Lee Bray, Head of Equity Trading, Asia Pacific, J.P. Morgan Asset Management, discusses the development and drive towards Commission Sharing Agreements (CSAs).
The development and use of CSAs is well established in Hong Kong given the existing history and culture of CSAs in the region. This is in contrast with somewhere like Japan where CSAs are not explicitly prohibited but they are just not generally used. It appears that the industry needs to seek clarification with the regulators in Japan to establish whether CSA’s are possible or not.
At J.P. Morgan the ideal scenario would be to have a platform that we can run multiple brokers on. We try to manage everything internally so we would use our own business model with respect to CSAs. From a systems perspective there are benefits in having interaction with a third party in terms of paying firms, research etc, but managing it all internally is our principal aim.
With regard to further development and use of CSAs, here in Asia we are only just beginning. Europe developed a process that firms had to go through, and I think we will gradually move towards something similar in Asia. The industry is getting up to speed and we need to better understand how CSAs work including their implementation and any issues or problems that can potentially arise. This is particularly relevant to the global asset managers who are working towards a global best practice in many instances.
Given the multiple markets and regulatory nature of the region it is even harder to work with CSAs – when you’re dealing with different legal entities it becomes difficult to administer.
Recently there has been a trend for regulators to focus on topics that have been under examination in other regulatory areas, for example the dark pool issues in Australia. It does make sense to try to keep up today with what’s going on in, say, London, regardless of the regulatory environment here in Hong Kong as you never know what could come along.
Do you think clients are becoming more switched on about CSAs?
Given how well it has been publicised, there has been a big push recently with the focus on trading costs and use of commissions, and clients are certainly becoming more focused. Clients themselves, particularly those based outside of the region, are a lot more evolved in their questioning about CSA and commission spend, although I still think there is a learning curve.
With the global nature of the business it seems a natural progression that asset managers in the region will have to grow according to the rules and regulations that are coming in across the globe. For example UK based clients investing in the region could well have certain expectations around CSA’s given their home regulators’ focus on it. Of course, the whole process is taking time to get established given the long developmental period involved. I know from my experience in the business that these questions probably wouldn’t have been in focus 15 years ago but they are certainly important now.
I think some firms will choose between research or execution on the sell-side although I can foresee a number of brokers who will make the step and be able to maintain both top tier research and execution. It will be helpful to see how the sell-side business model evolves in the UK to give us a better insight into how things might work in the future here – if the regulators ultimately feel the need to follow the same route.
It will take time to work through however and is the best indicator of what’s going to happen – the bigger firms in the region are ready for it simply because they have experience in other regions, nevertheless it will take a bold step, if and when the regulators become involved for firms to make that move.
I think global firms will move towards the more stringent global rules and regulations, regardless of local regulation. That might not be the case for the more localised firms where it’s not such regulations pressing issue due to differences in global regulations.
The aims of the regulator
In the UK, it seems that regulators are aiming for a fixed amount of commission to be put into research. Whether or not that is viable is yet to be determined, but it is good for us to be taking a view from here to see what happens in the UK and to give us an idea of how it affects the industry. The change to the overall industry is a fundamental one and we must be cautious as it works its way through. It could be that because of the structures here in Asia, that it might not significantly change anything. APAC is very different to other regions and must be taken in its own context.
Considering what’s been happening recently in Japan, it will be good to implement a CSA programme there. However, we would need to consult the regulator to see if this is a viable option.
It is a priority but there are limited resources available to the regulators to be looking into these things. It is high up on our agenda but then we have to balance that against the regulator’s own agenda. I think that the discussion on this issue has only really just started.