You have a global lending presence, but how do you view Asia in terms of the global landscape?
Zubair Nizami: Asia is a really important part of the global lending landscape. Demand levels are at historic highs, and we are seeing more and more opportunities for our clients with Asian assets. Developments such as the Hong Kong-Shanghai Stock Connect should only help this, and although it may take time to reach its full potential, it represents a great opportunity for beneficial owners.
Robert Lees: The region has always been strategically important to us from a securities lending and firm-wide standpoint, but over the last three years we’ve seen incredibly strong growth, which supports our decision to put more resources into the region. Having strong local connectivity to complement our well-established Asian trading presence is a priority for us—it’s our job to ensure our clients can take part in new revenue opportunities as they unfold. As a long-term specialist intrinsic value lender, our strengths play very well to the opportunities available in Asia and that bodes well for our clients.
We are also excited about the impact of the long-awaited mutual recognition of funds (MRF) programme. While progress has been a little slow since its launch, momentum is growing as an increasing number of managers begin to investigate the benefits of MRF. As of 6 January 2016, three Hong Kong funds and 23 Chinese funds have received regulatory approval under the MRF scheme. This is a positive long term development for the region.
You mentioned Stock Connect as an opportunity for beneficial owners—how far are we from China developing a lending model?
Nizami: The inclusion of A-shares in global benchmark indices is fundamental to the development of offshore lending. FTSE has already begun to add A-shares to some global benchmarks, while MSCI commented in June 2015 that further liberalisation of Chinese capital markets would be needed to support the addition of A-shares to the emerging markets benchmark.
Index providers are taking a measured approach, but A-share securities financing is expected to grow considerably over the longer term as both index providers and offshore investors increase their exposure to China. We expect a scalable offshore lending model to emerge in the next two to five years as overseas institutions increase their A-share holdings and China’s regulatory priorities shift back towards further market liberalisation.
What are the biggest considerations when engaging in lending in Asia?
Lees: From a day-to-day perspective, we interact with our clients and borrowers in Asia the way we do anywhere else. But at a macro level, the individual markets in Asia can vary greatly in terms of their development and operating models. Some markets have unique rules and regulations, particularly around short selling, trade settlement fails and operational frameworks, all of which will require a deep understanding of how they could impact on a lending programme. While the varying degrees of development and complexity require careful navigation, that makes for an exciting time in the region in terms of growth and potential revenue opportunity for beneficial owners.
The regulatory landscape sounds complex—how do you manage this level of disparity?
Lees: It’s true it can be complex, but it’s important to keep in mind that the regulatory landscape is evolving. We are seeing markets mature and develop their onshore and offshore frameworks over time. It’s also worth mentioning that this is an issue that goes beyond Asia. Regulators globally have reacted to market volatility to varying degrees and restrictions have not always remained in place once the broader implications are evaluated.
Looking at the bigger picture, we actually feel the regulatory tides are beginning to turn a little, as policymakers have begun talking about growth, liquidity and choice. At the start of February 2016 in fact, the Taiwan Stock Exchange (TWSE) announced it will allow unlimited day trading for all securities eligible for margin trading and short selling. This applies to almost all stocks, exchange-traded funds (ETFs) and warrants listed on its market. The expansion itself is exciting, but the ‘why’ is of just as much interest. In its statement, TSWE highlighted the driver of change was to increase choice, in this case through more hedging instruments, and to deliver increased trading volume.
We see this as a positive step forward and recognition of how securities lending activity is vital for market liquidity and investor choice and the role that plays in efficient capital markets.
So, given the evolution of lending markets in Asia, do you expect the region to play a bigger part in the global lending landscape going forward?
Nizami: Asia is a really exciting, forward looking region and the regulatory landscape will undoubtedly continue to evolve, with markets opening up more as they reach maturity. It has been a strong start in Asia, with robust lending returns in Hong Kong and South Korea, mainly as a result of concerns related to economic slowdown and exposure to China. These are long term macroeconomic trends that will likely remain for a while and demand levels are likely to go from strength to strength.
Lees: We see two key trends intersecting with the securities lending industry.
These will drive significant structural change, benefiting asset managers not just in Asia but across the globe, too.
First is the greater demand for transparency at all transaction levels, including securities lending. Technology will play a big role in providing this transparency and so it will be important for the industry to adapt and evolve to meet these needs.
Second is the broader ‘active versus passive’ debate in the investment industry. We are beginning to see significant changes in sentiment towards securities lending, with many ETF and passive fund providers not only engaging in securities lending, but supporting it. For a growing number of institutional investors, the possibility of offsetting fees with lending revenues is an increasingly attractive opportunity.
With different dynamics at play, we believe there are real opportunities for Asia and securities lending more broadly as markets mature and the product continues to evolve. It’s a great time to think creatively about how you can engage in new ways.
The views expressed are as of 12/02/15 and are a general guide to the views of BBH. The opinions expressed are a reflection of BBH’s best judgment at the time this interview was recorded, and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed. Neither BBH nor its affiliates provide legal or tax advice. Nothing contained herein is intended as a recommendation to buy or sell any security, or to invest in any particular country, sector or asset class. BBH is not affiliated with Securities Lending Times.
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