A recent flow article titled Asia’s securities markets: Turning the corner on Covid-19 assessed the impact of policy and operational responses by governments and financial regulators on Asia’s capital markets. Following its publication, Deutsche Bank’s Securities Services team decided to delve deeper, and host three separate webinars with regulators and investment industry practitioners looking at how Vietnam, Malaysia and Singapore continue to attract investors despite the upheaval caused by the pandemic. Led by the country heads, and organised by the Market Advocacy team, the webinars engaged clients and investors globally.

Reaffirming that the region’s progress towards attracting further investment remains on track, the webinars’ main themes were authorities’ continued efforts to develop their markets, facilitate the ease of investments, manage the long-term impacts on operational flows and financial markets and encourage digitalisation to strengthen operational resilience. Facilitating continual communication with cross-border stakeholders during challenging times was another key theme.

The first webinar of the series – held in May – discussed how policy makers, central banks, regulators, financial market infrastructures and other industry stakeholders have responded quickly and decisively to ensure Vietnam’s growing securities market maintains momentum.

Joseph Serrao, Head of Securities Services Vietnam at Deutsche Bank, kicked off proceedings by explaining that “Covid-19 has changed global dynamics, impacting the economic and financial trajectories for almost all countries, including Vietnam.” Against this backdrop, he explained, investors are closely monitoring government and central bank measures being put in place to mitigate the impact.

“Vietnam, much like Hong Kong and South Korea, has been very successful in containing Covid-19, in part driven by the government’s rapid formulation and implementation of mitigation measures at the beginning of the outbreak,” added Juliana Lee, Deutsche Bank’s Asia Chief Economist. “And, with Vietnam having ended its lockdown on 22 April, we are going to see a relatively quick economic rebound.” That said, she went on to warn that a second quarter contraction driven by external economies remains on the cards, with lockdowns in developed markets, and the accompanying recovery phase, likely taking much longer. To put this in perspective, the best estimates suggest that in Q2 the US and Europe are on track for the worst recession since the Second World War.¹

Vu Chi Dzung, Director General of the International Cooperation Department at the State Securities Commission of Vietnam, then shared the latest policies and updates on the Vietnam capital market. He began by explaining that, “in response to the Covid-19 pandemic, expertise and policy combinations from across the region have been shared to ensure there is harmonisation, not only for local investors, but also international investors operating in and outside of the region”. He explained that among the initiatives implemented has been the extension of deadlines for submitting financial statements and use of e-voting systems at annual general meetings (AGMs), which are being held in either physical or online environments. In addition, on 7 May 2020, the Ministry of Finance issued the Circular No. 37, which reduces the fees and charges on around 20 to 22 securities by 50% until 31 December 2020.

On the regulatory side there was also positive news, with Dzung explaining that the plan to apply International Financial Reporting Standards (IFRS) in Vietnam – a move that will bring greater transparency and continue to drive foreign investment – has now been approved. Preparations are now underway, with IFRS to be applied voluntarily between 2022 and 2025, before becoming compulsory for publicly listed companies from 2025 onwards.

Turning to Malaysia, and the country’s experience of Covid-19 has been exceptional even by the standards of an unprecedented global event. As Jacqueline William, Head of Securities Services, Malaysia & Sub-ASEAN, explained in the opening address of the second webinar of the series, the backdrop of changes in the Malaysian market came just as Malaysians were coming to terms with a recent raft of changes to the country’s government.

Speaking to more than 200 attendees, William hailed how “the entire nation very quickly shifted its attention to what matters most”, with participants aligning to protect the welfare of the most vulnerable segment of the population, avoid disruption to essential services or capital markets, and contain the spread of the virus.

The capital market’s effort was led by the Securities Commission Malaysia (SC), which released a series of relief measures to support capital market intermediaries and investors, and whose Chairman, Datuk Syed Zaid Albar, was on hand to explain the actions taken and analyse the impact.

From the outset, the SC identified the likely a significant impacts from Covid-19 and committed itself to two goals: to ensure that the market continues to function fairly and transparently, and to provide relief for market participants by easing operational pressures for intermediaries and ensuring investors have access to the right information to make informed decisions.

As simple as these goals sounded, realising them required huge amounts of careful co-ordination. Concrete actions that were taken, included the waiving of IPO listing fees for large corporations, the easing of fundraising for listed companies through private placement, the accommodation of convertible note issuance by venture capital and private equity firms, the raising of the fundraising limit for equity crowdfunding (ECF), and the implementation of secondary trading for ECF and P2P.

In addition to this, conscious of the “new normal” of home working, the SC launched a raft of initiatives to support the digitalisation of the market, ranging from the implementation of online trading and depositary account opening through digital signatures, through to industry-specific guidelines for carrying out certain procedures digitally. This included guidance for e-corporate actions – covering virtual and hybrid meetings, digital takeovers and digital share conversion – and the online distribution of capital markets products such as unit trusts, e-service platforms and e-wallet and e-payment service providers.

Significant results were quickly achieved. On 5 June, the SC was informed that 24 listed companies had conducted fully virtual AGMs for the first time, with several more having already announced plans for fully virtual or hybrid meetings in the near future.

“If there is a silver lining to the Covid-19 crisis,” said Albar, “it is the fact that it has forced companies to forge ahead with their digital strategies to ensure compliance with their legal and regulatory obligations.”

As William noted, the Covid-19 crisis has had the effect of shaking markets from their comfort zones across the board. But this hasn’t necessarily been a bad thing. “It was a positive step that SC gave brokers the flexibility to relax margins in order to manage volatility,” she observed. Counter-intuitive as this might be, it looks to have put a stop to margin-induced negative-spiral effects – so could it be a blueprint for future responses to volatility?

Albar was reflective on this point. Margin relaxation measures – including removing the requirement to automatically liquidate client margin accounts if the equity in that account falls below 130% of the outstanding balance, and allowing brokers to accept collateral such as bonds, collective investment schemes, unit trusts and immovable properties for the purposes of maintaining their clients’ margin account – appear to have helped in the short term.

Yet these were very urgent changes implemented in a distressed situation.

“Once the pandemic is over, we will have to review and determine whether these actions would still be appropriate going forward and will have to consider the circumstances prevailing at the time of future decisions,” he concluded.

When it comes to Singapore, the second most transformational development of 2020, after the impact of Covid-19, has been the introduction of the Variable Capital Company (VCC) framework. Launched in January 2020, the VCC is a new corporate entity structure through which several collective investment schemes can be gathered under one single umbrella, and yet remain ring-fenced from each other.

Opening the third webinar in the series, dedicated to this topic, Girish Pandit, Director, Securities Services Singapore Branch, Deutsche Bank, explained that VCC “is the city-state’s investment fund innovation, which can be used widely for investment funds and provides fund managers with greater operational flexibility and cost savings. It has been called a ‘game-changer’ not just for the Singapore fund industry, but also for the Asian asset management industry more broadly.”

Anand Rengarajan, Head of Securities Services Asia Pacific, Deutsche Bank, added: “Singapore is home to an efficient, market-leading asset management industry with over US$2.5 trillion assets under management, which continues to grow. The VCC, designed to encourage managers to domicile funds in Singapore, will immensely aid this growth trajectory.”

Elaborating on this, Elean Chin from the Monetary Authority of Singapore (MAS) outlined that, while Singapore is a leading Asian fund management hub and is region’s largest distribution center (distributing more than 3000 cross-border funds), “only a small proportion of these funds are actually domiciled in Singapore.” To date, most have been either pooled or domiciled outside of Singapore due to the lack of a flexible corporate vehicle. “The next stage of growth,” she outlined, “is to position Singapore as a full-service fund management hub and capture a greater share of the fund management value chain, including the fund servicing space.” In this respect, Chin sees the VCC as the final piece of the puzzle.

“The VCC, designed to encourage managers to domicile funds in Singapore, will immensely aid this growth trajectory”
Anand Rengarajan, Head of Securities Services Asia, Deutsche Bank

Chin explained that there are now more than 70 VCCs and appetite for the launch has not been dented by Covid-19. The VCCs to date have been used by both traditional and alternative fund managers and small multi-family offices across a wide range of fund strategies, including private equity, venture capital, hedge funds and tech investing. “We are encouraged that global fund managers from the US, China and India have adopted the new VCC structure – and we have even seen managers who have no operations in Singapore seeking to set up a presence to take advantage of the VCC,” she said.

One of the funds already benefitting from the VCC, having been part of its pilot programme, is UTI International Singapore. UTI’s Head of Product Manish Khandelwal explained the appeal: “The structures before VCC were more suited to private equity. The VCC allows us to create a standalone structure for investment into India – it is a perfect opportunity for us.”

Chin admitted that some small teething problems are inevitable – and that MAS is working hard to lower the costs and other barriers to entry. She pointed to three key initiatives in this respect, including the pilot programme, which she says, “created a strong launch and allowed the industry to see the usability and flexibility of VCC on day one”. In addition, Chin noted that the VCC model constitution, developed by the Singapore Academy of Law in collaboration with the industry, has helped deliver a starting point for understanding the structure and has helped to smooth the process for establishing a VCC. To encourage adoption, MAS is making grants available to cover up to 70% of the set-up costs, capped at SGD$150,000, said Chin.

When considering the benefits for wealth managers, PwC Partner Armin Choksey pointed to the flexibility of the VCC as a key differentiator. Choksey explained that, previously, two (or more) separate structures would often have to be created for different investor demands – now more efficiently performed via a VCC, that can act as an umbrella entity with multiple sub-funds, each with segregated assets and liabilities. This can help attain economies of scale by saving operational and compliance costs associated with setting up multiple corporate vehicles. “You can do anything [any funds] under the sun with the VCC umbrella,” said Choksey, although he added that the operational aspects and the economics of doing so need to be thoroughly considered.

For tax purposes, a VCC will be treated as a single entity – and should be eligible to access Singapore’s tax treaty network where it is considered as a Singapore tax resident. “It’s a win-win for Indian fund managers,” said Khandelwal, in that they can “check all the boxes and enter the treaty without any worries about the Indian tax regime and how it may view the structure.”

For more information, please contact Xiu-Qi Chen (xiu-qi.chen@db.com) in the Deutsche Bank Securities Services Market Development & Advocacy team.

Sources

¹ See https://bit.ly/31d4c5h at worldbank.org