Three new fund passporting initiatives in the Asia Pacific region have similar aims to the successful European UCITS framework. What links the separate initiatives is a will to break down national barriers and open up capital market flows, thereby supporting growth, liquidity and efficiency. They should also improve investor choice and encourage the circulation of jobs and regional expertise.

ASEAN’s Collective Investment Schemes (CIS) Framework was the first to go live in August 2014, allowing the cross-border distribution of funds between Singapore, Thailand and Malaysia.

Hong Kong and Mainland Mutual Recognition of Funds (MRF) was implemented with much fanfare in July 2015 and allows the distribution of investment funds within Hong Kong and the Chinese mainland.

APEC’s Asian Region Fund Passport (ARFP) will launch sometime in 2017 with the other participating countries of South Korea, New Zealand, Singapore, Thailand and more recently the Philippines and, the latest to join in September 2015, Japan. Australia has led the charge on the ARFP under the APEC banner.

The potential gains for Asia's capital markets are indeed significant. The APEC Policy Support Unit has calculated that its Asian Region Fund Passport (ARFP) could save the region’s investors $20bn annually in fund management costs once it is up and running, as well as offering higher investment returns at the same or lower degree of risk.

Early learning

However, all these schemes are experiencing teething problems. Most issues either stem from the fact that they remain somewhat limited or that the makeup of markets in Asia remains far more diverse than in Europe. It obviously has no political (let alone monetary) union, meaning that multiple Asian financial and regulatory regimes remain far from harmonised. The issues are of a higher order than those of Europe pre-UCITS; it’s certainly no easy feat.

To date, only 13 funds have been recognised by their home jurisdictions as qualifying for ASEAN CIS. Hong Kong's MFR only has six northbound funds (HK-based and marketed in China) that have been approved as of 15 April, along with 32 southbound funds.

AFRP was originally pencilled in for launch in 2016 but this was delayed for a year. The biggest issue for ARPF is arguably the different taxation methods of each country, creating an uneven playing field for competing funds. ASEAN CIS is also operating with added complications of country-specific tax rules.

A successful passport scheme may have to rule that passport funds are not subject to tax, or withhold tax on distributions from the passport fund and investee companies, according to PwC.

Much work also needs to be done to harmonise regulation, reducing the barriers to entry to schemes and the associated operational difficulties. Different timeframes and requirements for application processes as well as multiple monitoring and reporting procedures are creating challenges for firms hoping to participate, according to BNP Paribas Securities Services.

The schemes currently operating have also experienced issues around currency rules and limits placed on qualifying schemes. Strict currency rules in Malaysia and Thailand are at least a contributory reason for the slow uptake of ASEAN CIS, making it difficult to distribute share classes in non-domestic currencies in these countries. China also has restrictions on foreign exchange. For the ASEAN CIS, funds can only invest in a limited set of assets classes: transferable securities, money market instruments, deposits, units of other CISs and financial derivatives.

The rules for China and Hong Kong's MFR are also tight, with the biggest constraint being that at least 50% of capital invested in the funds must be sourced from the home jurisdiction.

 Progress

Myriad problems there may be, but the good news is that most are being tackled head on. For example, Singapore has recently forced attention on the issue of taxation by refusing to sign an ARFP memorandum of understanding in September 2015 (although it has continued to play a part in discussions).

The Singaporean stance seems to have had the desired effect, and APEC is soon to release the results of its benchmarking and mapping exercise to identify taxation issues in each economy that could impede the competitiveness of the ARFP.

In September 2015, regulators in the three countries participating in the ASEAN CIS reformed the review process that allowed equity or plain debt issuers to distribute the same prospectus for multiple jurisdictions,based on a single ASEAN-wide set of disclosure standards.

ASEAN is also considering an extension of the scheme to cross-listing and offering of real estate investment trusts (REITs) and infrastructure funds as well as the feasibility of enhancing the cross-border private placements regime. China and Hong Kong are also considering an easing of their rules and there is reason to believe that this may happen in the moderately near future, according to the Association of Luxembourg Funds Industry (ALFI).

UCITS

UCITS took 25 years to achieve the success it enjoys today. Given the lack of a common supervisory committee, it is questionable that creating an Asian passporting scheme of similar depth is possible but it is unlikely that its gestation will be as long. 

Asian economies are developing at pace and they have proven ability to bring new products and ideas to market at similar or increased speed. As late as 2012, some market participants were doubtful that Asia would develop a viable passporting scheme at all – four years later there are three.

Assuming that the initiatives continue to gather momentum, and more countries think it is worth taking the plunge, there's huge potential for success.

One criticism that has been widely touted about schemes, mainly the AFRP, has been the absence of China. However, Ching Yng Choi, who heads up the Asia office at ALFI, says that they may well join at a later date: "We all see the potential of China joining but it's not essential to a scheme's success. 

China has its own agenda led with mutual recognition of funds and Stock Connects. It is watching its development from outside and it may decide to join in the future."

While it may take some time before all the kinks are ironed out, with an honest appraisal of the current problems and goodwill from individual countries to overcome challenges, an Asia fund passport that matches the success of UCITS is just a matter of time.