#x20AC;&#x2122;l

International

South Africa

South Korea

Zimbabwe

Kuwait

Zambia

AIFMD

Alternative Investment Fund Managers Directive

S-VACC

Singapore Variable Capital Company

ARFP

Asia Region Funds Passport

UCITS

Undertakings for Collective Investment in Transferable Securities

Funds

Securities markets & investments CDP

Central Depository Pte Limited

FPI

Foreign Portfolio Investors

CSDR

Central Securities Depositories Regulation

SGX-DC

Singapore Exchange Derivatives Clearing Limited

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Prudential regulation, recovery & resolution BBRD

Bank Recovery and Resolution Directive

BSR

Bank Structural Reform

MREL

Minimum requirement for eligible liabilities

Financial crime AMLD

Anti-Money Laundering Directive

DFSA

Dubai Financial Services Authority

AML

Anti-Money Laundering

FATF

Financial Action Task Force

CFT

Countering the Financing of Terrorism

PSR

Payment Systems Regulator

Payments CPMI

Committee on Payments and Market Infrastructures

Other relevant legislation ASIC

Australian Securities and Investments Commission

ISA

Investment and Security Act

CCP

Central Counterparties

OTC

Over-the-counter

FSA

The Financial Services Authority

SID

Securities, Investment and Derivatives

GDPR

General data protection regulation

SRD

Shareholder rights directive

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