Commission Management is increasingly important in Asia, not because of local regulation but because it makes good business sense.
Although the use of dealing commissions to buy research and other services is under controversial scrutiny in Europe, most Asia Pacific markets still operate in a fully bundled way. This takes the form of brokerage rates that combine research with execution, and regulation, if it exists, that still refers to soft dollars – a term that has fallen out of favour in the US and Europe. However, investment is now a global rather than a local exercise, therefore demonstrating transparency and accountability in managing clients’ money is top priority when attracting investors and raising funds. Whatever the outcome with European regulatory review, Asian hedge funds and asset managers can implement some simple processes which demonstrate good practice in the use of client’s commissions. This will stand them in good stead for answering investor enquiries on the topic, or addressing regulatory review if the focus widens.
FIVE STEPS TO IMPROVING MANAGEMENT OF TRADING COMMISSIONS
1) Assess your broker panel to ensure you are happy with their execution quality. If any of your research brokers do not deliver with good execution, this costs your funds money and affects overall performance – there can be alternative ways to pay for their research (see 3 to 5 below).
2) Establish rates with your brokers which clearly define the portion of the commission for execution, and the portion for research or other services. Even if you continue to pay some or all brokers at a combined rate, the distinction creates a transparent framework for internal broker management, and can be important to show externally when fundraising or responding to client queries on best execution policy.
3) Set up a Commission Management programme in order to pay for: a) research from brokers that do not deliver high quality/ best execution; b) any independent research your firm uses; and c) eligible technology and other related services as appropriate under the rules that apply to your funds*.
4) Select your Commission Management broker(s). Choose brokers who offer high quality execution, and who have a dedicated CSA team. A good CSA/soft dollar broker will: make payments promptly on your behalf via a smooth process; understand the variety of global regulations and help you structure your commission management accordingly; be able to segregate or apply different treatments of soft or CSA at a fund level; offer an online platform for you to review your account at a glance, and provide reports for both your internal business management and any external client enquiries.
5) If using more than one CSA or soft dollar broker, CSA Aggregation can significantly reduce the administrative burden and streamline the process of managing and paying out from multiple pots. As CSA adoption in Asia and Australia has increased, ITG has more and more clients taking up this service. The CSA Aggregator can act as a centralised point of contact for all broker reconciliations and payments, tracking everything through an online portal. Not only does this reduce the amount of work that someone within the hedge fund or asset management firm has to do themselves each month, it also creates a highly transparent structure with a full and detailed audit trail across all commission. Reports can be run to track execution and research commission by broker, spending across all research or vendor firms, monthly or annual statistics; and can be produced at a firm-wide, or at a portfolio manager or fund level. This is useful for business management to identify how much is being spent and where, and it is particularly important for answering queries from investors about the use of dealing commissions on their investments in a quick and easy way. This will only become more important as regulation in other parts of the world demands these reports, and clients will start to expect them.
Although it looks unlikely that European-style full unbundling regulation will spread to Asia in the near future, by putting in place these simple steps, Asian hedge funds and asset managers will be well positioned to respond to increased scrutiny, and show potential investors and clients that their trading commissions are being used in a valid, transparent and accountable way.
* Commission Management Explained: Commission management programmes are used to manage trading and research relationships, often using CSA or soft dollar structures. They can take into account different global regulations on funds, as well as different fund mandate requirements as necessary. There is still a great deal of confusion across the industry about the difference between soft dollars and CSAs and when they can be used. Many use the term soft dollars to describe payments for technology or other non-research services, and CSA to describe payments for broker and independent research. However, these distinctions are not written within regulation in most markets and it is far more important for the fund management firm to understand which rules and regulations apply to their specific funds so they can set up their operations in the most efficient and compliant way.
Clare WittsContributors Head of Relationship Management, Asia Pacific
Clare Witts is responsible for the strategy and implementation of ITG’s interaction with institutional clients, regulators, exchanges and the media across the Asia Pacific region.
She also runs ITG’s Commission Management and CSA program in Asia and Australia.