“Three-Wheel Drive” Fund Operation
Industrial Bank Aiming at Pricing Rights on the Domestic Currency Market
Ten years ago, the Industrial Bank, like all other Chinese-funded commercial banks, did not regard fund operation as one of its major businesses. Five years ago, the Industrial Bank, relying on Shanghai's status as an international financial center, set up a fund operation center in Shanghai which was functionally positioned as “an operation body and a profit center” and aimed to make fund operation a major area of operational business. Today, the Fund Operation Center of the Industrial Bank is active in a number of fields including the bond market, foreign exchange market, and the gold market. In the 2007 Inter-bank Appraisal of Outstanding Market Maker in the Foreign Exchange Market, it was awarded several honors including the Most Outstanding Market Maker and Best Transaction Norm, and has been recognized as one of the most active participants in China's inter-bank market.
Though lauded with honors and recognition, Chen Shiyong, the general manager of the Industrial Bank's Fund Operation Center holds that the past five years has been but a foundation-laying phase for the center. “The growth of the market is creating more and more opportunities. Our goal is to keep up with the pace of the market and establish specialties and advantages in certain fields.”
A Turning-Point Presented by the Market
Opportunities for the development of fund business in commercial banks came from the reform and growth of China's financial market. As always, the data says the most. “From 2002 to 2003, the bond assets in Chinese-funded commercial banks nationwide occupied less than 15% of their total assets, but at present this proportion has already exceeded 20%. Among this, assets other than financial credit in state-owned banks are primarily bond investments, accounting for 30% to 40% of the total assets.” Chen said.
Understanding the Whole from a Single Perspective
Around 2003, with increased liquidity in the domestic market, funds available to commercial banks other than that for the issuing of loans began to increase. On the other hand, the scale of bond issuance continued to expand in the domestic bond market. Different terms, varieties, interest rates, conditions, tendering practices and issuing bodies emerged one after another. After the reform on foreign exchange rate was put into practice in 2005, exchange rate risks faced by the tangible economy flared up. Therefore, there was a cry for products that could manage and hedge these risks. This demand directly stimulated the rapid growth of the inter-bank foreign exchange market.
In Chen's words, the enhancement of fund position and the expansion of market space made fund operation "a must”. Regardless of whether it stemmed from a need for the management of assets and liabilities in commercial banks or the need to increase profitability, that fact remained that circumstances demanded participation in market trading, to invigorate and to improve the market.
On the bond market and foreign exchange market, the two major playing fields for the fund operation of commercial banks, financial market reform under the guidance of the Government has being picking up pace since 2004.
It was under a backdrop of deepening financial reform that the Fund Operation Center of the Industrial Bank officially launched in Shanghai in the end of 2003. “Prior to that, the function of fund operation had primarily been liquidity management and the operation of fund position to serve deposit-loan business. It played a supporting role. After the center was founded, we redefined its functional positioning, i.e. taking the initiative to create profit by active trading, operation and services. It would become an important segment in the Bank.” Chen recollected. This transformation thus established the status of fund operation in the Bank and the direction for the future development of the Fund Operation Center.
With clear re-positioning, the center actively sought opportunities to become involved in financial markets of all varieties. In terms of the acquisition of qualification, the Fund Operation Center made active efforts and obtained credentials as a market maker on the RMB bond market, market maker on the RMB foreign exchange market, member of Shibor and market maker on gold exchange within its first three years. In 2004, with the support of Shanghai local government and its supervision departments, the fund operation center obtained an individual financial license, marking that its business had entered a new stage.
In terms of business process design, the fund operation center has adopted the practice of “separation of the front-ground, middle-ground and back-ground”. Among them, the risk middle-ground carries out embedded management, participates in beforehand decision-making and is entitled to have a one-vote-down right. Chen said that the independent operation of and mutual supervision and support among front-ground, middle-ground and back-ground have played a crucial role in establishing control mechanisms and risk management.
In addition to conventional trading in the money market, bond market, foreign exchange market and derivatives market, the fund operation center has also made numerous attempts in non-standard market trading, including bill business and transfer of credit assets. According to Chen, non-standard business is a financial innovation based on traditional loan-deposit business; when resources are allocated in a rational way, the capacity of fund operation will be greatly improved and a major feature will also established, a feature that will distinguish the Industrial Bank from other Chinese-funded banks.
"Three-Wheel Drive" Fund Operation
Specific re-positioning and the acquisition of qualification can be seen as the first step in the long-term development of the fund operation center. The potential for further development is rooted in its individual features or its core competitiveness. Currently, the fund operation center is focusing on three areas: principal trading, wealth management on behalf of clients and self-run investment management. They constitute the so-called "Three-Wheel Drive” of fund operation
According to Chen, regarding the market maker -- the principal of fund operation, the Industrial Bank is aiming at the RMB market. “The development courses of all emerging markets prove one fact, that is, the domestic currency market is the groundwork for the development of domestic commercial banks. Those who control pricing rights and the industry standard will have the upper hand”.
In Chen's eyes, the key to innovating principal trading lies in obtaining pricing rights through the improvement of quoting capacity and the amassing of transactions. As for principal trading, the fund operation center has an objective of maintaining its position at the middle-higher level in the industry and developing its own unique features and advantages in certain fields.
In regard to wealth management on behalf of clients, the fund operation center of the Industrial Bank adopts a “two-lined focus” concerning investment management ability and client service ability. In the current management system and market structure, what a commercial bank is good at is financial product trading, including exchange rates, interest rates, bonds, credit and gold, as well as investment management. It has no professional competencies in fields such as stocks, funds and commodities. Therefore, to capitalize on its strengths and minimize its weaknesses, it has to cooperate with other types of financial institution.
With regard to this, the fund operation center invested a large quantity of manpower and resources in product innovation, personnel training and department coordination, starting right from basic financial projects. “The fund operation center, as a department of product innovation, carries out labor division and close cooperation with departments in charge of sales, such as the retail banking headquarters, institutional banking department and corporate banking department. According to the financial characteristics of different target client groups, it devises a variety of products that meet the demands seen in market.” Chen said.
In terms of self-run investment, further strengthening professionalism and fine division has been one of the most important tasks for the fund operation center ever since its establishment. Following fast development over a period of almost five years, the assets centrally managed by the fund operation center now account for one quarter of the total assets of the bank, exceeding RMB 200 Billion Yuan in scale.
When talking about the future development mode for the fund operation center, Chen confessed that there is no single perfect mode for the organizational structure and business pattern. “Under the unified strategic planning Industrial Bank Headquarters, what the fund operation center has to do is to establish the right development ideas and a development platform through proper system design and personnel training. This is what counts.” （From Shanghai Securities News）