Asia
21 February 2012
The only general conclusion one can draw about securities lending markets in Asia is that they present tremendous opportunity
Image: Shutterstock
Because it is a huge continent of a wide variety of markets in various stages of development under the protection of numerous regulators with individual sovereign interests, Asia is a tough region to generalise about. But where there is growth, there are investors sharpening the focus to see details, and it is likely that it will be emerging markets where watchful eyes keep tabs on securities lending market developments.
The macro picture for developed markets shows weakness. Asian markets continued to drift lower in the fourth quarter of 2011 on the back of the European sovereign debt crisis and the impact of a slowing global economy on China’s growth as well as the pull back in commodities and resources, according to a recent report from RBC.
RBC adds that sectors such as the consumer discretionary, banking and real estate continued to attract lending demand though borrowers are using internal inventory to cover shorts resulting in substantially reduced demand from traditional lenders.
The hot spot for revenue growth is Hong Kong, where average income from securities lending increased 50 per cent in the last three months of 2011, from 16 bps to 22 bps, according to Data Explorers. This, it adds, was down to rerating since the demand to borrow was fairly constant through the quarter.
“The big question is for how long this juicy lending environment will last. With news of China’s trade surplus reducing, some commentators think a stimulus could be around the corner. There is nothing like a centrally planned boost to the economy to set fright to short sellers betting on the China slowdown,” says Data Explorers.
Wayne Burlingham, global head of securities lending at HSBC Securities Services, identifies Hong Kong as the most exciting developed market in Asia currently, where he has seen revenues pick up across the board in a mostly specials environment of consistent demand. Meanwhile the regulatory environment is still conducive to international players, he adds. Given that economic conditions remain the same, he anticipates that the island will continue to be a good place for securities lending business.
“The whole of Asia is an exciting region for HSBC. If you look at the number of potential lending markets in the east versus the west, for example Malaysia, Philippines and beyond that Vietnam and Indonesia, from an agent lending point of view there is a lot of justification in keeping a close eye on Asia versus Europe and the US. It is a region of great potential basically,” he notes.
He adds, however, that the real growth sectors for securities lending markets generally, such as collateral transformation trades, do not apply to Asia to the same extent as they do in Europe and the US. The region is still about borrowing stock as opposed to seeking other trading opportunities.
That may be because so many of Asia’s markets and exchanges are in development. Meanwhile, just as developed markets are seeing challenges to economic growth, emerging economies are exhibiting strong fundamentals. The local market ending 2011 as Asia’s best performer was the Philippine Stock Exchange (PSE), with a four per cent gain. Capital raised on the PSE last year hit a peak of PHP 107.5 billion ($2.5bn) and there are indications that the exchange’s leadership would like to see the market upswing get a further boost by introducing ETFs and securities lending in the second half of this year.
The market slightly ahead of the Philippines in terms of development is Malaysia’s, which issued new rules recently making the environment “more lender friendly” Burlingham adds. For example, if a stock is on loan, it can be sold without being considered a short sale. He predicts that regulators and market participants will continue to work through other barriers to open up the Malaysian market.
China v India
As the two powerhouse economies in Asia, mainland China and India are subject to their fair share of speculation on when and how securities lending markets will open up or improve. There is plenty of work to be done in both, but whereas India has an established market, mainland China is yet to allow entry to international participants.
Commentators have noted that though mainland China has had forward momentum over the last couple of years, when any initiatives are announced in the public domain, markets take a dive. From the point of view of Chinese regulators, it is a daunting task to expose markets to these kinds of forces.
“If you are the regulator hitting the green button, even in quiet market conditions that is a big leap of faith. But if you can imagine going for it in the turbulent markets we have right now, when volatility is at historic levels, that is a massive call for any regulator. So for anyone to think the market can suddenly go from nothing to being wide open in a short space of time… that is just not that likely to happen,” Burlingham says, adding that he does not expect to see too much development in 2012.
The same is true for India, where the market has arguably been relatively slow to develop. Rules that are in place are not particularly friendly to lenders or borrowers, explains Burlingham, and he would need to see further rule changes to feel comfortable. Moreover, he does not see borrowers actively pushing for supply.
“Until it gets to the point where everyone feels quite comfortable it will remain a very limited market...where we have to do things very differently there are risks, pure and simple. The market preference is always to have a lightly regulated market with professional participants in it. We are happy to work to a reasonable set of rules, but Indian regulations are very tight comparatively. At the same time, it may be that India is happy to have a domestic market without international participation. Each country has its own ways of doing things and these choices may suit their market right now,” Burlingham says.
Fixed income space
At the same time, advocacy group ASIFMA (Asia Securities Industry & Financial Markets Association) is watching developments closely in the Indian repo markets. Almost all of the repo market is overnight, which contributes to an absence of liquidity in the underlying markets, notes Nicholas de Boursac, CEO of ASIFMA. In addition, there is still some progress yet to be made on issues such as title transfer and eliminating short selling restrictions.
A working group is currently preparing to make recommendations for measures to improve second market liquidity. A report is anticipated by the end of the first quarter this year.
“I think it is going to become more and more broadly accepted within Indian government circles that they need more foreign financing for the expansion of their economy and infrastructures, and therefore I expect, because government debt is going to carry on growing, that there will be changes in regulations which will make investing in India’s government securities more attractive as they face that economic reality,” de Boursac says.
At the moment, ASIFMA is focused on the fixed income markets in India, China and Korea. Similar to India, China still needs to make progress towards what de Boursac calls “a classic repo market”, in other words, one where there is proper transfer of title, documentation, tax and accounting treatments and liquidity. Some 85 per cent of China’s domestic RMB repo market is pledge repo, while the remaining 15 per cent of title transfer repo is not suitably documented and short term. He expects to see improvement within the next two years but does not anticipate that the country will see any “major disturbance” in financial markets in 2012.
“China has taken the decision that they want to make their markets more liquid and deeper and in some ways more integrated with the global markets, so that is a debate that is settled. I do anticipate some changes, but 2012 is a difficult year. There is a political transition underway and typically some of the reform agenda gets delayed so as not to get in the way of the political process. But I suspect once this transition is over, we will have some rapid progress in terms of modernising the financial system,” de Boursac says.
Of all the markets straddling the emerging/developed classification fence, Korea is noteworthy for both its repo development and recent hardline stance on short selling restrictions. In terms of the won repo market, ASIFMA points to continued growth - outstanding volumes have quadrupled to some $20 trillion won ($17.8 billion) in the last three or four years. Outside of Japan, Korea has one of the most developed fixed income markets in Asia.
The country is also going through a leadership change with elections this year. Along with a change in government, there is some anticipation that short selling restrictions introduced in the summer when markets plunged could be reversed.
“Most technicians will tell you that short selling is good for markets and works for market liquidity, but you will find that those regulations are put in place for political reasons. I suspect that if there is a change in government there is a possibility that they will reverse those rules, but of course there are no guarantees,” de Boursac says.
Regulatory arbitrage?
Both Wayne Burlingham and Nicholas de Boursac note that the global regulation conversation has far more to do with the west than the east. Burlingham explains that many of the European and US regulations such as Dodd Frank or Basel III affect western holders of Asian assets to a greater extent.
De Boursac takes issue with comments, which infer that Asian banks will compete for business by engaging in regulatory arbitrage. He points out that the loan to deposit ratio in Asian banks is far more favourable and dependency on wholesale funding is considerably lower than in European institutions at the moment.
“Can you treat Asia as a group? You can in certain areas, such as the fact that most sizeable Asian banks will probably be Basel III compliant before European banks…but if you look at sophistication, these markets are not fully developed in many cases and that is the challenge – to get markets to develop rather than regulate them,” de Boursac says.
The macro picture for developed markets shows weakness. Asian markets continued to drift lower in the fourth quarter of 2011 on the back of the European sovereign debt crisis and the impact of a slowing global economy on China’s growth as well as the pull back in commodities and resources, according to a recent report from RBC.
RBC adds that sectors such as the consumer discretionary, banking and real estate continued to attract lending demand though borrowers are using internal inventory to cover shorts resulting in substantially reduced demand from traditional lenders.
The hot spot for revenue growth is Hong Kong, where average income from securities lending increased 50 per cent in the last three months of 2011, from 16 bps to 22 bps, according to Data Explorers. This, it adds, was down to rerating since the demand to borrow was fairly constant through the quarter.
“The big question is for how long this juicy lending environment will last. With news of China’s trade surplus reducing, some commentators think a stimulus could be around the corner. There is nothing like a centrally planned boost to the economy to set fright to short sellers betting on the China slowdown,” says Data Explorers.
Wayne Burlingham, global head of securities lending at HSBC Securities Services, identifies Hong Kong as the most exciting developed market in Asia currently, where he has seen revenues pick up across the board in a mostly specials environment of consistent demand. Meanwhile the regulatory environment is still conducive to international players, he adds. Given that economic conditions remain the same, he anticipates that the island will continue to be a good place for securities lending business.
“The whole of Asia is an exciting region for HSBC. If you look at the number of potential lending markets in the east versus the west, for example Malaysia, Philippines and beyond that Vietnam and Indonesia, from an agent lending point of view there is a lot of justification in keeping a close eye on Asia versus Europe and the US. It is a region of great potential basically,” he notes.
He adds, however, that the real growth sectors for securities lending markets generally, such as collateral transformation trades, do not apply to Asia to the same extent as they do in Europe and the US. The region is still about borrowing stock as opposed to seeking other trading opportunities.
That may be because so many of Asia’s markets and exchanges are in development. Meanwhile, just as developed markets are seeing challenges to economic growth, emerging economies are exhibiting strong fundamentals. The local market ending 2011 as Asia’s best performer was the Philippine Stock Exchange (PSE), with a four per cent gain. Capital raised on the PSE last year hit a peak of PHP 107.5 billion ($2.5bn) and there are indications that the exchange’s leadership would like to see the market upswing get a further boost by introducing ETFs and securities lending in the second half of this year.
The market slightly ahead of the Philippines in terms of development is Malaysia’s, which issued new rules recently making the environment “more lender friendly” Burlingham adds. For example, if a stock is on loan, it can be sold without being considered a short sale. He predicts that regulators and market participants will continue to work through other barriers to open up the Malaysian market.
China v India
As the two powerhouse economies in Asia, mainland China and India are subject to their fair share of speculation on when and how securities lending markets will open up or improve. There is plenty of work to be done in both, but whereas India has an established market, mainland China is yet to allow entry to international participants.
Commentators have noted that though mainland China has had forward momentum over the last couple of years, when any initiatives are announced in the public domain, markets take a dive. From the point of view of Chinese regulators, it is a daunting task to expose markets to these kinds of forces.
“If you are the regulator hitting the green button, even in quiet market conditions that is a big leap of faith. But if you can imagine going for it in the turbulent markets we have right now, when volatility is at historic levels, that is a massive call for any regulator. So for anyone to think the market can suddenly go from nothing to being wide open in a short space of time… that is just not that likely to happen,” Burlingham says, adding that he does not expect to see too much development in 2012.
The same is true for India, where the market has arguably been relatively slow to develop. Rules that are in place are not particularly friendly to lenders or borrowers, explains Burlingham, and he would need to see further rule changes to feel comfortable. Moreover, he does not see borrowers actively pushing for supply.
“Until it gets to the point where everyone feels quite comfortable it will remain a very limited market...where we have to do things very differently there are risks, pure and simple. The market preference is always to have a lightly regulated market with professional participants in it. We are happy to work to a reasonable set of rules, but Indian regulations are very tight comparatively. At the same time, it may be that India is happy to have a domestic market without international participation. Each country has its own ways of doing things and these choices may suit their market right now,” Burlingham says.
Fixed income space
At the same time, advocacy group ASIFMA (Asia Securities Industry & Financial Markets Association) is watching developments closely in the Indian repo markets. Almost all of the repo market is overnight, which contributes to an absence of liquidity in the underlying markets, notes Nicholas de Boursac, CEO of ASIFMA. In addition, there is still some progress yet to be made on issues such as title transfer and eliminating short selling restrictions.
A working group is currently preparing to make recommendations for measures to improve second market liquidity. A report is anticipated by the end of the first quarter this year.
“I think it is going to become more and more broadly accepted within Indian government circles that they need more foreign financing for the expansion of their economy and infrastructures, and therefore I expect, because government debt is going to carry on growing, that there will be changes in regulations which will make investing in India’s government securities more attractive as they face that economic reality,” de Boursac says.
At the moment, ASIFMA is focused on the fixed income markets in India, China and Korea. Similar to India, China still needs to make progress towards what de Boursac calls “a classic repo market”, in other words, one where there is proper transfer of title, documentation, tax and accounting treatments and liquidity. Some 85 per cent of China’s domestic RMB repo market is pledge repo, while the remaining 15 per cent of title transfer repo is not suitably documented and short term. He expects to see improvement within the next two years but does not anticipate that the country will see any “major disturbance” in financial markets in 2012.
“China has taken the decision that they want to make their markets more liquid and deeper and in some ways more integrated with the global markets, so that is a debate that is settled. I do anticipate some changes, but 2012 is a difficult year. There is a political transition underway and typically some of the reform agenda gets delayed so as not to get in the way of the political process. But I suspect once this transition is over, we will have some rapid progress in terms of modernising the financial system,” de Boursac says.
Of all the markets straddling the emerging/developed classification fence, Korea is noteworthy for both its repo development and recent hardline stance on short selling restrictions. In terms of the won repo market, ASIFMA points to continued growth - outstanding volumes have quadrupled to some $20 trillion won ($17.8 billion) in the last three or four years. Outside of Japan, Korea has one of the most developed fixed income markets in Asia.
The country is also going through a leadership change with elections this year. Along with a change in government, there is some anticipation that short selling restrictions introduced in the summer when markets plunged could be reversed.
“Most technicians will tell you that short selling is good for markets and works for market liquidity, but you will find that those regulations are put in place for political reasons. I suspect that if there is a change in government there is a possibility that they will reverse those rules, but of course there are no guarantees,” de Boursac says.
Regulatory arbitrage?
Both Wayne Burlingham and Nicholas de Boursac note that the global regulation conversation has far more to do with the west than the east. Burlingham explains that many of the European and US regulations such as Dodd Frank or Basel III affect western holders of Asian assets to a greater extent.
De Boursac takes issue with comments, which infer that Asian banks will compete for business by engaging in regulatory arbitrage. He points out that the loan to deposit ratio in Asian banks is far more favourable and dependency on wholesale funding is considerably lower than in European institutions at the moment.
“Can you treat Asia as a group? You can in certain areas, such as the fact that most sizeable Asian banks will probably be Basel III compliant before European banks…but if you look at sophistication, these markets are not fully developed in many cases and that is the challenge – to get markets to develop rather than regulate them,” de Boursac says.
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