Welcome to our latest ACSA member newsletter.

This newsletter aims to update colleagues on ACSA’s ongoing work on behalf of members of the custody and asset servicing sector.

Nearing the end of the year it is safe to say 2009 will be remembered not only for the global financial crisis but also as a period of major regulatory change.

The GFC has driven much consultation around the functioning of global financial markets and the checks and balances in place to prevent future market dysfunction. The various working groups at ACSA have been focused therefore on working through a changing regulatory agenda with an emphasis on disclosure around securities lending / short selling as well as the implementation of tax changes due to come into force in 2010.

The introduction of the new TOFA measures in June 2010 will bring significant change to our industry. Given ACSA represents members that will be some of the first taxpayers with significant financial arrangements to implement the TOFA measures, we have been working closely with the ATO TOFA Working Party of the NTLG Finance & Investment Sub Group to ensure changes are implemented in the most effective manner, and that our industry continues to be consulted and viewed as a source of practical advice on issues of implementation.

More work around changing tax rules has recently taken place around the proposed new Tax Agent Services Act with ACSA briefing Ernst & Young to assist with two submissions to Treasury aiming to remove custodians from the reach of the new legislation. Further detail on that progress is below.

Looking forward, 2010 will no doubt be a year of recovery and revitalisation as the industry shifts into forward gear. Markets are already providing a strong boost to asset levels and we are delighted to see an increase in total funds in our latest ACSA statistics .

Next year will kick off as usual with our industry conference , slated for February 23 in Sydney .

In addition we are now calling for nominations for the 2010 ACSA Awards – which aim to recognise outstanding contribution to the custody industry. If you know someone who has worked hard to help drive our industry forward, please make a nomination for the 2010 Awards by contacting the ACSA Secretariat for the relevant nomination form.

One person I would like to personally thank for his efforts during 2009 is Jean-Marc Pasquet of BNP Paribas. Jean-Marc is returning to Paris after three years in Australia and during his time here has contributed enormously to ACSA and our industry. In particular Jean-Marc spearheaded the development of the ACSA Training & Education program which is now up and running with its first students graduating in September. This program provides purpose built training for the Australian custody sector and is a major milestone in our efforts to develop the sector as a stand-alone career choice for financial services professionals.

Finally I would like to thank the industry for reappointing me as Chairman of ACSA. 2009 has been a challenging year but 2010 looks to be a very exciting one and I am pleased to be able to continue working with colleagues and regulators to help continuously improve the industry for the benefit of our clients, employees and investors.

• Bryan Gray (Chair) – J.P. Morgan Worldwide Securities Services
• Robert Brown – AUSMAQ
• John Butler – HSBC Securities Services
• David Travers – RBC Dexia Investor Services (Deputy Chair)
• Ray Lester – National Custodian Services
• Paul Cutts, The Northern Trust Company
• Geoff O'Callaghan – ANZ Custodian Services
• Chris Field – State Street Investor Services
• Jean-Marc Pasquet – BNP Paribas (Treasurer)

Since its first meeting in April 2009, the Investment Administration Working Group has passed through its formative stage.  Under the leadership of Robert Brown from Ausmaq, the Working Group now enjoys good representation across the ACSA membership base, including all of the major administration providers.

The Group's charter has been set as:

The Investment Administration Working Group focuses on investment administration issues including unit pricing and registry functions. The Group's mandate extends to industry efficiency opportunities that are not explicitly aligned to other Working Group charters. The Group seeks to be a forum for the dissemination of information and will promote issues that can benefit from cross-organisational dialogue.

A common observation by members of the Group is that there are areas for improved efficiency particularly in portfolio accounting, and a lack of common market practice at the detailed level. 

Another general area of concern is the ability to interpret regulation. This is sometimes exacerbated by interpretive differences from tax and audit professionals.

Members of the Group have raised a number of specific items in the areas of portfolio valuation, unit registry and unit pricing.  These include:

• Off market buy-backs
• Valuation issues related to stock splits and buy-backs
• 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
• Lack of standard practice in reporting ex-date and distribution information for funds

The Group has noted that some standards exist in these areas, but that a number are too high level to support detailed implementation, and few have been drawn up with full automation in mind. 

Some other issues identified by the Group, including MIT Capital / Income declarations and changes to FIF legislation, have been referred to the Taxation Working Group.

Finally, the Working Group has taken a watching brief on the current Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System (The Cooper Review).  It is expected that the second phase issues paper (Operations and Efficiency) released on 16 October will require careful review by ACSA.  The Working Group expects to support members through analysis and commentary over the coming months. A link to the Cooper Review is here: http://www.supersystemreview.gov.au/

Further participation in this Group is welcome, as are suggestions for topics of review. Please contact the chair Angelo Calvitto at Northern Trust, or the sponsor Robert Brown at Ausmaq.

ACSA has been in discussions with Federal Treasury and Assistant Treasurer Nick Sherry over a potentially undesirable outcome of the proposed new Tax Agent Services Act 2009 (TASA) which may brand custodians as tax agents for the purposes of the new regulation.

TASA has been developed to protect the public - to regulate the tax agent profession where tax agents and advisers deal with the public, and to ensure the delivery of quality services. It creates a new regulatory regime, with educational, registration and regulatory requirements. ACSA agrees with the general objects of the TASA with regards to tax agent services that are offered to members of the public – however is concerned that some of the tax-related services provided by custodians may be considered tax agent (and/or BAS agent) services under TASA.

In August ACSA, working with Ernst & Young, provided a detailed submission to Treasury submitting that these custodial and sub-custodial services should be excluded from the TASA under the regulations now being developed, just as auditors of self managed super funds are excluded.

Encouragingly Senator Sherry has undertaken to convey ACSA's concerns to the tax Practitioners Board which has the general administration of TASA, while encouraging ACSA to make any additional representations to Treasury during the regulation drafting process.

In September ACSA / Ernst & Young made a second submission to Treasury in relation to draft regulations, providing specific information about the custodial industry, and submitting that the regulations exclude asset custodians to ensure they are not in appropriately caught up in the TASA regulatory regime. The submission also highlighted some issues to achieve a smooth administration of this major reform.

We await next steps concerning the TASA, which is slated for a commencement date of 1 January 2010.

On 2 October the Government released a ‘consultation draft' of the long-awaited short selling regulations under the Corporations Act 2001 (Cth) for the reporting of short selling activity.

The draft regulations require the reporting of both covered short selling transactions to market operators (currently ASX) and short positions by short sellers to ASIC. Some changes are scheduled to take effect later this year and others by April 2010.

ACSA has been working in concert with the Australian Securities Lending Association (ASLA) to discuss various elements of the pending legislation and will continue its dialogue on how securities lending obligations and legislation should be developed.

One issue currently being discussed is the treatment of hold notices in securities lending – ie where a lender puts a ‘conditional hold' on an available stock pending the borrower actually borrowing the stock. Under the proposed new regulations ASIC's view is that such hold notices will constitute a securities lending transaction, potentially prompting a breach of the prohibition on naked short sales. However in a letter to ASIC on 6 October ASLA (with support of ACSA) has contended that it is not their experience that borrowers have in practice been breaching that prohibition by the use of such holds.

“ALSA members are of the view that so long as it is the position of a Borrower that it has a ‘presently exercisable and unconditional right to vest' the security being sold, the provision of a ‘hold' by a Lender does not impact the issue of whether or not the Borrower breaches the prohibition on naked short sales under section 1020B of the Act.“ ALSA says.

ASLA has also noted to ASIC that its members are particularly concerned that should ASIC seek to impose compliance obligations onto lenders under section 1020B, lenders will withdraw from the Australian market, adversely impacting the securities lending activity in Australia .

“Such a compliance requirement would differ from those of overseas markets and Australia would be the only market to impose such a compliance obligation onto Lenders.“ ASLA added.

The folks at SWIFT are making strides towards improving Australia 's corporate actions process with early stage talks with the ASX now underway.  According to SWIFT's Commercial Manager Funds in Australia, Tim Hamer, Australia has the benefit of seeing how the US and Switzerland have fared in their efforts to standardize corporate action announcements – bringing benefits throughout the chain from issuer to investor.

Standardising and automating corporate actions is a priority for custodians because, apart from being a very manual process, it is one of the highest risk areas in the investment/custody world. 

A key inefficiency created in the corporate actions process is when issuers announce events in non-standard formats – messages go into the system but the free format text can be interpreted differently through the chain of intermediaries, resulting in confusion over particular event details that investors need. 

In the US , a technology gaining widespread adoption for corporate and financial regulatory reporting is eXtensible Business Reporting Language (XBRL). A new joint effort by SWIFT, Depository Trust & Clearing Corporation (DTCC) and XBRL US is leveraging the success of XBRL as a technology to improve issuer-investor communications for corporate actions in the US . The approach has global applicability as both XBRL and SWIFT are international organizations and there is a commitment to ensure alignment with global ISO standards.   Collaboration amongst these three organizations will promote straight through processing of corporate actions with issuers able to electronically ‘tag' data using off the shelf or open source software when preparing a prospectus. The tagged data can then be readily transformed into an electronic data-driven ISO 20022 message for consumption and downstream processing from intermediaries to investors. 

Hamer says it's early stages in terms of replicating the project locally, either with XBRL or an alternative process.  More information on the US experience can be found in SWIFT's latest Asset Servicers Newsletter here:   http://www.swift.com/solutions/factsheet_downloads/AS_SWIFT_issue2_Sep09.pdf

As part of its initiative to drive greater efficiency and mitigate risk across the industry, Computershare recently hosted a series of Corporate Action Workshops to better understand the requirements to move towards an automated process for corporate action processing.  Attendees included various businesses and industry organisations.

The sessions specifically focused on capital raisings, and reviewing the barriers of technology, regulation, people and process which prevent a streamlined solution.  At the forefront of concern are a lack of consistency in processes throughout the industry and the vast number of manual work including spreadsheets of data, faxes, and cheques - all of which result in a high risk of lost or missing funds and entitlements.

In effort to move towards an automated solution, Computershare is working together with ACSA and session attendees to fully understand the requirements to establish a standard method to replace manual processing, and to enable custodians to make payment of funds and confirm status of applications electronically and in real time. 

All participants support the need for change and improvement. The next steps include engaging with a broader audience to break down the technology and regulatory barriers; to determine the various subsets of work; and align who is best placed to lead the change given the many parties involved.  All parties agreed the solution should be cost effective, universal across issuers and share registers, and be the market standard to ensure consistency and usability. 

Computershare will host a follow up workshop in mid February 2010. If you have any questions or suggestions for further subjects to be covered in this initiative, please contact Dañelle Michael at Computershare on 03 9415 5009 or danelle.michael@computershare.com.au

SWIFT is also calling for feedback from the asset servicing community as part of its move to develop a new asset servicing strategy.  In addition to working more closely with asset servicers, SWIFT is also reaching out to adjacent communities including issuers and their agents, registrars, investment managers and data vendors.  The strategy is designed to achieve four main goals:

• to further automate and standardize corporate actions;
• to work with issuers and their agents to involve them with industry standardization;
• to increase levels of compliance with market practices; and
• to support large market infrastructures in migrating to ISO standards for corporate actions.

As part of the new strategy SWIFT is also collaborating with industry associations such as the International Securities Services Association (ISSA), the Corporate Actions Joint working Group, the Association of Global Custodians and ISMAG. 

One element of the project will involve a global survey of asset servicers on costs and risks associated with corporate actions.  “If we can quantify the costs and risks we can better describe the value of automation and standardization – and this will help us to create a convincing business case for the involvement of issuers and their agents,“ says the project leader at SWIFT Sophie Bertin.

A roadmap for delivery of the strategy is expected by year end.  More information can be found at http://www.swift.com/solutions/solutions/corporate_actions/index.page

More advances have been made over the past six months regarding the use of automated funds transaction processing over the SWIFT network.

In April SWIFT announced that HSBC Securities Services, RBC Dexia and Vanguard Investments Australia were the first to go live on the new platform, with BGI Investors following in June.

Global asset managers are using SWIFT for funds messaging around the world – yet Australia has been slow to keep up with the pace of change.  SWIFT is encouraging both managers and custodians to get on board as part of the push to improve cost efficiencies and reduce transaction risk.

SWIFT's Tim Hamer says the move to automation means real potential savings for custodians as the volume of transactions inevitably grows.  The program also coincides with continued pressure on all market participants to reduce the cost of doing business – and ultimately the end fee for investors.

According to Hamer, the Australian industry is sending more than 16,000 faxes daily between custodians, funds managers, dealer groups and wrap style platforms – instructions that have to be interpreted, keyed in manually and then checked.  The process is not just more expensive and cumbersome but also more prone to error.

“ Australia is way behind Europe and the US in terms of automation and the ultimate loser is not just the industry but also the investor,“ Hamer says.  He says Europe is around 70% automated and the US highly automated via its Depository Trust & Clearing Corporation (DTCC) – compared to around 2-5% of Australian transactions.  The expectation now is that more funds participants will join the automation initiative before year end, with five other firms working on projects to go-live.

“In all discussions with industry participants everyone agrees that automation is the way to go, and with the first group of participants now live there's no excuse for others not to do the same,“ Hamer says.

ACSA's latest statistics published in September show Australia 's custody sector has benefited from rebounding equity markets recording new growth in assets under custody for Australian investors.

The half yearly industry figures showed total assets under custody for Australian investors grew by three per cent for the first half of the year to 30 June 2009 to $1.687 trillion. Offshore assets under custody for Australian investors performed particularly well with an increase of nine per cent to $336 billion during the six months.

Key findings from the statistics

• National Custodian Services remains the largest player in the custody market with $552.9 billion in total assets under custody for Australian investors, followed by J.P. Morgan ($272.3 billion), BNP Paribas ($198.5 billion) and State Street ($147.8 billion).
• Total local assets held under custody increased by 1.83 per cent over the past six months to 30 June 2009 with National Custodian, J.P. Morgan and BNP Paribas the leading holders of Australian assets under custody. This compares to a decline of 2.68 per cent in local assets held in the six months to 31 December 2008.
• Australian assets held under custody for foreign investors (sub custody) increased by an impressive 19 per cent over the six months to 30 June 2009. HSBC Bank is the largest sub-custodian in Australia with $338 billion in sub-custody assets, recording an increase of 33 per cent since 31 December 2008. HSBC is followed by J.P. Morgan ($76.1 billion) and National Custodian ($55.8 billion) in this category.

Full details of the latest industry statistics including assets under administration and transaction volumes can be found on the ACSA website here: http://www.custodial.org.au/public_panel/industryindustrystats.php

ACSA has provided submissions to ASIC in relation to the impact of Share Purchase Plans on customers of ACSA members. This dealt with how customers were impacted by restrictions imposed by ASIC's regulatory guide 125 on Share Purchase Plans issued 18 June 2009 and ASIC's class order [CO09/425] Share and Interest Purchase Plans issued 15 June 2008. The restrictions denied the opportunity for underlying clients to participate in share purchase plans. Customers impacted included investor directed portfolio services (IDPS) and IDPS like schemes; master trusts; and global custody structures.

ACSA's primary submission in July 2009, http://www.custodial.org.au/public_panel/news.php?news_id=58 sought confirmation from ASIC on the intention of the Regulatory Guide in relation to ACSA members' customers.

In subsequent submissions and discussions, ACSA has received favourable responses to address the concerns raised and is expecting changes to be made by ASIC to better accommodate the needs of ACSA members' customers. ACSA anticipates ASIC will issue clarifications to assist ACSA members with the treatment of Share Purchase Plans in the near future.

Demand has been growing for Australia 's first custody qualification program – the Certificate IV in Financial Services (Custody) – launched earlier this year by ACSA. Developed exclusively for custody professionals by Financial Education Professionals (FEP), the program requires completion of two subjects - Introduction to Financial Markets and an Introduction to Custody.

Despite difficult market conditions this year, both subjects have been fully subscribed with the inaugural participants graduating with their Certificate IV in late September. 

The key goals of the course are to share the cost of training custody professionals, as well as reinforcing the scope of a career in custody.  Overall the feedback on the course has been extremely positive with students appreciating the tailored course content and experienced trainers. A second series of workshops for the Introduction to Custody course are due to commence in Sydney in November 2009. 

Many graduates fall into custody via broking, accounting or funds management, however, with the market dominated by global players career opportunities in custody are rapidly expanding. Students are also given the opportunity to meet people working across many different areas of custody.

Experienced market participants can also choose to undertake a fast-track option, enrolling in the program via the Recognition of Prior Learning pathway, allowing them to undertake one of the two subjects via an assessment-only option, which is cheaper and faster.

The second qualification, the Diploma of Financial Services (Custody), will be available from February 2010, and all those who have already completed the Certificate IV will be qualified to enrol .

For further information about ACSA courses go to http://www.custodial.org.au/public_panel/courses.php

Planning has begun on ACSA's 13th annual Investment Administration Conference which is produced by Investment & Technology publisher Conexus Financial. Appropriately titled Thriving in the New World Order, the conference will be held on February 23, 2010 at the Sofitel Wentworth Hotel, Sydney .

The conference will include six plenary sessions and twelve breakout sessions with presentations from local and international speakers. The sessions will tackle topical issues such as structural market reform, the impact of increased competition with the ASX, operational efficiency, securities lending and the rise of self-managed investment vehicles.

More than 300 delegates are expected to attend including super fund executives, operations managers at fund management firms, asset consultants, implemented consultants and platform providers. The conference will be followed by a gala dinner also held at the Sofitel.

For more information about the conference go to http://www.investmenttechnology.com.au/

ACSA is currently calling for nominations for the ACSA Achievement Awards, which will be presented at the 13th annual Investment Administration Conference on 23 February 2010. The ACSA awards aim to recognise outstanding contribution to the Australian custody and investment administration sector. Any person who makes a significant contribution to the industry and to ACSA is eligible.

The ACSA Awards are intended to:

• recognise individuals who have made an outstanding contribution to the industry, ACSA clients and the Association itself;
• encourage greater participation from individuals and firms in industry-based initiatives;
• better promote the role of the industry; and
• highlight the level of professionalism within the ACSA community

Joanne O'Callaghan of State Street, Sandra Powell of HSBC and Paul Toepfer of State Street were announced as the inaugural award winners last year, all demonstrating a high level of professionalism, knowledge and willingness to contribute to the custody and investment administration industry.

We encourage you to consider a colleague you can put forward for an award in 2010. Nominations can be made via the official ACSA Awards entry form which is available from the acting ACSA Secretariat, Patricia Choong - pchoong@ifsa.com.au