CACEIS NEWS 38 EN

No. 38 - June 2014 - caceis news 3

Interview with Steven Libby, PwC Luxembourg, Asset Management Leader

NEW BUSINESS

The Edmond de Rothschild Group and CACEIS sign a fund accounting, bookkeeping, custody and transfer agent services agreement in Luxembourg

Therefore asset managers must un- derstand their investors’ needs and adhere to their risk principles. As already mentioned in one of our previous reports 1 , asset managers must strive to deliver consistent risk-based performance and charge appropriate fees while demonstrat- ing the utmost transparency and governance as well as a commit- ment to meet the needs of institu- tional investors through operation- al strength. At the same time, they need to be able to navigate the new regulations effectively in order to deliver appropriate investment schemes and communicate effec- tively with their clients. The report warns that if asset managers fail to take advantage of the digital era, a new breed of entrants could disrupt the market. Where do you think these new en- trants might originate? In many respects, digital investing is a new frontier for asset management providing new opportunities for as- set managers to engage not only in direct communication with investors, but also to team up with technology players to increase sales and disrupt the market. In China, several nota- ble asset managers and new entrants within the financial services industry

to the fund is delivered via its online platform AliPay. Yu’e Bao, which launched just ten months ago, has attracted more than 81 million in- vestors. By comparison, China’s A-share market boasts about 67 mil- lion investors after 23 years of devel- opment. In an incredibly short time, Yu’e Bao has become the third larg- est money market fund in the world. Last year (October 2013), Baidu and China Asset Management Company also teamed up to launch an online wealth management platform of- fering two money market funds: “Baifa” and “Baizhuan”. In January 2014, Tencent cooperated with four asset managers (ChinaAMC, EFund, China Universal and GF Fund) to launch a similar product called “Licaitong” on its popular instant messaging smartphone ap- plication, WeChat. In the past, communication towards investors has predominantly been seen as the responsibility of distrib- utors, especially in the retail space, but the rise of social networks has created a channel that allows inves- tors to interact directly with asset managers and obtain information with little effort. Additionally, on- line investment communities fa- cilitate investor connections which foster the exchange of information, giving rise to the digital investor who is both well informed and criti- cal of the asset management and fi- nancial advice industries. Those that do not integrate digital technology into their business mod- els could face real competition from a new breed of entrants emerging from technology firms that under- stand the value and efficient utilisa- tion of new technologies to create a unique client experience within the industry. However, this is mitigated by the fact that technology firms will have to overcome the regula- tory and cost barriers of entering the financial services industry

their managers pro- tects investors, but also limits systemic risks and risk trans- mission. Each fund is legally separate from its manager and the manager’s other funds, so investment risks in one fund do not spill over to others. Fund assets are held sepa- rately by an eligible custodian and, there- fore, cannot be used to cover losses incurred by the manager. It is important to remem- ber that, although as- set management is taking over some busi- ness from banks, it re- mains a separate entity with its own unique framework and busi- ness model. Therefore,

After entering into exclusive negotiations at the end of 2013, the Edmond de Rothschild group and CACEIS can now confirm that a partnership has been agreed. * The deal will allow the Luxembourg arm of the Edmond de Rothschild group to continue developing a high value-added service, following the Edmond de Rothschild model and supported by a progressive, state-of-the art operational platform. CACEIS will provide bookkeeping, custody, transfer agent and accounting services, while Edmond de Rothschild (Europe) will remain depositary and

The report identifies significant opportunities for asset manage- ment in funding national econo- mies. Is there a risk that the largest players might be classi- fied as a systemically important financial institution (SIFI) and therefore be subject to higher capital requirements and capital surcharges? Yes, the growing importance of the asset management industry does increase the risk of it being regulat- ed as banks. Often, policy makers mistakenly put asset management and banks in the same category, and apply identical regulations to both. But the two are entirely dif- ferent. Categorizing them together would unnecessarily impose siz- able constraints on investment flexibility for asset management and potentially increase the costs for end-investors. In its current state, the asset management indus- try is already highly regulated and does not pose a systemic risk to the economy. Therefore, regulations that apply to banks may not nec- essarily apply to the asset manage- ment industry. For instance, asset management, with the exception of hedge funds, does not use leverage. Therefore, mutual funds and UCITS don’t fail the same way banks do. Unlike banks, asset managers are not compromised if their investors lose money. In an agency func- tion, asset managers do not bear credit, market and liquidity risk on their own. Blackrock, the world’s largest asset manager, currently has over $4 trillion of assets un- der management, but has only $9 billion of assets of its own. Fluctuations in asset values do not threaten the insolvency of an as- set manager as they would a bank. Furthermore, investors fully expect to absorb losses along with gains.

bank regulations designed to pro- tect clients will not necessarily be appropriate for asset managers. As a key client segment going forward, what special considera- tions must asset managers ad- dress in order to meet the needs of institutional investors?

central administrator, meeting its commitments to its customers.

The deal involves assets of more than €20 billion. More than 110 Edmond de Rothschild employees will join CACEIS teams on 1st October 2014.

CACEIS/PwC Assurance Model

More than €20bn in assets 110 employees will join CACEIS More than

According to Marc Ambroisien , CEO of Edmond de Rothschild (Europe): “By choosing CACEIS, a global leader in this business and a long-standing partner of our Group, we have laid the foundations of our future development. Our teams have worked together in recent months, allowing us to maintain the highest levels of service and offer bespoke solutions that set us apart from the market.” Pierre Cimino , Managing Director of CACEIS Bank Luxembourg, added: “This is an innovative alliance which will draw on our complementarity and respective skills, and see us consolidate our relationship with the Edmond de Rothschild group, an internationally- renowned partner. CACEIS hopes to support the Edmond de Rothschild group in its development strategy through its constantly changing service offering. The staff joining us will help ensure the quality and continuity of services for our partner and its customers.” * Subject to the approval of the Commission de Surveillance du Secteur Financier

Source: CACEIS/PwC, Taking the Reins, 2012

1 CACEIS/PwC, Taking the Reins, 2012

As asset managers begin to fill the gaps left by banks, they will be- gin to serve a variety of growing sources of money, specifically in the area of long-term investments. Institutional investors, such as pension funds, (life) insurers and sovereign wealth funds (SWFs) represent an important source of long-term finance, so asset man- agers will have to increase their expertise to provide solutions for these investors. Furthermore, institutional inves- tors have become more risk-sensi- tive and require the utmost trans- parency. At the same time, they expect positive returns delivered by investment vehicles that are ap- propriately suited to their goals. As institutional investors have be- come more proactive and scrupu- lous of their investments in light of poor returns, full disclosure of risk has emerged as a key concern.

have leveraged on new technologies to gain market share and disrupt the status quo. E-commerce company Alibaba has blended the best attrib- utes of Amazon, eBay and PayPal to deliver premium service to its 300 million “real–name” 2 users. Access

2 A “real-name” is certified and linked to a Chinese bank account. Currently, there are 800 million registered accounts with Alipay that are not necessarily certified or backed by a bank account.

In fact, the inherent structure and regulation of mutual funds and