As head of securities lending for HSBC, what does your role involve?
I run securities lending for the agency side of the business for clients of HSBC Securities Services. That’s custody clients that are lending and clients that we’re lending for that are not using HSBC as a custodian. I am responsible for the delivery, product enhancement, trading, sales and relationship management.
The Securities and Futures Commission (SFC) of Hong Kong proposed additional safeguards on the use of securities lending, repo and derivatives transactions in January. What will this mean for Hong Kong’s securities lending programmes going forward?
They’re in a consultation period. HSBC, as a securities services provider, and the Pan Asia Securities Lending Association (PASLA) as the industry association, are both looking at what the SFC has asked and proposed. They’re trying to promote increased transparency.
In terms of questions, they just want to make certain that they have best practice aligned with other markets, whether it’s collateralisation processes or the right assessment to check whether securities lending is an appropriate activity for each potential lender. They’ve also asked for general feedback regarding indemnifications which has been a hot topic.
They are essentially trying to put an infrastructure in place that will help continue to promote the growth of investment management activity because Hong Kong is such a big hub. We want to make certain that everything is fit for purpose and there’s an infrastructure here that allows the business to grow, while maintaining prudent safeguards.
Hong Kong has been a key financial hub in Asia for a long time, but other markets are beginning to develop their own bases. Does this threaten Hong Kong’s status as the primary base for international entities or do you welcome the diversity?
From a securities lending point of view, irrespective of where people are located, you always have a global approach anyway. Actual desk locations don’t influence the international impact of it. Most market participants have representation in Hong Kong and that is likely to continue irrespective of whether firms make moves in other locations.
What may have a larger impact in the coming years is whether any of the banks relocate their legal entity for booking transactions. Right now, US loans get booked in to the legal entities in the US and non-US loans typically get booked to the European entity of the firm, whether that’s London, Dublin, Paris, Frankfurt and Zurich.
We expect to see some firms add locations as legal booking entities based on the cost of capital, balance sheet usage and regulatory requirements. That’s more likely to influence change in terms of the location of trading desks. But that’s not a trend as such, rather it’s something that’s on everyone’s radar. For most firms it isn’t top of the list at the moment.
Business in Asia is growing anyway across the board, if by migrating to a new market it encourages more participants then that actually reinforces growth in the industry as a whole for the region. If a new location adds activity that’s not necessarily at the expense of Hong Kong, it’s incremental to it.
What are the biggest securities lending challenges the industry will face in 2018?
The biggest determinant of the success of the industry is what’s happening in the market. Securities lending in itself is, in a way, a secondary transaction—you can’t just create securities loans in the same way you can create a trading strategy. Something else occurs which requires an entity to borrow.
The demand from borrowing securities follows on from what’s happening in the marketplace as a whole. What we’ve seen over the last year, was that as stock markets rose, we saw a lot more hedging activity in main index securities. As the indexes themselves were rising, it actually meant any short sells were concentrated in to main index names. That’s why you saw balances grow, and the shift to the securities was actually shifted to the main indexes, so that will continue.
We saw a lot of hedge funds cover their short positions in ‘special’ securities that were being borrowed. As stock prices went up, a lot of funds closed short positions in names where they had conviction the securities were overpriced, but the market continually moved against their view. Now that the prices have come off a little bit, we are possibly starting to see the first signs of people coming after those names again.
Usually when you’re in a volatile period, like now, people tend to wait before taking positions until they get a sense for the direction of the market, so market is the biggest factor, as well as market participation, technology and of course regulations are always going to influence how we do our business.
What are your views on regulation in the financial services industry?
From a securities lending point of view, not a lot of the regulations actually directly impact securities lending. We’re impacted by regulations that are applied to other activities. After Lehman defaulted for example, Basel III and the Volker Rule restricted proprietary trading which lead to less short selling activity by banks for their own trading accounts. So therefore, there was less borrowing demand from that group.
The Financial Transaction Tax (FTT) is another example. FTT required taxes to be collected for regular cash market transactions in France and Italy. Securities finance transactions were exempted from FTT so that created a requirement to report the securities that were done in order to ensure that you got the exemption.
Two new regulations combined to create what is referred to as the ‘collateral transformation trade’. Liquidity coverage ratio incentivised borrowers to fund some inventory types for fixed terms. New regulations for over-the-counter (OTC) derivatives (for example, European Market Infrastructure Regulation) required central clearing increasing the need for high-quality liquid asset collateral to be given to central counterparties.
In the collateral transformation trade, borrowers get improved values for term funded collateral they give out while receiving other securities that can be used for central clearing and other collateral obligations. Securities lenders whose government bonds lay unutilised in the zero/negative interest rate environment suddenly found there was demand for their assets. In this case, securities lenders were the beneficiaries of new regulations.
These are all examples of regulations that aren’t directly regulating, but influence behaviour in the business.
← Previous interview
International Securities Lending Association
Sejal Amin
Next interview →
BBH
Zubair Nizami
Image: Shutterstock 
