ACSA Special Edition Conference Newsletter

2010 ACSA/Investment & Technology Thriving in the New World Order Investment Administration Conference.

From the Chair, Bryan Gray

Welcome to a special edition of the ACSA member newsletter.

This newsletter provides an update on our recent annual custody and investment administration conference in Sydney, as well as the latest news from ACSA itself.

Produced by Investment Magazine in association with ACSA, our annual industry conference once again packed a strong agenda with many sessions attended at full capacity.

The impact of regulatory change on the Australian financial services sector, as well as ongoing challenges in improving operational efficiency were core themes of the day, with a broad range of additional commentary around topics such as prime broking, super fund mergers, platforms and distribution and administration and technology developments.

ACSA has flagged 2010 as another year of significant change for the investment and financial services sector with a raft of new law and regulation set to affect custodians and their clients. As always, ACSA takes the position that implementation should be as efficient and practical as possible.

ACSA believes there is a fine balance between regulation and efficiency and to this end has contributed a submission to the Cooper Review in relation to its Stage 2 Operation & Efficiency Review.

Read on for more on this submission, as well as some highlights from the conference and recent ACSA activity.

Finally, the conference dinner featured a presentation of ACSA Awards for 2010, and the opportunity to recognise those who have made an outstanding contribution to the industry.

A copy of all available ACSA conference presentations can be found on the Conexus Financial website here:

Australia in danger of over-regulation

Professor Ian Harper of Access Economics kicked off the ACSA conference with the dominant theme of the day: the impact of financial regulation.

According to Harper, while Australia has weathered the global crisis well compared to the rest of the world, we risk becoming swamped with global regulatory reforms which are neither "appropriate nor necessary" for Australian conditions.

"The quality and efficacy of Australia’s regulatory regime is one of the reasons why Australia performed well, however there is a trade-off between efficiency and regulation… enhanced safety comes at a cost," he told the audience. "In the fog of macroeconomic war, microeconomic efficiency losses are collateral damage," Professor Harper said.

Some of these microeconomic efficiency losses include the return of leverage ratios which were abolished in 1988 and the potential for the return of the liquidity ratio, abolished in 1980.

Harper examined the raft of global regulatory reform currently underway, including measures generated by the G20 Pittsburgh Summit 2009, the Financial Stability Board, BIS, IOSCO and IASB and FASB accounting regulations.

Headline regulatory proposals include measures around capital adequacy, macro-prudential regulation, leverage ratios, liquidity ratios, credit rating agencies and the ‘too big to fail’ additional regulatory requirements for institutions of systemic importance.

He said the implications for Australia were higher cost of intermediation ("a fillip to a new round of disintermediation?"), higher cost of capital to be passed through to Australian business, and influence placed on local regulators – eg heightened concerns over hedge funds / shadow banks offshore which may force regulation of Australia mortgage trusts.

The expert views dovetail with ACSA industry comment on the need for Australia to balance regulation with the industry’s ongoing drive for efficiency.

"Australia’s regulatory framework needs review and adjustment but not a major overhaul… the debate is just beginning about how to best facilitate ‘mutual recognition’ of Australia’s response to regulatory reform," Harper said.

"There is a need for closer relations amongst Australia’s regulators."


Professor Ian Harper from Access Economics discussing regulatory proposals.

Increasing regulations, responsibilities to drive operational efficiency

The impact of increasing global regulations and the growing responsibilities placed on custodians post GFC were two driving themes in a discussion around global trends in operational efficiency at the ACSA conference.

Specific events such as the collapse of Lehman’s has shed light on the distinction between a custodian providing ‘reasonable care’ to clients and having an ‘absolute responsibility’ to restitute assets lost in a corporate collapse. According to Andrew Bastow, HSBC Bank Australia’s head of securities services, managing these risks better will need to be priced into the service model.

“If the risk and liability that custodians are taking on changes, this will lead to greater costs to industry and will be borne by custodians and perhaps clients," Bastow told the audience.

Mr Bastow said Australia had very good levels of efficiency across the settlement process but singled out corporate actions as an area for local improvement.

"Globally the market has made great strides regarding bringing Swiss standards to the reporting of these transactions... however the market is lagging here in terms of the funds management community understanding or wanting to spend investment dollars on improving client service in this area," he said.

Pierre Jond, incoming managing director Australia and New Zealand for BNP Paribas Securities Services, said 24/7 securities processing – like STP – was always moving closer and was clearly a trend as the industry continued to globalise.

"24/7 is certainly a trend but we’re still more a 24/5 industry, we’re not working weekends just yet," he quipped.

"The general trend is still a matter of scale... to sustain stable processes efficiently we need to maintain economies of scale and the concept of developing ‘centres of excellence’ is a good way to centralise competencies... it’s a way to leverage scale both from a human resources and technical perspective."

On the question of offshoring, Jond said the decision to establish offshore centres was also part of the globalisation theme as firms faced pressure to grow services, as well as a reaction to new political risks highlighted by events around 9/11. He said firms needed to take a prudent approach and look at what global platforms they can leverage, as well as using global systems which can be tailored to local markets.

"The incoming TOFA regulations are a good example of something that needs to be done on the ground," he said.

Bastow said firms needed to consider the business drivers behind the decision to offshore.

"Australia has several dynamics that are similar to Europe... the offshoring decision is not just about labour but needs to be about the overall service proposition and what you are putting in front of a client," he said. "Where unemployment is low you are likely to have a war for talent and a limited resource pool to keep growing, so the question is how do you keep growing and remain competitive.  So offshoring is not just a political risk issue but also a question of growing sustainably."


Andrew Bastow, Head of Securities of HSBC Australia, confronts the tough issues of offshoring and operational efficiency gains.

Super fund mergers – where are they?

With so many industry experts forecasting super fund mergers over the last 12 months, the actual activity has been smaller than predicted, conference delegates heard in a session on fund mergers.

A key theme to emerge from the discussions was that trustees, where possible, should look for certain size economies of scale where they are available.

Andrew Proebstl, CEO of Legalsuper, voiced his opinions saying larger funds were not always the best performing, nor do they have the lowest fees. Although he did say there were benefits to mergers as smaller funds carry the burden of compliance which can be a major influence.

While there are obviously advantages to mergers in the right conditions the discussion was divided on the key drivers and barriers.

Sheena Kay, tax partner at KPMG, pointed out that people thought the tax concessions granted to super would drive the mergers. "Unfortunately, tax has not proven a driver for mergers, especially with the technical deficiencies of the legislation and issues which are still to be dealt with," she said.

Graham Sammells, CEO of the IQ Business Group, also highlighted the difficulties with data migration which can be required during fund mergers. "Data migration just adds a layer of complexity with integrity of data being a key issue which could result in downtime of systems," he said.

Although there were plenty of barriers to overcome, merger activity is still expected to continue, especially amongst funds under $3 billion in assets. However, with so many issues yet to be resolved it may be more of a gradual process than initially predicted.


From left to right, Andrew Proebstl, CEO of legalsuper, Graham Sammells, CEO of The IQ Business Group and Sheena Kay, Corporate Tax Partner of KPMG discussing super fund mergers.

Impacts of TOFA to linger longer

With the Taxation of Financial Arrangements (TOFA) legislation applicable from 1 July 2010 taxpayers of all sizes are scrambling to be prepared. With over a hundred issues identified by the tax liaison group and still requiring resolution, conference delegates pondered the impact TOFA will have on the industry – now and in the future.

David Rhind, senior manager investment accounting solutions at DST Global Solutions, said TOFA was a real opportunity for custodians to distinguish against competitors. With TOFA having real world tax effects impacting on the reporting of numbers, accuracy, efficiency and how well companies adapt will become important issues.

"Only a small portion of the industry has a really good grasp of TOFA. With some service providers more prepared than others, TOFA may be an opportunity to win clients," he said.
Paul Toepfer, the appropriately named head of fund operations at State Street Australia, agreed TOFA would become a distinguishing trait in the industry. However, with the likelihood of further amendments to the legislation, issues surrounding complexity may arise.

"A major problem with TOFA is Australia’s already complex tax system. This combined with very little guidance being provided means until test cases occur, taxpayers cannot be certain about the grey areas. The reporting season ahead will also be an important testing ground for future developments in the legislation," Toepfer said.

The management of TOFA by the ATO is another issue. No real guidance has been provided on disclosures and the level of detail required. With various disclosures being made in TOFA, the speakers questioned the level of supporting documentation required by taxpayers.

"One of the issues being looked at is dealing with approximations where historical data is not available. Estimations require assumptions, but how will this be communicated to the ATO?" Toepfer asked.

With any new legislation, more issues will be exposed during the first year as the system is tested. The legislation will continue to evolve to close loopholes and remove unintended consequences of the legislation.

"Although initial implementation of TOFA will be the most difficult aspect, people forget legislation changes over time. Being prepared and understanding TOFA in its current form is important, but being aware of the changes which are most likely to occur is just as crucial," Mr Rhind said.


Paul Toepfer, Head of Fund Operations of State Street Australia and David Rhind, Senior Manager of DST Global Solutions commenting on the difficulties surrounding TOFA.

Custodian as prime broker? Transparency the key says panel

The future shape of prime broking services was discussed at the ACSA conference by a panel representing a range of perspectives: a prime broker (Merrill Lynch), asset owner and trustee (Colonial First State Investments) and a custodian (Citi Global Transaction Services).

Greater transparency around prime broking arrangements was the call of the day as each panelist put forward their views on changes occurring in the industry.

Citi’s Martin Carpenter said asset owners had not fully understood the implications of differing custodial arrangements for traditional long-only type investment and increasingly mainstream alternative investments such as hedge funds.

"The collapse of Lehman’s changed all that however, with investors starting to look more closely at counterparty risk and who had control over the assets in a custody context," he said.

Lehman’s collapse showed that some hedge fund investors’ assets were comingled with other Lehman client assets so the connection between the beneficial owner was lost, leaving the ultimate owners of the hedge fund assets as unsecured creditors in the queue.
"We’ve had to sit down with clients and explain what it all meant," Carpenter said.

Daniel McNicholas at Merrill Lynch said he "felt like the villain today" being a prime broker and also a former Lehman’s man. He said the decision for asset owners was not a choice between using a prime broker or a custodian, rather to have a range of options to choose from.

"As long as providers are transparent regarding the set up and the risks, investors can choose the option that is best for them," he said.

John Paull from Colonial First State said as an asset owner and a trustee, his organisation had reviewed its prime broking set up after the GFC in an effort to protect assets.

"We see there being an insurance premium to having a structure where assets are protected… it’s important to understand the implications of different set ups and the trade off regarding added funding costs," he said.

Citi’s Carpenter said the industry had progressed in terms of the offerings now available. In order to improve on earlier ‘clunky’ operational arrangements between custodian and prime broker accounts, which made it harder for fund managers to execute their strategy, Citi has brought all the elements onto one platform including a common reporting set up and single point of contact to optimise movement between broker and custodian based on levels agreed with the client. Asset owners could also select assets likely to get a better return to go into the prime broking model, with lesser earning assets staying with the custodian.

"So with the increased risk oversight you are still getting better returns from your assets,"  Carpenter said.

Debate continues around share purchase plans

One of the biggest issues currently being debated is the access of beneficiaries to share purchase plans, conference delegates heard in a special session on priority ACSA issues. Currently there are restrictions to a beneficiary accessing share purchase plans where the registered holder of the shares is a custodian.

ACSA met with ASIC at the end of 2009 to discuss why these restrictions had been imposed in June 2009, and provided reasoning as to why they should be lifted. Sandra Powell from HSBC Securities was hopeful the lobbying would be successful.

"We are quietly confident our requests will be heard by ASIC," she said.
Another area of focus for custodians will be the tax treatment of proceeds received from rights issues and also potential for withholding tax to be withheld from these proceeds.
This has been an area of much debate since the Commissioner of Taxation vs McNeil (2007) case where the High Court treated the proceeds of rights as ordinary income. There have been conflicting views on whether all rights issues will be treated in this manner and lose access to the capital gains discount.

"The custodians are working closely with different working groups to come to a position on what we believe is the fair and correct taxation of rights. We will be lobbying the ATO to help ensure the rights issues are treated in the correct manner and whether withholding tax should be withheld from non resident shareholders," Powell said.

Some of the other highlighted issues to be faced by the custodian sector this year include:

• Custodian reporting requirements
• Non compliance with 12-H reporting including withholding tax issues
• Processing issues with the Rapid system 

If any of the above topics interest you, please contact Vera Paratore on (02) 8235 2530 or VParatore@ifsa.com.au

Industry supports Sydney’s homeless

To conclude a busy day at the conference, delegates enjoyed cocktails and canapés followed by a gala dinner. Conexus founder Greg Bright made a heartfelt speech outlining his own life changing experiences from just one day he and his team spent at the Wayside Chapel, the conference’s philanthropic partner for the past four years.

Sponsored by Milestone, the dinner again helped raise money for the Wayside Chapel, this year bringing in $18,740. Over the past four years the custodial industry has raised nearly $250,000 which goes directly to support the local homeless community.

Wayside Chapel Pastor Graham Long spoke to diners about the Wayside’s work and the significant impact donations have on the lives of homeless people. He also highlighted the impact of donations from the 2009 conference which helped fund an extra full time employee, dedicated to helping the less fortunate.

Finally, entertainment came in the form of comedian Gary Eck, a multi talented performer with an ability to mimic various celebrities. The highlight of his act was his use of a mug and a microphone to mimic Darth Vader with more than a few delegates rushing home to see if they could achieve the same results.

As the festivities drew to a close, delegates bid farewell to the Sofitel, only to wait another year for the next conference.


Wayside Chapel Pastor, Graham Long, asking for continued support from the industry and illustrating the amazing opportunities last year’s donations provided.

Custody sector recognises outstanding achievements in 2010

ACSA was proud to announce the second year of winners of the ACSA Awards at this year’s conference. The awards recognise outstanding contributions to the industry, members, clients and ACSA itself. Similar to last year, there was a strong level of peer recognition within the industry and the quality of candidates nominated made it difficult to choose the eventual winners.

Denise Hartman, Learning and Development Manager with BNP Paribas (Sydney) and chair of ACSA’s Professional Development Working Group, was recognised for her lead role in guiding ACSA’s development of an accredited industry training module for custody practitioners.

Launched in March 2009, the ACSA Institute offers a range of education opportunities to promote the professional development of employees working within Australia’s growing custody sector. Ms Hartman’s contribution has been instrumental in driving not only the launch but a successful first year of courses through her active championing of the training agenda amongst member firms, coordinating the training provider and achieving excellent results and feedback from professionals undergoing the courses.

Lisa Simmons, a Sydney based partner with law firm Blake Dawson, has generously contributed her time and expertise to the ACSA Regulatory Working Group. She has been instrumental in helping members understand and influence issues raised by regulators and interpreting new policies and law. Lisa has provided assistance with drafting submissions and interaction with regulators across a diverse range of issues including Share Purchase Plans, Anti Money Laundering/Counter Terrorism Financing rules, Corporations Act disclosures, and the application of the Hague Securities Convention to Australia.

Andrew Gibson, Product Manager, Citi Global Transaction Services in Melbourne, has been awarded for his contribution to improving the effectiveness and efficiency of custodian operations in the Australian market. In particular, Andrew has worked on numerous papers, projects and submissions as part of the ACSA Corporate Actions Working Group including the refinement of Share Purchase Plans processing and the problems of late notification of debt instrument interest rate changes to the market.

On behalf of ACSA, we thank the three winners for their enormous contributions to the custody industry over the last 12 months. Each winner has committed their skills, time and expertise to influencing regulatory change, providing training and improving the efficiency of the Australian custody sector.


Bryan Gray, ACSA Chairman, Lisa Simmons, Partner of Blake Dawson, Denise Hartman, Learning and Development Manager of BNP Paribas and Andrew Gibson, Product Manager, Citi Global Transaction Services receiving their awards.

Investment Administration working group makes Cooper Review submission

One year in, ACSA’s Investment Administration working group under the lead of Ausmaq’s Robert Brown has consolidated its focus with a recent submission to the Cooper Review in relation to Operation & Efficiency.

The focus of the ACSA submission was to draw attention to the need for:

• Continued support of a competitive market as the most important driver of sustainable innovation and efficiency improvement.
• Substantive reduction in the hidden agency costs of administering complex and impractical prudential, tax and accounting regulation.
• Encouragement of further automation and e-commerce standards within wholesale investment administration.
• Alignment of superannuation policy in support of Australia’s emergence as a financial services hub.

Commenting on what's next for the Investment Administration working group, Brown said that with so much focus on regulatory reforms, the group will add most value by ensuring information is properly exchanged between other ACSA working groups and industry bodies.

So far the invitation has been extended to the Tax Working Group, the P Group, and the IFSA Unit Pricing working Group for information sharing and cross-attendance by members.

The focus for the next twelve months will include:

• Administration impacts of MIT Capital / Income declaration and changes to FIF legislation - in consultation with Tax WG.
• Valuation issues related to stock splits and buy-backs, including off-market.
• Difference between NAV conventions and financial accounting treatment (fair value versus last close).
• Lack of standard practice in calculating and reporting hard close unit prices – in consultation with IFSA and P-Group.
• Lack of standard practice in reporting ex-date and distribution information for funds.
• 12H Reporting.
• Potential for a second submission to the Cooper Review on the fundamental role of the custodian. 

If any of the above topics interest you, please contact Vera Paratore on (02) 8235 2530 or VParatore@ifsa.com.au

Transitioning to TOFA

With the new TOFA legislation targeting any “financial arrangement", Tony Mulveney, tax partner at KPMG, looks at the impact this will have on the sector, and what steps custodians can take to ensure the transition is smooth for clients.

After a long wait and redraft after redraft, the new taxation of financial arrangements legislation is finally coming into effect on 1 July 2010. In simple terms the new legislation aims to align tax and commercial recognition of gains and losses.

This is a one sentence summary and obviously, the finer details are much more complicated than this and custodians will be more interested in what needs to be done before 1 July and what are some of the more complicated issues to be faced.

Adoption of any new tax legislation is always going to be difficult as there are no precedents. Without precedents, there is doubt and one particular and complex aspect of transitioning into TOFA will be balancing adjustments.

Balancing adjustments can pose a difficulty, not only due to calculation issues but also problems with the extensive levels of record keeping which are required to bring assets into TOFA, which in reality are probably non-existent.

Let us look at an example. When you bring a financial arrangement into TOFA, you must now account for the arrangement as if TOFA had always been in place. That is, a retrospective calculation. The difference between how it was currently accounted for and under TOFA will be the balancing adjustment which must then be brought into account over four years.

Already, this balancing adjustment brings up a variety of issues:

1. What if there is not enough information to recreate some of the details of the arrangement?
2. If there is not enough information, what kind of estimations can be used?
3. During the four years where the balancing adjustment is brought to account, what happens if the financial product is sold? No guidance has been given around the treatment of the balancing adjustment.

This is just one area of a piece of legislation which will have ongoing ramifications to the custodial industry and more broadly, the financial services sector. Preparation will be the key to ensure TOFA does not catch you out.

Dancefloor effect for ACSA accredited training program

The ACSA Institute and new accredited training program is now one year old and expecting a busy year in 2010 as the industry receives overwhelmingly positive feedback from the courses.

Launched in March 2009, the Institute was established to provide a range of educational opportunities to promote the professional development of employees working within the custody and investment administration sector.

The first flagship course, the ACSA Accredited Program, offers two core subjects and four elective streams. On completion of the core subjects participants are eligible to receive a Certificate IV in Financial Services.

Since the start of the program there have been 81 subject enrolments to the Certificate IV which has led the way for the students to be eligible for the full diploma in 2010.

Anusha Srinivasan-Ayer, Business Development Manager at Financial Education Professionals (FEP), which runs the curriculum, says generating positive student experiences in the first year has been vital to building interest in the unique training series.

"There is no comparable course in Australia or in the custody industry globally, so we believe it will take a little time for the industry to recognise the value this course can provide," she said. "However feedback from the first year of students has been excellent and we are excited about the intake for our year ahead."

She drew an analogy about a dance floor and how people slowly creep in before everyone is dancing. "Right now, we believe the industry is playing a waiting game, to see what value the course will bring," Mrs Srinivasan-Ayer said.

The industry should not wait too long however. Based on the unedited feedback forms, close to 80% of people who took the course believed they could use the information covered to further their work. Close to 95% were interested in pursuing other units in the ACSA program.

With candidates eligible for the diploma in 2010, it looks like the time is right for the dance floor to become crowded and for everyone to come to the party.

Latest industry statistics reflect new growth surge

ACSA’s latest industry statistics for the six months to December 2009 show a large increase in Australian assets under custody for Australian investors, with total assets increasing by 10% to $1.85 trillion. Other key findings include:

• National Custodian Services remains the largest market player with $598.5 billion in total assets under custody for Australian investors, followed by JP Morgan ($320 billion), BNP Paribas ($229 billion) and Citi Group ($127.9 billion).
• Australian assets under custody for foreign investors (sub custody) is up 20 per cent over the six months from June 30, 2009. This follows an impressive six month period to 30 June 2009 where sub custody was also up by 19%.  While partly market related, this shift also indicates a move by foreign investors to repatriate assets back home. HSBC Bank is the largest sub-custodian in Australia with $255 billion in sub-custody assets.
• Assets under administration (that is, not held in custody but administered by custodians) increased by 32 per cent over the six month period. State Street remains the largest administrator in Australia WITH $67.9 billion in assets under administration, up 52 per cent since 30 June 2009.

Full details of the latest industry statistics including assets under administration and transaction volumes can be found on the ACSA website here:

Khoury, Jond and Carpenter join ACSA board

ACSA is pleased to announce the appointment of Paul Khoury, Pierre Jond and Martin Carpenter as members of the ACSA executive committee for 2010.

The new members have been appointed following the resignations of three previous ACSA directors Chris Field from State Street, Jean-Marc Pasquet from BNP Paribas and Geoff O’Callaghan from ANZ Custodian Services.

Paul Khoury is chief operating officer, Global Services for State Street Australia and New Zealand. He has over 20 years experience in the investment management industry in the Asia Pacific region. Since joining State Street in 2001, Paul has held a number of senior roles including the areas of client relationship management, product development and business strategy.

Pierre Jond was appointed managing director, Australia and New Zealand for BNP Paribas Securities Services on 30 November, 2009 and is a Member of the BNP Paribas Securities Services Management Committee. Prior to this Pierre was located at BNP Paribas Securities Services in France where he was head of global sales and relationship management for Financial Intermediaries.

A key aspect of Jond’s committee membership will be to lead ACSA’s Professional Development Working Group which oversees ACSA’s training curriculum, passionately spearheaded by Jean-Marc Pasquet during 2008 and 2009. Martin Carpenter is head of securities and fund services at Citi Global Transactions Services and brings almost 20 years industry experience to the executive committee. He joined Citi in October 2005 and prior to this was with SWIFT for five years. With his fund administration background, Carpenter will be involved with the Custody Operations Working Group and the Corporate Actions Working Group to help drive operational efficiency and provide input into the custodian process settlement message.

We take this opportunity to thank the former directors for their contributions to ACSA and to welcome the new members to our board.

2010 ACSA members meeting schedule

Meeting Date	Meeting Type	Meeting Timing	Meeting Location
27 April	Executive	0930 – 1030	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530
9 June	Executive	1000 – 1100	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530
9 June	All Members	1100 – 1200	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530
23 July	Executive	1100 – 1200	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530
24 August	Executive	1000 – 1100	TBC Melbourne
24 August	All Members	1100 – 1200	TBC Melbourne
22 September	Executive	1000 – 1100	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530
26 October	Executive	0930 – 1030	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530
26 October	All Members	1115 – 1215	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530
1 December	Executive	0930 – 1030	Investment & Financial Services Association Level 24, 44 Market Street, Sydney Tel: 8235 2530