Asia
15 March 2011
After retrenching during the financial crisis, Asian markets are returning to the securities lending market in numbers
Image: Shutterstock
As the markets tumbled in the past few years, Asian asset owners - like their counterparts across the world - took a look at their participation in the securities lending industry and, in many cases, reduced their exposure or withdrew from the market.
While securities lending itself was causing few problems, the collateral reinvestment was proving trickier. While there were few losses, managers took the decision that the rewards were far outweighed by the risks.
Compared to European or North American markets, those in Asia fared relatively well. The established markets saw comparatively small falls in their values, while the emerging growth markets continued pretty much as they were - the levels of growth dropped slightly, but they kept on growing.
The one major exception was Australia, which saw its markets tumble and many securities lending players either withdraw from the market or reduce their exposure. Legal suits are ongoing, but most of the major players have gradually edged their way back into the market.
But that is starting to change. The past year has seen securities lending agents report revenues of up to 25 per cent more than the year before, and the big beasts in the institutional finance world are making sure their presence is felt in the biggest markets. At the recent PASLA conference in Singapore, over 80 per cent of delegates predict that revenue for the market is only going to grow.
The same conference held the view that Taiwan will be leading the way in terms of revenue generation, with Hong Kong not far behind. Prospects in Japan are less positive, although growth is still expected. India remains a market many eyes are on, although active participation is limited - there still appears to be a lack of understanding of how the market works and a reluctance to be a frontiersman when it comes to entering the market.
But while there is significant excitement about the market, concerns remain about risk. Over 90 per cent of attendees said that risk has risen up their agenda since the financial crisis, and the amount of time spent working through risk profiles and working to understand the levels of risk.
The figures certainly look good. The MSCI Far East Index has risen by around eight per cent over the past year, compared to virtually flat figures for Europe and Asia.
Collateral strategies have changed, however. Cash is becoming less popular, in part due to the reinvestment strategies used in the past - it was not uncommon for beneficial owners and their service partners to put the cash into mortgage-related assets, including those in the sub-prime categories, which caused so many problems during the crisis. Now, the preference appears to be fixed income, US Treasuries and other low-risk assets. EU bonds are becoming increasingly popular, despite some of the member countries’ well-documented fiscal problems.
“Clients are reviewing all aspects of their programme and this includes the duration of investments derived from cash collateral,” says one player. “There is a greater focus on maintaining overnight liquidity and the defensive management of cash. The duration of loans generally has fallen as borrowers come under balance sheet pressure and need to more finely calibrate the use of precious balance sheet resource.”
CCPs
There does not seem to be a huge appetite for the introduction of CCPs within the region, even though the market predicted to grow the fastest - Taiwan - already has one in place, while India has a de facto CCP model. “We don’t see that the added costs and administrative burden that will be placed upon us [from the use of a CCP] is worth the reduced risk that it will bring,” is the comment of one agent lender, who says that his views are shared across both the beneficial owner and borrower communities.
The players
In the past six months, there has been huge investment from some of the major players into the region. Data Explorers opened its Hong Kong office at the end of the third quarter 2010, and now publishes data in both Mandarin and Hindi. Equilend’s new Hong Kong office is already servicing the company’s existing clients in the region, with high expectations for plenty of new business from local players.
Jules Pittam, managing director, Data Explorers, said at the time of the office opening: “Asia stands out as a region where the income from securities lending is gently rising. We have long term relationships with clients across Asia and Japan who use our daily global content to support their investment decisions and manage risk. We are excited to formalise our presence in the region ... and are pleased to welcome Emmie Osawa to the team.”
Banks such as Barclays - which has almost doubled its securities finance workforce in the region - and HSBC, which is opening a branch of its custody and prime brokerage operations with its prime services platform, are just two global operators who are making a play for the market.
“The number of firms setting up offices in the region is increasing, due in large part to the belief that it is leading the global economic recovery. Institutional investors in Asia have not been as impacted as in other areas and markets here have long-term growth prospects.”
The feeling now - as in other areas of institutional finance - is that if you don’t have a strong presence in Asia, then you’re nowhere. This is highlighted by the continuing rumours - strongly and repeatedly denied by the bank - that HSBC is set to move its headquarters back to the region.
Over the past couple of years, Data Explorers estimates the numbers of securities available for lending has increased by as much as 20 per cent, compared to declines elsewhere in the world. Hedge funds are also setting up shop, with Algebris Investments opening a Singapore office last year and Marshall Wace forming a joint venture with Asia specialist GaveKal Holdings in 2008.
In part, this is down to the activity within the market compared to elsewhere. IPOs, moribund in Western markets, are booming here, accounting for over 70 per cent of global volume throughout most of 2010 according to Dealogic, and seven of the world’s top 10 deals, in value terms, occurring in Asia.
The financial crisis has also had one further effect. While it’s unfair to describe the changes in service providers as a flight to quality, beneficial owners have certainly made the decision that in this market, bigger is better. They have looked to the HSBCs and J.P. Morgans of the world to be their partners in the securities lending market, rather than using smaller domestic providers.
“These smaller firms have been the unwitting victims of the market turmoil,” says one fund manager. “Our risk assessments mean that while the relationships we have built up mean we have always been happy with the service and we never really had any problems with their size, but the risk managers are looking at global footprints and spreading the risk. They are also looking at the borrower funds themselves much more closely and if these global organisations have relationships with the hedge funds going across borders, we are more comfortable with that.”
Regulation
Asia is by no means a single market; there is a significant amount of variation about the rules on securities lending. Mature markets, such as Australia, Hong Kong and Taiwan, have a well-established regulatory infrastructure. But the story is very different elsewhere. India’s securities lending regulation still has to be fully tested and few players are willing to make real investments in the market. In Pakistan, the ink is not yet dry on the new rules surrounding securities lending, although the feedback from both the local market and international participants has been broadly positive.
China, meanwhile, is the market that everyone is waiting for. Some time ago, the country’s government allowed a pilot scheme to assess the viability of securities lending, but little has happened since then, mainly as a result of the financial crisis. Most of the major global banks, as well as China’s existing local players, have made great strides in terms of building China’s financial infrastructure over recent years, so if and when securities lending is permitted, the market will be ready.
“It’s certainly a market for the future,” says Brian Lamb, CEO of EquiLend. “At the moment though it’s not apparent to me that there is any meaningful activity EquiLend’s clients are doing in the market for us to necessitate a focus on it.”
While securities lending itself was causing few problems, the collateral reinvestment was proving trickier. While there were few losses, managers took the decision that the rewards were far outweighed by the risks.
Compared to European or North American markets, those in Asia fared relatively well. The established markets saw comparatively small falls in their values, while the emerging growth markets continued pretty much as they were - the levels of growth dropped slightly, but they kept on growing.
The one major exception was Australia, which saw its markets tumble and many securities lending players either withdraw from the market or reduce their exposure. Legal suits are ongoing, but most of the major players have gradually edged their way back into the market.
But that is starting to change. The past year has seen securities lending agents report revenues of up to 25 per cent more than the year before, and the big beasts in the institutional finance world are making sure their presence is felt in the biggest markets. At the recent PASLA conference in Singapore, over 80 per cent of delegates predict that revenue for the market is only going to grow.
The same conference held the view that Taiwan will be leading the way in terms of revenue generation, with Hong Kong not far behind. Prospects in Japan are less positive, although growth is still expected. India remains a market many eyes are on, although active participation is limited - there still appears to be a lack of understanding of how the market works and a reluctance to be a frontiersman when it comes to entering the market.
But while there is significant excitement about the market, concerns remain about risk. Over 90 per cent of attendees said that risk has risen up their agenda since the financial crisis, and the amount of time spent working through risk profiles and working to understand the levels of risk.
The figures certainly look good. The MSCI Far East Index has risen by around eight per cent over the past year, compared to virtually flat figures for Europe and Asia.
Collateral strategies have changed, however. Cash is becoming less popular, in part due to the reinvestment strategies used in the past - it was not uncommon for beneficial owners and their service partners to put the cash into mortgage-related assets, including those in the sub-prime categories, which caused so many problems during the crisis. Now, the preference appears to be fixed income, US Treasuries and other low-risk assets. EU bonds are becoming increasingly popular, despite some of the member countries’ well-documented fiscal problems.
“Clients are reviewing all aspects of their programme and this includes the duration of investments derived from cash collateral,” says one player. “There is a greater focus on maintaining overnight liquidity and the defensive management of cash. The duration of loans generally has fallen as borrowers come under balance sheet pressure and need to more finely calibrate the use of precious balance sheet resource.”
CCPs
There does not seem to be a huge appetite for the introduction of CCPs within the region, even though the market predicted to grow the fastest - Taiwan - already has one in place, while India has a de facto CCP model. “We don’t see that the added costs and administrative burden that will be placed upon us [from the use of a CCP] is worth the reduced risk that it will bring,” is the comment of one agent lender, who says that his views are shared across both the beneficial owner and borrower communities.
The players
In the past six months, there has been huge investment from some of the major players into the region. Data Explorers opened its Hong Kong office at the end of the third quarter 2010, and now publishes data in both Mandarin and Hindi. Equilend’s new Hong Kong office is already servicing the company’s existing clients in the region, with high expectations for plenty of new business from local players.
Jules Pittam, managing director, Data Explorers, said at the time of the office opening: “Asia stands out as a region where the income from securities lending is gently rising. We have long term relationships with clients across Asia and Japan who use our daily global content to support their investment decisions and manage risk. We are excited to formalise our presence in the region ... and are pleased to welcome Emmie Osawa to the team.”
Banks such as Barclays - which has almost doubled its securities finance workforce in the region - and HSBC, which is opening a branch of its custody and prime brokerage operations with its prime services platform, are just two global operators who are making a play for the market.
“The number of firms setting up offices in the region is increasing, due in large part to the belief that it is leading the global economic recovery. Institutional investors in Asia have not been as impacted as in other areas and markets here have long-term growth prospects.”
The feeling now - as in other areas of institutional finance - is that if you don’t have a strong presence in Asia, then you’re nowhere. This is highlighted by the continuing rumours - strongly and repeatedly denied by the bank - that HSBC is set to move its headquarters back to the region.
Over the past couple of years, Data Explorers estimates the numbers of securities available for lending has increased by as much as 20 per cent, compared to declines elsewhere in the world. Hedge funds are also setting up shop, with Algebris Investments opening a Singapore office last year and Marshall Wace forming a joint venture with Asia specialist GaveKal Holdings in 2008.
In part, this is down to the activity within the market compared to elsewhere. IPOs, moribund in Western markets, are booming here, accounting for over 70 per cent of global volume throughout most of 2010 according to Dealogic, and seven of the world’s top 10 deals, in value terms, occurring in Asia.
The financial crisis has also had one further effect. While it’s unfair to describe the changes in service providers as a flight to quality, beneficial owners have certainly made the decision that in this market, bigger is better. They have looked to the HSBCs and J.P. Morgans of the world to be their partners in the securities lending market, rather than using smaller domestic providers.
“These smaller firms have been the unwitting victims of the market turmoil,” says one fund manager. “Our risk assessments mean that while the relationships we have built up mean we have always been happy with the service and we never really had any problems with their size, but the risk managers are looking at global footprints and spreading the risk. They are also looking at the borrower funds themselves much more closely and if these global organisations have relationships with the hedge funds going across borders, we are more comfortable with that.”
Regulation
Asia is by no means a single market; there is a significant amount of variation about the rules on securities lending. Mature markets, such as Australia, Hong Kong and Taiwan, have a well-established regulatory infrastructure. But the story is very different elsewhere. India’s securities lending regulation still has to be fully tested and few players are willing to make real investments in the market. In Pakistan, the ink is not yet dry on the new rules surrounding securities lending, although the feedback from both the local market and international participants has been broadly positive.
China, meanwhile, is the market that everyone is waiting for. Some time ago, the country’s government allowed a pilot scheme to assess the viability of securities lending, but little has happened since then, mainly as a result of the financial crisis. Most of the major global banks, as well as China’s existing local players, have made great strides in terms of building China’s financial infrastructure over recent years, so if and when securities lending is permitted, the market will be ready.
“It’s certainly a market for the future,” says Brian Lamb, CEO of EquiLend. “At the moment though it’s not apparent to me that there is any meaningful activity EquiLend’s clients are doing in the market for us to necessitate a focus on it.”
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