FINANCIAL REGULATION - Centro Asia...

Editor’s NoteWelcome to the inaugural Asia-Pacific-focused special edition of Bloomberg Brief: Financial Regulation. As regulation remains especially complex in Asia, with its many countries in varying stages of economic development, we aim to provide coverage of how the region is handling its unique regulatory chal-lenges. This issue focuses on topics including how banks in Asia are adapting to Basel III capital rules, over-the-counter derivatives reform in the Australian market and how life insurers are adapting to a new solvency regime in Asia.

This special issue also includes graphics and insights from Bloomberg Intel-ligence analysts, Q&As and interviews with industry participants and regulators as well as our exclusive regulation tracker. Other topics covered are high-frequency trading in Australia, regulatory harmonization in Asia and the implica-tions of Australian financial reform for private equity.

We plan to publish more special issues focused on regulation in this region. Thank you for reading, and if you have any questions or comments on this edi-tion — or thoughts on future coverage — please reach out to me at [email protected].

— Melissa Karsh, Bloomberg Brief Editor

InsideBasel Capital Rules Asian banks largely meet or exceed Basel III rules, says BI ......................3

Life Insurers Solvency development may speed up again in Asia ................................4

Q&A: China Reform ASIFMA’s CEO says China can lead on regulatory harmonization .............5

OTC Derivatives Regulation GreySpark says regulatory changes drive up bilateral trade costs ............6

Q&A: High-Frequency Trading ASIC’s Yanco says Australia’s current HFT framework is appropriate ..........7

For The Record Sumitomo’s Oku, HKMA’s Chan ........8

Q&A: Australian Private Equity AVCAL CEO says rules are limiting pension fund investments in PE .....10

Asia-Pacific Region Special

FINANCIAL REGULATION

7.31.14 Bloomberg Brief | Financial Regulation 3

www.bloombergbriefs.com

The largest Asian banks’ average Tier 1 capital ratio is well above the global aver-age, thanks in part to strong local capital rules in some Asian countries.

In 2013, the top 35 Asian banks by market cap had a Tier 1 capital ratio of 12 percent and a total capital ra-tio of 15.2 percent, topping the Basel III minimum capital requirements for 2015 and 2019. Some Asian countries, including China, have gone even further and imposed more stringent standards than specified under Basel III, requir-ing domestic banks to hold more capital and to implement the rules ahead of the January 2015 deadline.

Basel III requires banks to maintain a minimum Tier 1 capital ratio of 6 per-cent and a total capital ratio of 8 percent when the transition period starts in 2015. Toward the end of the transition period in 2019, banks will be obliged to maintain a minimum Tier 1 capital ratio of 8.5 percent and a total capital ratio of 10.5 percent, including capital conservation buffers.

China set a high standard on capital by adding a 1 percent buffer to global sys-temically important financial institutions, or G-SIFIs. China has two banks that fall under the SIFI designation — Industrial & Commercial Bank of China Ltd. and the Bank of China Ltd.

Singapore also imposed a higher requirement of 10.5 percent for its Tier 1

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35 Asian Banks Topped Basel’s Tier 1 Capital Ratio Minimum in 2013

capital ratio and 12.5 percent for the total capital ratio for domestic banks.

One key challenge for Asian banks’ imple-mentation of the Basel requirements centers on the conservative and broad-based risk-weightings on several prevailing bank loan assets in Asia, such as trade finance, small and medium-enterprise (SME) lending and infrastructure finance. These loans remain the key credit and economic drivers for most Asian nations, as many economies are in the developing stage.

Higher risk weights may discourage banks from lending to these sectors. This may add to the borrowing costs of these sectors, and undermine economic devel-opment in the region.

Francis Wing Fu Chan is an analyst with Bloomberg Intelligence covering Asian banks and insurance.

BASEL CAPITAL RULES ANALYSIS BY FRANCIS WING FU CHAN, BLOOMBERG INTELLIGENCE

Asian Banks Largely Meet or Exceed Basel III Rules, Risk-Weighting Poses a Challenge

Bloomberg Brief Financial Regulation

Bloomberg Brief Executive Editor

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Financial Regulation

Editor

Melissa Karsh [email protected] +1-212-617-4557

Newsletter Business Manager

Nick Ferris [email protected] +1-212-617-6975

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Asian insurance markets including Austra-lia, Japan, China and Taiwan may move to enhance their existing solvency regimes to keep up with their Western peers, following the EU Parliament’s decision to set a Jan. 1, 2016 implementation date for Solvency II.

Regulators and insurers in these mar-kets have expressed varying degrees of interest in moving closer to Solvency II to complement existing regimes, such as the risk-based capital (RBC) framework. The three-pillar framework of Solvency II takes a more holistic approach to assess capital and risks. For example, assets should be marked to market and liabilities should be computed based on an explicit model of discounted future cash-flows. Meanwhile, insurers will establish their own assessment of risks, known as the Own Risk and Sol-vency Assessment (ORSA), while improving transparency to the public.

The RBC framework, which began in the U.S. in the early 1990s and gained some popularity before and after the 2008 global financial crisis, has already helped insur-ers in markets such as Singapore, Korea, Malaysia and Thailand to gauge capital requirements by quantifying key exposures such as asset risks and underwriting risks.

Adopting the Solvency II regime may change a few aspects of how life insurers in Asia will operate, including the risk ap-petite on investments and products. For example, exposures to risky assets such as equities and high-yield bonds may fall. Products need to be more carefully designed to mitigate risks, such as the continuous low-interest-rate environment in Japan, Korea and Taiwan. Insurers may also face a challenge when it comes to securing often scarce risk manage-ment resources in Asia.

Another challenge could be the costly initial consultation and implementation phases, which will likely prompt the need for upgrades in IT systems and other infrastructures. An issue unique to China is that the nation houses the sole Asian

Solvency Development May Speed Up Again in Asia, Changing Risk Appetites

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Asian Insurers See Silver Lining on Capital Relative to Peers

LIFE INSURERS ANALYSIS BY STEVEN LAM, BLOOMBERG INTELLIGENCE

Australia, Japan, Malaysia and Taiwan Move Toward Solvency IIMARKETS CURRENT SOLVENCY REGIME MOVING TOWARD

Australia RBC Solvency IIChina Solvency I RBC / Solvency IIHong Kong Solvency I RBCIndia Solvency I RBC / Solvency IIIndonesia RBC N/AJapan RBC Solvency IIKorea RBC N/AMalaysia RBC Solvency IISingapore RBC RBC 2Taiwan RBC Solvency IIThailand RBC N/A

Sources: Regulators, Bloomberg Intelligence analysis

insurer on the global systemically impor-tant insurer, or G-SII, list, which is Ping An Insurance Group. This may speed up the development of the nation’s version of Solvency II with further updates due out in September of this year.

One of the key concerns for investors is whether the adoption of Solvency II would raise capital needs for insurers beyond the normal course of business

growth. In the absence of a consistent solvency metric across markets globally, a rather simple approach is to look at the equity-to-asset ratio as a gauge of lever-age. On this scale, Asian insurers’ capital levels appear adequate relative to peers in Europe and in the U.S.

Steven Lam is an analyst with Bloomberg Intelligence covering life insurance in Asia.

MANAGE YOUR EQUITY PORTFOLIOS AND RISKWITH THE LATEST DESKTOP APPLICATION



Q&A: CHINA REFORM

Mark Austen, CEO of the Asia Securities Industry & Financial Markets Association, told Bloomberg’s Melissa Karsh via e-mail that the development of the domestic bond market and the ongoing launch of a municipal bond market are among the Chinese government’s top 2014 financial reform priorities.

Q: How has the Chinese government advanced its 2014 reform priorities?A: The government is very focused on financial reform, but still needs to find the right balance in terms of pace. Streamlining regulatory regimes and decentralization of power appear to be the prominent features of these reforms, with government controls being relaxed, approvals replaced with reporting requirements only or delegated to lower levels of government. The government certainly appears to be on track carrying out these reforms.

On the domestic front, changes were first made to the PRC Company Law in late 2013 to loosen the registered capital requirements for companies. This was followed by the relaxation of the capital con-tribution requirements for foreign invested companies this March, and further simpli-fication this June of the capital contribution and verification process for foreign-invested companies. On the external front, new outbound direct investment regulations were issued this April to remove the need for prior government approval for certain outbound investment projects, and to provide for filing of such projects at provincial levels only. Similarly, a new procedure for cross-border guarantees and security was introduced in May to eliminate the need for seeking prior approval or pre-approval annual quota for the issuance of such cross-border security. It even removed the need to register or file such security in certain cases.

Q: What do you see as the top priority?A: It appears that the top priorities are to continue the development of the domes-tic bond market as an alternative to bank lending through greater access to the bond futures contract, a classic repo market and the ongoing launching of a municipal bond market. This is to encourage greater transparency in local government invest-

ASIFMA’s Austen Says China Can Lead Developing Asia on Regulatory Harmonization

Age: 47 Hometown/Residence: Hamilton, Canada/ Hong Kong

Professional background: Joined ASIFMA in 2012. Prior to joining, was with

the Association for Financial Markets in Europe as COO and served as acting

chief from December 2009 to September 2010.

Hobbies: Kite surfing, Pinball

Family: One wife and two cats

What’s playing on your iPod: The xx, John Grant

ment, and to level the playing field between domestic and foreign-invested companies, and domestic private and public companies within China. This is in order to introduce more competition, for example, to attract for-eign investment into China and to promote outbound investment and more cross-bor-der trading and commerce.

Q: How does the regulatory progress in China compare to the rest of Asia?A: China’s regulatory and judicial uncer-tainty continues to be a serious impediment to foreign investment and stable growth. Recently, China has been more active and open to recommendations and consulta-tions, but more needs to be done. Many pilot initiatives have stalled or not been as successful as originally thought — securiti-zation, bond futures, etc.

Other initiatives such as the Shanghai Free Trade Zone have been met with only lukewarm reception from corporates and financial services. China does have the opportunity to lead regulatory harmoniza-tion initiatives and set the example for developing Asia. This is most clearly seen in the internationalization of the RMB and the growing influence of the currency in trade and investment throughout the Asia Pacific. Where China could best focus its efforts is rationalizing its large number of regulatory and quasi-regulatory bodies that govern the financial sector. There is a vast universe — PBOC, CBRC, CSRC, SAFE, MOF, SAT, NDRC, CIRC — of stakeholders which often have competing and overlapping priorities and processes. Also, there is a severe lack of transpar-ency for market participants both foreign and domestic. China’s regulatory agen-cies need to increase their coordination

and transparency to reduce uncertainty and foster confidence, thereby serving as a role model for the region.

Q: How does this progress compare to the U.S. and Europe?A: Asian regulators felt the one-size-fits-all model of reforms flowing from the U.S. and EU did not meet Asia’s risk profile and could harm their efforts at market develop-ment. Asia is seeking to create Asian rules for Asian markets while learning from the example of the U.S. and Europe. China can and should be an influential leader here.

Q: Has the global pressure on shadow banking worked to curb risks?A: Much progress has been made by China’s financial regulators to address the growth of shadow banking, but more reform is necessary. Chinese authorities introduced Notice No. 107 at the end of last year, which expands the regulatory perimeter over cer-tain activities and aims to address shadow banking in a way that is proportionate and targeted to the risks posed. Yet critical com-plementary reforms are needed to mitigate risks in the financial system. This will require tighter prudential oversight, transitioning to market-based pricing mechanisms, the elimination of implicit or explicit public guar-antees, better disclosure and transparency for investors and the removal of incentives for regulatory arbitrage.

In China, much of the shadow banking growth has been the result of the exces-sive control over the formal banking sec-tor. A move to a market-based system will undermine the need for retail participants to leave the official sector.



Malavika Shekar, consultant at GreySpark Partners in Australia, says the rising cost of trading and funding margin on bilateral trades, the shift in liquidity from the bilateral to

the cleared markets and the advent of electronic platform trading are three factors that will impact Australian buy-side firms in the over-the-counter derivatives market as regulators take steps to make local requirements stronger.

Almost five years after G20 commitments triggered significant changes to the nature of liquidity in the global OTC derivatives market, various regulatory changes have been implemented in the U.S. and Europe-an Union. Over this period, Australian regu-lators had the luxury of watching and learn-ing from the successes and shortcomings of their overseas counterparts while taking preliminary steps toward firming up local rules. Here, we look at changes anticipated in the next few years that promise to shake up Australia’s OTC derivatives market.

Capital Rules for Bilateral TradesThe next few years will see additional

capital charges imposed on uncleared trades under the Basel III accords. While the Australian Prudential Regulation Authority has not yet consulted on or proposed the application of margin requirements on un-cleared swaps, there is no doubt that such regulations are imminent. At present, many buy-side firms are willing to accept higher costs for trading bilaterally as they still have liquidity available in the bilateral markets — however, this behavior is expected to change when the charges laid out in the chart make bilateral trading more expensive.

The key macro regulatory changes that are driving the costs of bilateral trading higher include Basel III and the future appli-cation of margin requirements on uncleared swaps. The chart relates to trade exposure to an interest-rate swap of $100 million with a BBB-rated counterparty. Under the Basel II accords prior to 2013, a default risk charge of $5.1 million was applied to this trade. Under Basel III, a credit valuation adjustment (CVA) charge of $7 million now

OTC DERIVATIVES REFORM GUEST COMMENTARY BY MALAVIKA SHEKAR, GREYSPARK

GreySpark’s Shekar Says Rising Bilateral Trade Costs to Impact Australian OTC Market

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

$18,000,000

Bilateral Trading Pre-2013 Bilateral trading 2013-2015

Bilateral trading post 2015

Default Risk Charge CVA Charge Initial Margin

Source: GreySpark Partners

Regulatory Changes Drive Bilateral Trading Costs Higher

applies in addition to the default risk charge already levied. When margin requirements for uncleared swaps are imposed in 2015, an initial margin amount of $4 million will ap-ply over and above the existing default risk charge and CVA charges. This represents a long-term upward trend in bilateral trading costs that will impact the Australian OTC derivatives market.

Mandatory ClearingOnce the Australian Securities and Invest-

ments Commission’s (ASIC) proposed mandate for clearing comes into effect in early 2015, liquidity in the Australian OTC derivatives market is likely to become split between the bilateral and cleared markets, following the trend observed in the U.S. and EU. An ASIC mandate on clearing for the buy-side could trigger a tipping point in OTC derivatives liquidity, generating the momen-tum required to push the concentration of liquidity from bilateral to cleared markets.

At this tipping point, Australian buy-side firms that were willing to bear the increased cost of trading bilaterally in the short-term would be forced to make the shift to clearing for economic or liquidity reasons. This point would also cause some small players with low trading volumes to exit OTC derivatives trading altogether or to move to futures swaps trading as an alternative.

Electronic Platform TradingAn ASIC mandate on electronic platform

trading could prove to be a game-changer for the Australian OTC derivatives market. Following the U.S. regulations, mandating open access on electronic-trading platforms in Australia would be a bold step that could wrest price-making power from the hands of the market incumbents, redistributing it between the sell-side and non-dealers stepping up to become market-makers. Australia’s big four banks would have a lot to lose in this scenario, and — given the country’s recent history of deregulation — it is more likely that ASIC will find a middle ground for platform trading rules that will not force changes for local market participants.

In summary, three key factors that will impact Australian buy-side firms — namely the increasing cost of trading and funding margin on bilateral trades, the shift in liquid-ity from the bilateral to the cleared markets and the advent of electronic platform trad-ing — will revolutionize OTC derivatives markets in the country as well as across the AsiaPac region. Market participants who prepare their long-term strategy early on will have an edge. The bottom line for the Aus-tralian buy-side is that accepting some need to clear these trades now is the only viable, long-term option to remain competitive in the OTC derivatives markets overall.



Q & A: HIGH-SPEED TRADING

Greg Yanco, senior executive leader of market and participant supervision at the Australian Securities and Investments Commission (ASIC), told Bloomberg’s Melissa Karsh via e-mail that the current policy settings and regu-latory framework are “appropriate” to address concerns regarding high-frequency trading in Australia. Yanco said ASIC is also focusing on lifting industry standards of the treatment of confidential information by listed companies.

Q: What’s your outlook on high-fre-quency trading in Australian markets?A: In recent years, issues around high-frequency trading (HFT) have generated a great deal of media attention and concern among investors and consumers. In 2012, ASIC established a taskforce to look at these concerns. The taskforce analyzed data and market behavior, and where ap-propriate, took action, including changes to the regulatory framework, and publicly reported on its findings. In 2013, ASIC re-leased a report and consultation paper ex-amining the impact of HFT on Australia’s financial markets. The taskforces found that commonly held negative perceptions about HFT were not supported by our analysis of Australian markets. Any sug-gestion that HFT is pervasive in Australia, is simply not supported by the evidence.

There are a number of factors which distinguish Australian financial markets from others where HFT is more prevalent. Not only is the proportion of the Australian market that involves HFT considerably smaller, but ASIC has actively discour-aged maker-taker pricing rebates, has banned payment for order flow and has taken a principles-based approach to market selection for execution.

Q: What would a clamp down on HFT mean for retail investors?A: In 2013, we released rules on HFT. We also released guidance on the rules which clarifies ASIC’s expectations of market operators and participants, and a report on submissions made on the proposed rules. We are satisfied that the current policy settings and regulatory framework are appropriate to address any concerns regarding HFT in Austra-

ASIC’s Yanco Says No Further Clamp Down on HFT in Australia Is Needed Right Now

Professional background: Former CEO of AXE ECN Pty Ltd.; Worked at the

Australian Stock Exchange from 1986 to 2006

Financial regulation theme song: “Money” by Pink Floyd

Summer reading list: “Nudge;” “Time’s Anvil;” “Grand Pursuit: A Story of

Economic Genius”

Hobbies: Surfing

Favorite vacation spot: Burleigh Heads, Queensland

lia, and that no further “clamp down” is necessary at this stage.

Q: Has concern about HFT strategies been overstated?A: ASIC has sought to ensure that our regulatory framework is best equipped to deal with the behaviors shown by high-frequency-like trading in Australia. It is important to be market specific when talking about HFT because there are significant differences between markets in different jurisdictions. We consider that public concerns over HFT in Australia appear to have been overstated and can be attributed to the increasing use of trading technology by investors generally. Many issues can be dealt with by existing regulations and there has been a marked change in the professional traders’ behavior during the course of — and the aftermath of — ASIC’s study.

Q: Is HFT still a priority? What’s at the top of your list? A: ASIC has actively engaged with the evolution of the electronic marketplace, including HFT. We will continue to moni-tor trends in HFT and, where appropriate, we will propose new rules. Where we detect predatory behavior we will take immediate action. This is consistent with ASIC’s general approach of monitoring longer-term Australian trends and acting in the interests of the Australian market. Our core markets priority is the promo-tion of investor confidence through fair and efficient markets. A fair and efficient market is vital to ensuring investors can make confident and informed decisions. As always, we will monitor changing conditions, patterns and trends — both

here and abroad — in what are dynamic financial markets.

More specifically, ASIC is keen to lift industry standards on the treatment of confidential information by listed compa-nies. We have been undertaking an ongo-ing program of work aimed at identifying and correcting deficiencies in the treat-ment of confidential information by listed companies. This work aligns with ASIC’s strategic priority of promoting fair and ef-ficient markets.

Q: Have you looked at some of the tactics other regulators have taken?A: In analyzing the impact of HFT on the Australian market, we looked at other jurisdictions to gain insight into how they were dealing with the issue. However, our results and findings reflect the issue of HFT in the Australian market. We have taken a proactive approach to ensure we have a regulatory framework that can best deal with the technological advancements like HFT that exist in our markets.

ASIC’s supervision of financial markets has recently been bolstered by the suc-cessful rollout of our new market surveil-lance system, Market Analysis Intelli-gence, which was built around algorithmic trading technology. It gives ASIC the abil-ity to analyze trade data for patterns and relationships consistent with the increased use of technology in day-to-day trading. A benefit is the ability to run reports for very large trading periods in a fraction of the time when compared with the previ-ous surveillance system. This allows our surveillance analysts to identify suspicious transactions and traders more quickly, and request information from brokers earlier than under the previous system.



FOR THE RECORD

■ Sumitomo Mitsui Financial Group Inc. Chairman Masa-yuki Oku said Japa-nese banks don’t need the rule being negotiated interna-tionally on liabilities banks must hold that can be automati-cally written off in a crisis, known as the gone-concern loss absorbing capacity measure, or GLAC. “Japanese banks don’t need the GLAC rule because our business model is different from those of Western banks,” Oku told Bloomberg News at a forum in Tokyo July 24, without elaborating. He said he’s ex-plaining his stance to Japanese authorities and hopes they consider it during talks with global counterparts. “Our bank is manag-ing capital based on Basel III and there is no way to assess the overall impact from other measures if they are introduced,” Oku said, in reference to the Basel Committee on Banking Supervision’s global capital standards. The “biggest risk for Japan’s big banks in dealing with tougher global finan-cial rules is that they would be forced to accumulate excessive capital, which would end up hurting banks’ businesses in many ways,” Oku said.

— Monami Yui

■ Hong Kong Monetary Authority Chief Executive Norman Chan said Hong Kong banks are not disadvantaged by the authority’s more stringent liquidity rules. “A high capital adequacy ratio provides banks with buffers to absorb bad debts and other losses when necessary,” Chan said of the

rules that are being phased in to comply with Basel III guide-lines. “Therefore, I cannot subscribe to the notion that banks in Hong Kong would be placed at a com-petitive disadvantage compared with other banks because the HKMA imposes additional or higher regulatory require-

ments on top of the international minimum standards under Basel III. Competition among banks should focus on quality of services and safety of the institutions rath-er than maximizing profits with the lowest possible capital adequacy ratio.” Chan said in a July article on the regulator’s website that the HKMA’s “two-pronged approach” to supervision, which involves the monitoring of bank asset-liability risk and the estab-lishment of new departments to supervise business conduct, sends an important message to banks. “Apart from ensuring the robustness and safety of their balance sheets, the ethical business practices and professional integrity of their employees are equally important,” he said.

— Dominic Lau and Melissa Karsh

■ The China Banking Regulatory Com-mission’s decision to amend the calcula-tion of bank loan-to-deposit ratios, or LDRs, could raise bank asset quality risk, according to Fitch Ratings. “Spurring growth of lending to small/micro enterpris-es (MSEs) has the potential to hurt bank credit profiles over the medium term,” Katie Chen, Fitch associate director of financial institutions, and Justin Patrie, Fitch Wire senior director, wrote in a July article posted online. The CBRC, as part of an ongoing effort to ease liquidity con-ditions, increased banks’ capacity to lend money by changing the way that LDRs are devised, allowing for the inclusion of negotiable certificates of deposit sold to companies or individuals and the exclu-sion of loans advanced to small enter-prises and the rural sector that are backed by bonds. “The policy decision reflects the ongoing challenge of regulators as they seek to rebalance the economy away from capital investment and reduce the role of the shadow banking sector while avoiding a sharp economic slowdown,” they wrote.

— Melissa Karsh

■ Australia & New Zealand Banking Group Ltd. has tightened its commodity financing process in China “a little bit” amid a probe into metals stockpiles at Qingdao port, CEO Michael Smith said. Financ-ing using commodities as collateral is an “important business” for ANZ, Smith said in a July interview in Sydney, adding that he wasn’t worried by any exposure the bank has to that business in China. He didn’t

provide specifics on how ANZ had beefed up its procedures. The comments came as Chinese authori-ties examine fraud allegations linked to metals warehoused at Qingdao. “Historically, these things come out of the closet occassionally,” Smith said on the sidelines of a recent forum. “This is as old as time and it is up to the in-dividual banks to ensure their risk manage-ment is good enough to try and avoid these situations.” The bank said June 18 it had “limited indirect exposure” to Qingdao port and doesn’t expect any losses. “We are ok at the moment,” Smith said. “We’ve tighted up a little bit, but you’d expect that.”

— Narayanan Somasundaram

■ Australian Prudential Regulation Au-thority Chairman Wayne Byres told the House of Representatives Standing Com-mittee on Economics in Canberra that regulation on its own is not a substitute for supervision. “We primarily seek to identify and prevent problems, rather than deal with wrongdoers after the event,” Byres said in the July statement. “Supervision has greater capacity to be both risk-based and outcomes-focused. This, in turn, is likely to maxmize both the efficiency and effectiveness of the prudential framework.”

Byres also addressed claims about APRA being a “tough” regulator, espe-cially when imposing more stringent Basel standards. “Basel standards are minimum requirements and it is quite common for jurisdictions to apply more stringent standards in some shape or form; and secondly, there are peer jurisdictions that have gone further and/or faster in imple-menting the reforms,” he said. “We would not want to be perceived in any way as a soft regulator, but the claim that APRA is way out in front of the rest of the world is, quite frankly, incorrect.” Among the other important reforms he cited were key changes for authorized deposit-takers, superannuation and a review of insurers’ capital rules.

— Melissa Karsh

Masayuki OkuSource: Bloomberg/Akio Kon

Norman Chan Source: Bloomberg/Dale De La Rey

Michael SmithSource: Bloomberg/Jeremy Piper



REGULATION TRACKER

Asia Pacific Tracker DATE REGULATOR ACTION DESCRIPTION LINKS

Aug. 1 Australian Treasury Submissions Due

Proposal papers on central clearing of OTC interest-rate derivatives denominated in Australian dollars. http://bit.ly/1omfTOg


Consultation on extending unfair contract term protections to small businesses. http://bit.ly/1AftjAS

Aug. 8 Reserve Bank of India Submissions Due

Draft guidelines for setting up and operating a Trade Receivables Discounting System (TReDs). http://bit.ly/WPbzwO

Aug. 8 Monetary Authority of Singapore Submissions Due

Consultation paper on draft regulations for reporting foreign-exchange derivatives contracts. http://bit.ly/1zsszb7


Proposed amendments to the managed investment trust withholding tax regime to provide certainty for foreign pension funds.

http://bit.ly/1nG6xOe

Aug. 14 Monetary Authority of Singapore Submissions Due

Consultation on proposed amendments to MAS's notices to financial firms on the prevention of money laundering and countering the financing of terrorism.

http://bit.ly/1zbzzYU

Aug. 18 Hong Kong Monetary Authority & Hong Kong Securities and Futures Commission

Submissions Due

Joint consultation on mandatory reporting and related recordkeeping rules for the OTC derivatives market. http://bit.ly/WGYOET

Aug. 29 Australian Securities & Investments Commission

Submissions Due

Consultation on technical changes to trade reporting obligations for OTC derivatives. http://bit.ly/1AfsgAO

Sept. 1 Monetary Authority of Singapore Submissions Due

Consultation on proposals to enhance regulatory safeguards for investors in the capital markets. http://bit.ly/1omdSBO

Sept. 5 Australian Treasury Submissions Due Discussion paper on retirement income stream regulation. http://bit.ly/1rhbZ8h

Dec. 31 Reserve Bank of Australia Effective Date Final rules on the new criteria for eligibility of residential mortgage backed securities operations. http://bit.ly/12Rdmzf

AROUND THE WEB COMPILED BY MELISSA KARSH, BLOOMBERG BRIEF EDITOR

■ The Reserve Bank of India released a framework on July 22 for identifying do-mestic systemically important banks, or D-SIBs, as well as additional regulatory and supervisory policies for them, according to a statement on the central bank’s website. Four to six banks may be designated as D-SIBs under various buckets, RBI said, adding that the banks will be disclosed in the month of August every year starting from 2015. http://bit.ly/1xqgv6l

■ South Korea’s Financial Supervisory Service received 60 cases for investiga-tion regarding unfair securities trading practices in the first half of 2014, down 24.1 percent from 79 cases during the same period last year, the regulator said in a July 16 report. The decline was mostly spurred by government-level ef-forts to root out unfair trading practices, the FSS said. http://bit.ly/1nzYrpx

■ The International Organization of Securities Commissions (IOSCO) published a review of the implementation of its financial benchmark principles by the Libor, Euribor and Tibor administra-tors. The standard setter said more work is needed by banks and administrators to apply these principles. It also found that completed and ongoing reforms have raised the oversight, governance, trans-parency and accountability of the three administrators and their benchmarks. “Libor and Tibor administrators need to devote more attention to the management of conflicts of interest,” IOSCO said. http://bit.ly/1l7P2kg

■ The Australian government in a July 21 discussion paper reviewed retirement income stream regulation. The review includes a look at the regulatory barriers restricting the availability of relevant and appropriate income stream products in the Australian market, and the minimum

payment amounts for account-based pen-sions to assess their appropriateness in light of current financial market conditions. http://bit.ly/1rhbZ8h

■ The International Monetary Fund in a June report said the regulatory and super-visory framework in the Hong Kong Special Administrative Region, which is overseen by the Hong Kong Monetary Authority and Securities and Futures Commission, would benefit from strengthening the regula-tion and supervision of markets, auditors’ oversight and enforcement of securities regulation. The IMF overall said the regula-tors have developed a sound framework for regulation of the securities markets. The review, based on a self-assessment and market data report, aimed to see the extent to which the regulations currently in place adequately capture the risks undertaken by different participants. http://bit.ly/1AqPhAX



Q&A: AUSTRALIAN PE

Yasser El-Ansary, chief executive of the Aus-tralian Private Equity & Venture Capital As-sociation (AVCAL), told Bloomberg’s Jennifer Rossa that regulatory reforms since the global financial crisis have diminished superannuation funds’ appetite for Australian private equity (PE) funds and that pending regulation on disclosure may make investing in PE even more difficult.

Q: How did Australian regulators re-spond to the global financial crisis?A: Our regulators did pay very close at-tention to what was happening around the world in the economic downturn, even though it had a less significant impact in Australia. They took defensive steps to ensure that we had the right regulatory set-tings to avoid the worst of the impact from other jurisdictions and minimize the risk of the same sort of outcomes happening in Australia in the future. The government in the last three or four years worked toward some significant reforms in the context of our superannuation system. The govern-ment has focused on how to minimize risk, minimize cost and at the same time try to maximize retirement outcomes for working Australians in the long term. The reforms put in place over recent years are having the indirect effect of discouraging superannua-tion funds from investing in long-term illiquid asset classes like private equity and venture capital. That’s a significant structural chal-lenge for our industry and the broader econ-omy, and something that we’re continuing to talk to the government about now. Given the change in government in the last year, we’re encouraging the new government to take a close look at whether or not some of the recent policy reforms are consistent with the long-term objectives of maximizing the retirement savings of working Australians. In our view they are not.

Q: What sort of feedback are you getting from the government?A: We’re part of the way through a major review of our entire financial system. It’s something Australia last did around 20 years ago. Earlier this year the govern-ment appointed a panel to look closely at our entire system and how it should be modernized to help fund Australian busi-

AVCAL CEO Says New Rules Are Limiting Pension Fund Investments in Private Equity

Born: Canberra Based in: Sydney

Education: Bachelor’s degree in commerce from the Australian National

University; Masters in taxation law from the University of New South Wales

Professional background: Spent 13 years with PwC; Worked for the Austra-

lian Department of Treasury, Rio Tinto and Australand Holdings Ltd.

Current reading: Timothy Geithner’s “Stress Test”

Favorite band/musician: Coldplay

Favorite restaurant: Limoncello at Double Bay in Sydney

nesses. We’re part of that process through our contributions to this inquiry. A final re-port is due around December of this year. We’re expecting a series of recommenda-tions across financial sectors to map out a plan for how Australia can modernize its regulatory framework.

Q: How are the regulations affecting private equity firms?A: The impact of these regulations, which were put in place around two years ago, is starting to be felt in our industry and other longer-term asset classes with lower liquid-ity. That’s starting to be quite a challenge for a number of the PE funds. The other aspect that’s a challenge for private equity fundrais-ing in particular is the sheer scale of our superannuation pool. As part of the pres-sure to reduce costs and to reduce fees, we’ve seen consolidation among superan-nuation funds. That’s meant that their scale has increased. The minimum allocation that some of our superannuation funds want to make might be hundreds of millions of dollars. In some discussions we’ve heard that the smallest check they want to write is $200 million. For some Australian PE funds a single contribution from a single investor of that size is out of the question.

Q: Are you watching other regulations?A: There are plans here to introduce a dis-closure regime for assets held by super-annuation funds to ensure transparency and accountability. The government has proposed a range of reforms that would require disclosure to members of the full range of assets and investments held on their behalf right through the spectrum.

That presents a challenge for PE and ven-ture capital as an asset class. We’ve been using the U.S. FOIA laws as a comparable regime that our government should look to. Let’s not recreate the wheel, let’s look at what other markets have done.

The other area that is a major focus is our tax system. The government is proposing sweeping changes that would limit the capacity of corporate groups to claim deductions on interest on borrowing. We’ve been talking about how to manage the transition from an existing tax regime to a new one in a commercially appropri-ate way.

Q: What needs to be done for crowd-funding in Australia?A: Right now equity crowdfunding is an area that our system doesn’t cater to at all. We have crowdfunding platforms, but those are not geared toward raising equity. In the last six months or so the government commissioned an independent panel to look at how we might bring about changes in this area. That report has been handed down and the government is considering the recommendations. The government is concerned in a marketplace that doesn’t necessarily tolerate high risk that there’s very likely outcomes that would involve indi-viduals losing significant amounts of money without ever realizing a return. The govern-ment is trying to manage expectation versus reality. We don’t want to lose innovative startups to markets like the U.S. We tend to come up with great ideas, but our economy doesn’t do a great job of helping to support those startups as they progress through the investment scales that they need.



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FINANCIAL REGULATION - Centro Asia...

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