To enhance the competitiveness of the domestic fund market, the Financial Supervisory Commission issued “Capital Market Roadmap” at the end of 2020 to build a forward-looking and internationally competitive capital market. In addition, under the strategy of “Enhancing the market function and competitiveness of financial intermediaries “, TDCC, after a long period of research, planning, and system development, completed the establishment of the “Onshore Fund Centralized Settlement System” and officially launched its service at the end of June this year. Since then, the settlement of the domestic fund market has moved towards a more standardized and automated service model.
Service Origin: Improving Cost Efficiency
In Taiwan, there are many channels for investors to conduct fund investment, including banks, securities firms, investment trust and consulting businesses, so fund investment possesses accessibility to some extent. However, behind the efficiency of the services, a complex market operating mechanism exists. Although there are many sales agents in the domestic market providing investors with fund investment services, their sales methods can roughly be divided into the following three categories:
1.Banks or securities firms sell funds to investors through a specific money trust method (known as the trust method in the market), and the sales agents individually process payment and receipt of funds for each fund’s separate account with custodian banks entrusted by the investment trust companies.
2.The general fund distributors (such as securities firms and investment consulting companies) process fund transactions for investors in their own names (known as the integrated account method in the market), and the distributors entrust TDCC to process transaction information transmission and payment and receipt of funds.
3.An investment trust company sells services directly to investors (commonly referred to as investment trust direct clients in the market). Investors place orders directly with the investment trust company and follow the instructions and operating methods of the investment trust company to handle the payment and receipt of funds for each fund’s separate account at the fund custodian bank. Each domestic fund issued by investment trust companies is often entrusted to different custodian banks for management, thereby forming an operating network of 38 investment trust companies and 24 fund custodian banks to handle over 800 open-end funds and over 3,500 separate fund accounts. Compared to the above-mentioned different fund distribution and payment processing modes, this “many-to-many” information flow and fund flow further derive issues of high market operation and remittance costs, with room for improvement in cost efficiency.
Research and Planning: Establishing Platform Development
To reduce the overall costs of fund receipt and payment operations in the domestic fund market, TDCC has started devoting itself to project work and research since 2019, analyzing the current service status in the domestic fund market, comparing and sorting related data on fund settlement systems in major international financial markets such as the United States, Germany, South Korea, Japan, and China, as well as holding seminars for practitioners and conducting opinion surveys. TDCC has been evaluating the operating centralized settlement system for funds in major international markets for several decades, and the payment processing procedures of investment trust companies, fund sales agents, and custodian banks can be streamlined through the payment and receipt mechanism of central clearing. This can significantly reduce the overall market operation costs. TDCC therefore submitted a planning proposal to the Financial Supervisory Commission in March 2022 to establish a centralized settlement platform for domestic funds. The Financial Supervisory Commission issued a letter in May of the same year to promote the centralized settlement payment and receipt mechanism for funds of investment trust companies, mandating TDCC to establish a “Onshore Fund Centralized Settlement System” to elevate the overall operational efficiency of the fund market.
After establishing the development direction for the centralized settlement business, TDCC leveraged the experiences in serving the domestic fund market to create a central clearing platform information system. This transforms the current domestic fund market’s many-to-many payment operations into a “many-to-one, one-to-many” model. After inviting many investment trust companies, fund distributors, and custodian banks for joint testing, the service officially went live at the end of June this year. Related companies will join and use the settlement system from July gradually.
Business Support: Encouraging Market Participation
Besides information systems, to align with the centralized settlement operation of domestic funds, TDCC has also completed the stipulation of the “Operating rules for Onshore Centralized Settlement System,” “Service Fee Standard for Onshore Centralized Settlement System,” and “Cooperation Items for Onshore Centralized Settlement System.” The Securities Investment Trust & Consulting Association of the ROC also revised some articles of the “Operation Procedures for Public Offering, Issuance, Sale, Subscription, or Repurchase of Securities Investment Trust Funds” as well as various types of contract templates of fund and securities investment trust and securities investment trust fund sales for related practitioners to follow and apply.
To encourage investment trust companies’ enthusiastic participation in the “Onshore Centralized Settlement System,” TDCC offers a special “Early Bird Discount” program. If investment trust companies adopt the settlement system to handle fund receipt and payment operations before the end of this year, they are entitled to the benefits of using the settlement system for free in 2023 and 2024. In addition, the Financial Supervisory Commission also revised the “FAQ of Encouraging Investment Trust Companies to Leap Forward Program” this February. It announced that investment trust companies using the settlement system before the end of the year can also apply to the Financial Supervisory Commission for recognition of the “other tangible factors contributing to elevating Taiwan’s asset management business operations and development” in the “Encouraging Investment Trust Companies to Leap Forward Program.” In short, by joining the clearing platform, investment trust companies can promote market value and enrich their corporate values. The authority therefore encourages practitioners’ active participation to leap forward for value enhancement together.
Gradual Progress: Expanding Service Areas
The fund centralized settlement service mechanism serves as the revolution of the market operation infrastructure, which will affect practitioners’ existing operating rules and practices. As these practitioners need to adapt to standardized operations gradually, and most of them have issues regarding system scheduling and human resources overlap, the “Onshore Centralized Settlement System,” which went live this June, first provides gross settlement service mode. It offers trading and fund receipt and payment services between investment trust companies, custodian banks, and fund distributors (B2B). In addition, TDCC has arranged launches in batches for companies that have completed system testing and related contract revisions. After the aforementioned B2B mechanism operates smoothly, TDCC will continue to evaluate and plan for receipt and payment services of trade between investment trust companies and direct customers (B2C), as well as more advanced net settlement service mechanisms.
With previous accomplishments and prospects for the future, the launch of the “Onshore Centralized Settlement System” is just the starting point for the transformation and upgrade of the fund market. There will still be many more in-depth and wide-ranging improvement projects to follow. Under the guidance and support of the authority, TDCC will continue to cooperate with the related associations and practitioners in the fund market, leveraging its service capacity as an intermediary institution in the fund market to enhance the market competitiveness of the domestic fund industry.
