With Indonesia exploring short selling structures, the reopening of covered short selling in Korea in the next several weeks, and the resurgence of activity in the initial public offering (IPO) pipeline as issuers head to Hong Kong, APAC presents an interesting value proposition for market participants.
Reviewing the past 12 months, the APAC region has demonstrated mixed attitudes towards securities lending and short selling. For instance, Japan’s Government Pension Investment Fund (GPIF) confirmed in March that it would resume foreign stock lending after it initially suspended this activity in 2019.
According to Stephen Howard, CEO of the Pan Asia Securities Lending Association (PASLA), GPIF is returning to the market now because it sees the value proposition in the region. He adds: “It's also probably due to the rate structure in Japan changing, and the fact that the value proposition is now ever so more significant with a higher rate structure, albeit the rates are still quite low, but it's all relative.”
On the other end of the spectrum, and four months after the GPIF’s decision, China approved the suspension of securities relending to further strengthen the counter-cyclical regulation of securities lending. The China Securities Regulatory Commission (CSRC) also approved to raise margin requirements for short sellers.
“We have seen China go through a major recalibration, plus a range of different policy initiatives that came post that as well. At both ends of the spectrum it reflects two themes — retail participation and retail concerns with spot prices that policy makers cannot control,” Howard explains. “Securities regulators can make sure that the market structure is appropriate for the market backdrop that they have at that point in time, and be adaptive.”
In the G7 economies, Howard indicates a world that is going through an increasing-rate environment and a higher inflationary landscape, while in China, deflation trying to take hold. “The economics of this is quite interesting for the fixed income markets in a rate-cutting environment, that's phenomenal for fixed income in China,” he continues. He notes that this rate-cutting backdrop is a “significant boost” for equities. Given this, Howard believes the financing of assets is going to be important for a broad range of investors and market participants.
Elsewhere in Asia, Taiwan has become the standout success story of this year according to Howard. The country’s equity market has been technology-driven, the region lives off processor chips, and Nvidia feeds through that chip construct.
Even with Korea’s short selling market being closed for the best part of a year, Howard has seen a revenue profile that is corresponding to that, but the upside with the reopening “is going to be quite interesting”. He adds: “The banks are going to be cautious with the reopening, but when we look forward, this is a rightsizing opportunity for the Korean market.”
In Hong Kong, there has been a quiet pipeline in 2023 of IPOs and product issuance. But then in 2024, participants started to see this IPO pipeline reappearing as issuers have come to Hong Kong rather than the Chinese market, which allows people to get exposure to China.
Headwinds for this year are things market participants can’t control, for example inflation and geopolitical factors. Howard explains: “We will deal with these when they come along, I don't think they will change the market structure; more that there will be changes to spot prices, which means a greater requirement for hedging and financing solutions. It's a win-win for different component pieces of the market.”
Where it all began
For three decades, PASLA has supported the growth of the APAC region, and has itself expanded over the years to accommodate market interest. Since its emergence in 1995, the association has been present for some of Asia’s key turning points, providing guidance through turmoil and triumph.
As PASLA celebrates 30 years, it is important to revisit how the association came to be. According to Howard, the emergence of an association often occurs when there is an issue to be solved, for PASLA, this challenge was Hong Kong inland revenue based.
In Hong Kong, firms need to file their securities lending documentation with inland revenue to achieve a stamp duty exemption. “The challenge was that this is a government office and the documentation that existed was bilateral and very bespoke. Everyone was seemingly happy with this bilateral approach, except it failed to live up to the Inland Revenue's expectations," Howard explains.
“The key problem was that everyone was submitting their version of a securities lending document into the inland revenue, which led to documents being rejected due to it not being recognised.”
The industry coalesced quite rapidly around this problem and agreed to use a single set of documentation, with an annex which would cover specific points that are relevant for the inland revenue, and called it a side letter. Organisations would then sign this when transacting in Hong Kong.
Not long after, in 1997, the financial crisis across Asia appeared. Howard recalls how PASLA was integral in supporting Malaysia’s netting process with both derivatives and securities lending markets. “Having gone through that period of market turmoil, what was interesting was that the Hong Kong market persisted — no suspension of the short sale regime.”
In the early 2000s, after the Asian financial crisis — “and this goes down to the nature and DNA of how we’ve chosen to refactor and describe the securities finance business in Asia” — a key theme was investment access. In other words, achieving market access to China, Taiwan, Korea, or India, and markets which have different barriers to entry.
Howard says this created the question: how do you get exposure and do that in a securitised or an OTC derivative form? From this, he indicates that it necessitated financing pools of assets, particularly hedging solutions around indices, which brought index providers into play and allowed them to help structure indices, making them more robust.
“The transition from the local market benchmark to the MSCI or to the FTSE indexing has helped to open up that embryonic need for hedging requirements,” he explores. “This leads directly to — for the futures market — the need for short sell market structures, which can only really work with securities borrowing and lending to ensure fair market pricing construction and pricing efficiency.”
There are many events which have occurred through that process, Howard pinpoints, including the openings of markets in Korea and Taiwan, the creation of the Qualified Foreign Institutional Investor (QFII) infrastructure in China, Stock Connect, and being able to navigate through the global financial crisis in 2008, again “without too much structural trauma” through that process.
The conference
Through PASLA’s headline conference in Macao on 26-27 February, the association will celebrate its 30th anniversary with members and financial players, as it hosts a number of discussions surrounding market moves and the future development of APAC.
Macao is an administrative region of China, on the country’s southern coast, and will be home to this year’s PASLA conference. Only a 45-50 minute drive from Hong Kong, Macao was chosen to provide a different experience from previous events.
Following feedback from its members, Howard says the association found that conference attendees were continuously pulled away into meetings when located in a regional financial hub. This year, the event has been designed to allow attendees to be more present, and will take place at the Galaxy International Convention Center.
Howard indicates that participants want to “get eyes and ears involved in the dialogue, discussions, the narrative, as well as the professional networking that comes with that, so that they can create connectivity across that landscape”. To help with this connectivity, the large venue will have enough private meeting room space for members to have “those deeper and more invested conversations”.
Opening the conference will be a panel discussion on Hong Kong and China, named ‘Re-awakening the Dragon’, which will feature one of the largest international banks operating in China, a Chinese asset manager, as well as an exchange from each region. The panel will explore a variety of topics including Stock Connect, Bond Connect, and what asset managers are looking at in China.
“The market is different in terms of retail participation, which is far higher in China relative to institutional participation, because the institutions haven't evolved and grown due to the underlying market being slightly different,” Howard highlights.
“China only put a national pension system in place two years ago — the need for the pension dynamic, the need for that form of savings vehicle, is very different, it's evolving at the moment. The opportunity set is significant with that, and then concurrently, the opportunity set for the financing of those assets and the product suite to support this.”
The conference will also host a review of legal and regulatory perspectives, highlighting several regional market adaptations and also discussing with law firm Kim & Chang the reopening of Korea — which is happening within four weeks after the conference.
Providing more details of the event, Howard notes: “For the rest of the conference, we have tried to make sure that we have the right themes, such as retail and private wealth. We've had a new member firm join us who is a retail aggregator, Tiger Brokers.
“We feel that's an important segment of the market, and one that we're probably going to focus on over the course of this year, probably next year as well, because the retail voice needs to be represented.”
Rounding off the conference, the association will host an anniversary gala dinner, which will provide capacity for up to 500 participants. Conference ticketing (which includes the gala dinner) is available, and juniors are encouraged to come and join the feast.
“Come to the conference, become a PASLA member,” Howard encourages. “Once you are a PASLA member, you can deliver your brand into the association and use this as an opportunity to sponsor events. The conference is going to be operating at a different pace, on a different scale, than what we've done before in the past. More than ever, you will see the change year on year. It's going to be something quite special.”
A leading voice in Asia
Moving forward, the association reviewed its membership structure to re-design it to better fit the membership it intends to grow into.
Howard explains: “We want to create membership sleeves that represent the functional pieces of business activity that is being conducted, so it is then easy to bring those membership
firms together.”
These sleeves include Prime membership (international prime brokers, securities houses); Agent (custodians and third-party lenders); Hedge membership (alternative asset managers, liquidity providers); Owners (beneficial owners, family offices and sovereign wealth funds); and Solutions Partners (market solution providers, infrastructure support providers).
By creating these member sleeves, PASLA is able to provide for that particular group, whose advocacy requirements are likely to be of a similar vein, instead of “trying to be all things for all people”. To help further this initiative, the association will “up the cadence” of different events that it is hosting and target them around the different membership sleeves.
Over the coming months, the association expects to onboard a number of new members. Furthering its expansion, PASLA aims to achieve a physical footing in Australia — which could potentially take place in March. The association intends to create a round table and coalesce some of its existing and new members.
Howard expands: “During the conference last year, we signed a letter of intent between PASLA and the Australian Securities Lending Association. We wanted to leverage our professional footprint, membership structures, and full-time staffing into the Australian market. Just like PASLA before it had an executive function, ASLA is member run.
“It's an opportunity for us to present an offering to a lot of different constituencies in the Australian market. I think this is why Barrenjoey joined us as a member, because they saw this as a springboard opportunity to sit with a larger entity with a more regional perspective to support their business objectives.”
As Howard looks ahead at the future of the association, he reviews PASLA’s key priorities. He says: “It’s growth, it’s growth, and it’s growth.”
He continues: “It is growth in the membership and in the underlying market structures and supporting that construct. It’s growth in the sense of delivering stronger advocacy outcomes out of our working groups and into those markets, so we can help to support that growth factor in those capital market structures as they’re evolving.
“We want to help support policy makers, stakeholders, decision makers, through that construct, so that we can be the leading voice in Asia for all things securities finance.”
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Image: Stephen Howard 
