The introduction of new corporate fund structures by Hong Kong, Australia and Singapore (the OFC, CCIV and VCC respectively) is designed to encourage asset managers to look at domiciling funds in the fast-growing Asia Pacific region. Yet each vehicle goes about doing so differently, and that makes deciding between them a complex task. Our extensive asset servicing experience in supporting comparable schemes, such as UCITS, allows us to assess each, and determine which may provide the best fit with fund managers’ strategic goals and investment strategies.
In this two-part series, we outline the background, key features and the issues asset managers should consider when deciding whether to use these new structures in their fund manufacturing and distribution strategies.
Getting to grips with OFC, CCIV & VCC
Asset managers need to consider a number of factors, including regulatory, competitive and investor demands, when considering where to domicile their investment fund offerings.
In APAC, where assets are forecast to double from their 2016 levels to nearly USD 30 trillion by 20251, Australia, Singapore and Hong Kong are looking to further build and reinforce their positions as regional asset management hubs. Regional governments and regulators are committed to attracting investment, increasing cross-border trade and regulatory cooperation to create a dynamic and globally competitive funds management industry. The introduction of the new corporate structured fund vehicles in Asia Pacific offers a credible and compelling offering.
The introduction of these new fund structures also comes at a time of increased efforts to develop a single regional market for funds through various cross-border passporting schemes - notably, the ASEAN Collective Investment Scheme (ASEAN CIS)2, the Asia Region Funds Passport (ARFP)3and various bilateral schemes such as the Hong Kong- China Mutual Recognition of Funds (MRF) scheme4.
More choice, greater flexibility
The new structures introduce some important benefits, such as allowing an umbrella and sub-fund structure, and reduce some compliance requirements. Part two of this series assesses some of the advantages and disadvantages of each, as well as the ancillary factors driving fund managers (and investors) to consider them.
This article outlines the basics behind:
- Hong Kong's Open-ended Fund Company (OFC), which launched in 2018.5
- Singapore's Variable Capital Company (VCC), which is expected to launch later in 2019.6
- Australia's Corporate Collective Investment Vehicle (CCIV), which was expected to launch in 2019, but now looks likely to launch in 2020.7
Hong Kong's OFC
Hong Kong’s mutual funds have not been able to accommodate diverse needs from fund providers, though its laws have long allowed asset managers to set up investment funds in a unit trust structure. The OFC allows them to set up under a corporate structure.
Unlike a unit trust structure, the OFC does not require a trustee, but acts for and on behalf of itself. Additionally, its enabling law – the Securities and Futures Ordinance – permits it a variable capital structure, which is not the case with companies formed under the Companies Ordinance8.
Cost-wise there is little difference between the OFC and the unit trust structures. However, if we compare the cost of selling the funds established in Hong Kong versus outside Hong Kong, there is a cost benefit to set up as an OFC: An OFC is simpler and cheaper because it only requires compliance with Hong Kong legislation.
An OFC can have an umbrella and sub-funds structure, and the law supports cross-investment of sub-funds. It can be public or non-public, and must have a board of directors with at least two individual directors. It must appoint a fund manager, an external auditor, and a custodian who has responsibility for all safekeeping of assets.
A key benefit promoted by the authorities is that being domiciled in Hong Kong provides access to mainland China, although whether or not the OFC funds will be distributable under the MRF scheme has not yet been clarified9.
This specialised corporate structure introduces a fourth fund type to Singapore and is designed to provide fund managers with greater operational flexibility and help them reap economies of scale and monetary savings.
The enabling law (the Variable Capital Companies Act 2018) supports umbrella and sub-funds structures, with sub-funds able to appoint a local board of directors and use the same service provider as the umbrella fund.
A VCC covers both traditional and alternative assets, can be open-ended and closed-ended, and can be used for retail and non-retail strategies10. A retail fund requires three directors; a non-retail fund requires one.
Singapore’s strategic positioning in the region and its role as one of the world’s most competitive nations should further attract interest from asset managers11.
With the largest fund management industry in the Asia Pacific region, the introduction of the CCIV could prove to be a boon for the country12.
CCIVs have a range of benefits: they have an internationally recognised corporate structure limited by shares; they are designed to integrate with the ARFP cross-border initiative; and they complement the existing regulatory framework, potentially creating cost efficiencies and reducing compliance costs.
In a first for Australia’s fund management market, a CCIV must have one sub-fund (and can have more). Additionally, sub-funds can offer a range of investment strategies delivering increased investor choice, scale and cost-savings.
To protect investors, sub-funds’ assets and liabilities must be kept separately, with each CCIV required to have an authorised corporate director, which must be a public company. It is expected that the law will permit both retail and wholesale CCIVs and introduce a depositary requirement for retail CCIVs.
The second part of this series looks more closely at some of the factors that fund managers and investors should consider with funds that use these new structures, and their prospects for success.
Thanks to our Asia Pacific footprint and global cross-border expertise, BNP Paribas can help clients to identify the impact of the different schemes from a cost of administration or ability to support different investment strategies perspective. We provide support from set-up with trustee, custody and transfer agency services, as well as fund administration.
Call our experts for a more in-depth conversation about cross border fund distribution.
1 Asset & Wealth Management Revolution: Embracing Exponential Change, PwC (2017). See: https://www.pwc.com/gx/en/asset-management/asset-management-insights/assets/awm-revolution-full-report-final.pdf
2 For more, see: ASEAN Collective Investment Scheme (ASEAN CIS) - regulation memo, BNP Paribas Securities Services (April 24, 2019). See: https://securities. bnpparibas.com/insights/asean-cis-collective-investment.html
3 For more, see: Asia Region Funds Passport (ARFP) - regulation memo, BNP Paribas Securities Services (April 29, 2019). See: https://securities.bnpparibas. com/insights/arfp-asia-region-funds-passport.html
4 For more, see: Hong Kong Mutual Recognition of Funds (MRF) - regulation memo, BNP Paribas Securities Services (April 29, 2019). See: https://securities. bnpparibas.com/insights/hong-kong-mutual-recognition.html
5 FSFC implements open-ended fund companies regime, Hong Kong Securities and Futures Commission (27 Jul 2018). See: https://www.sfc.hk/ edistributionWeb/gateway/EN/news-and-announcements/news/corporate-news/doc?refNo=18PR90
6 Explanatory Brief on the Variable Capital Companies (Miscellaneous Amendments) Bill, Monetary Authority of Singapore (Aug 5 2019): https://www. mas.gov.sg/news/speeches/2019/explanatory-brief-on-the-variable-capital-companies-miscellaneous-amendments-bill-on-5-august-2019
7 For more, see: Australia Corporate Collective Investment Vehicle (CCIV) - regulation memo, BNP Paribas Securities Services (March 10, 2019). See: https://securities.bnpparibas.com/insights/result/cciv-regulatory-memo. html
8 For more, see: Hong Kong Open-Ended Fund Company (OFC) – regulation memo, BNP Paribas Securities Services (March 6, 2019). See: https://securities. bnpparibas.com/insights/ofc-regulatory-memo.html
9 “Hong Kong, Singapore Gear Up Reform in Asset Management Sector”, Regulation Asia (October 4th 2018). See: https://www.regulationasia.com/hong-kong-singapore-gear-up-reform-in-asset-management-sector/
10 For more, see: The Singapore Variable Capital Company – regulation memo, BNP Paribas Securities Services (February 12, 2019). See: https://securities. bnpparibas.com/de/insights/vcc-regulatory-memo.html
11 The Global Competitiveness Report 2018, World Economic Forum See: http://www3.weforum.org/docs/GCR2018/05FullReport/ TheGlobalCompetitivenessReport2018.pdf
12 For more, see: Australia Corporate Collective Investment Vehicle (CCIV) – regulation memo, BNP Paribas Securities Services (March 10, 2019). See: https:// securities.bnpparibas.com/insights/result/cciv-regulatory-memo.html
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