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ETFs in Monetary Policy Case Study: Bank of Japan

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This article is sponsored by State Street.

By: Alexander Petrov, Associate, Policy Research, Official Institutions Group at State Street Global Advisors

KEY POINTS

– Bank of Japan (BoJ) has diversified assets in its purchase program through the use of ETFs*
– ETF purchases perform a supplementary role in monetary policy, but have significant implications for equity and ETF markets
– Divestment of the ETFs and other shares will need careful management

Using Exchange-Traded Funds (ETFs) for monetary policy purposes remains rare and controversial, despite many central banks adopting unconventional measures following the financial crisis. Some central banks buy equities for their foreign exchange reserves,** but they are usually considered too risky for use in domestic monetary policy. However, one major central bank — the Bank of Japan (BoJ) — has been purchasing shares using ETFs since 2010, as part of its broader asset-buying program to ease monetary conditions. In this paper, we examine why BoJ chose this mechanism and the footprint it has left on the structure of the Japanese equity market. We consider the future policy implications and next steps BoJ might take.

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By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

* Exchange-traded funds (ETFs) are funds that trade on an exchange and typically offer exposure to an index of underlying securities.
** Foreign exchange reserves are assets held by central banks in foreign currencies, used to back their liabilities, conduct monetary policy and intervene in currency markets.

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The Future of Operations: Simplify, Innovate and Transform

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This article is sponsored by Broadridge.

Now that the pain of the global financial crisis and subsequent regulations are starting to fade from view, the asset management industry is facing new challenges that will transform the business. Firms must be nimble enough to support this evolution. That means not only redesigning operations, but also adopting new technologies that can be used for innovation in-house and with the help of partners.

In active management, the industry has created more complex products to generate alpha, while the growth of passive management, spurred by fintech competition, is compressing fees. At the same time, expansion into new markets has added costs. Facing these challenges will require serious improvements to back- and middle-office operations — an overhaul of everything from data validation to trade reconciliation.

For this type of transformation, experts say, it’s not enough to improve the steps in a process. Financial institutions need to eliminate steps. Specifically, executive members of the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA) say that leading firms should:

Work collaboratively. Firms should collaborate to solve common problems; use associations to identify and promote best practices; and partner with service providers, utilities and regulators to tap their specialized skills and mutualize non-differentiating functions.

Tackle common pain points. Many of the industry’s biggest challenges come from a lack of standardized processes: Standardizing data is the top challenge and sets a foundation to accelerate change.

Leverage transformational technology. Cloud computing, artificial intelligence, and distributed ledger technology can be transformational over the coming three, five or 10 years — but investing now is vital.

Assess, accept and mitigate risks. During times of large transformational change, it should be understood that risks are higher. This traditionally risk-adverse industry must balance the need for bold change against the fear of producing subpar outcomes.

This paper asks how asset managers can move beyond incremental improvements, like shaving costs from processes like post-trade settlement, regulatory compliance and reconciliation, to reimagining how operations are handled. Based on discussions with executives from leading asset management, buy-side, and sell-side firms, as well as service providers, it assesses the drivers for change and the challenges and opportunities ahead, and discusses what actions the industry must take to reach its desired future state.

The long-term vision of how asset management operations should change is best summed up by one word: Simplify.

To learn more about “The Future of Operations” for the asset management industry, download the white paper from Broadridge and the SIFMA Asset Management Group.

To learn more about Broadridge’s solutions for the asset management industry, please visit www.broadridge.com/financial-services/asset-management/

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Building Passive Solutions: Meeting the Unique Needs of Central Banks and Sovereign Wealth Funds

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This article is sponsored by UBS.

By: Dr. Massimiliano Castelli, Head of Strategy and Advice, Global Sovereign Markets and Philipp Salman, Strategy and Advice, Global Sovereign Markets

KEY POINTS

– Passive investment strategies have grown rapidly over the last 20 years, attracting assets from investors across the spectrum.
– In recent years, sovereign wealth funds (SWF) and Central Banks have increased their allocations to passive strategies, embracing the liquidity, transparency, low costs, and customization options that these investment strategies offer.
– The goals and restrictions of SWFs and Central Banks are often quite different to those of other institutional investors. This can require a customized solution.
– We expect sovereign investors to continue exploring new passive strategies and we outline emerging trends that could be of special interest for this investor group.
– Asset managers need to respond to the evolving needs of these institutions in the passive space.

Index investing has been one of the fastest growing strategies of the last 20 years, with an estimated USD 10 trillion invested globally, tracking a wide range of benchmarks across asset classes in a variety of investment vehicles. It is an investment style which appeals to a broad range of institutional investors, from Pension Funds to Sovereign Institutions. 1

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By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

1. Source: IMF 2017, SWFI 2017, UBS 2017.

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Transforming Saudi Arabia’s Capital Markets

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This article is sponsored by State Street.

KEY POINTS

– Vision 2030 and the Aramco privatization mark a decisive point to advance Saudi Arabia’s financial sector — a critical ingredient to the country’s economic transformation

– Saudi’s “Financial Triad” remains partially incomplete with a sound banking system and a rapidly emerging equity market, but an immature bond market.

– The privatization of Saudi state assets (including Aramco) could deliver a boost to the depth and sophistication of the Saudi equity market and — if cleverly designed— have positive spillover effects into other areas of finance and policy.

– The timing is ideal to launch an accompanying systematic drive to build local currency bond markets, which is a prerequisite for achieving the broader economic goals of Vision 2030.

Saudi Arabia’s Vision 2030 is remarkable in its aspiration to engineer far-reaching economic transformation. As a global asset manager, we note that one of the three pillars of this vision sets out the aim to make the country a “global investment powerhouse.” 1

While Saudi Arabia has a strong legacy as a sovereign investor in foreign markets, this ambition also requires its local financial system to deepen across all sectors. Strong capital markets work together with a banking system to channel investment and ensure efficient capital allocation across the economy. In the absence of such channels, many worthwhile business ventures never take place, capital is misallocated and underutilized, and economic growth remains below its potential.

To read the full study please click here.

1 Foreword to Vision 2030, http://vision2030.gov.sa/en/foreword.

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