What stage are the securities lending markets at in Asia?
Asian markets have developed substantially over the past several years, creating a number of mature markets in the region, such as Australia and Japan. There are also opportunities in several markets where we are either not yet lending but exploring, or where there is still no lending framework. Part of our work as an agent lender is to determine exactly how those opportunities will come into play and how to make them work for our clients, but we think that they will be fertile fields. We have dedicated significant resources to client-facing staff and trading in Asia, with a team of about 30 people. Our approach is fairly bullish, representing how we feel regarding the type of activity that we see.
Also, we have had clients in the region for a long time now, and securities lending has remained an important source of incremental revenue. So, from the beneficial owner point of view, interest in securities lending remains high, and lendable assets continue to grow. However, the reality is that the market is more challenging than in years past, with increasing pressures on spreads. This pressure forces lending agents to try harder to find value in clients’ portfolios and offer clients the flexibility they need to generate returns in line with client guidelines.
Clients are looking to have additional monitoring and checking—including for exposures, collateral restrictions and many other aspects of their securities lending programme. We see this as a healthy and constructive level of interest, and we are having many more meaningful discussions around this with our clients. Additionally, we are receiving many more requests for greater transparency from clients. This has created the need for more and more varied reporting into the different facets of the lending programme. We view this as positive, as we have always made transparency one of our hallmarks.
How does the securities lending market in Asia compare to those in the US and Europe?
In general, I would say that the markets look similar. It depends on the stage the particular Asian securities lending market is at, and whether that market allows for a particular strategy. In a broad sense, strategies can be applicable in Asia as they might in Europe or the US. Like Europe, Asia is not a single, homogeneous market, and regulation is varied from market to market, country by country. Differences in regulation or tax construct can create opportunities in that they may open the way for a particular type of lender (beneficial owner) to lend in that market. We need to continue our focus on viewing each market strategically and understanding the development and progression of these markets to translate any changes into opportunities for clients.
Another side of this question is to look at the beneficial owners in Asia that are involved in securities lending programmes. In a relative sense, lending is a newer construct for clients in Asia, though again it varies by market. Regardless, I feel as though clients in this region have covered a lot of ground quickly, and there are many points of intersection with clients in other parts of the world in terms of things such as collateral guidelines, lending limits, and so on.
How representative is China’s move to develop its securities lending framework of Asia as a whole?
First, the development of a securities lending market in China is an area that generates quite a bit of interest. The Shanghai Stock Exchange, for example, is further implementing and broadening rules to permit Chinese brokerages to take advantage of margin lending and securities lending. As an offshore lender, we are interested to see how rules may develop for offshore participants, but I think that directionally, this is quite positive for the securities lending markets.
This does have some resemblance to what we see in other Asian markets. Because of the markets’ different stages of implementing securities lending, it’s important to understand the rules. The implicit understanding is that the way something would work in one market would probably be different to other markets in Asia. So, we have to look at developments through two lenses: how the securities lending market is going to operate in the context of how we function (or what modifications we may need to consider to lend in that market), and more importantly, if the way a market operates will work for beneficial owners.
When we look at entering a new market, we need to consider applicable regulations, including any tax-related rules or reporting regimes, as well other unique characteristics. For example, some markets, such as Taiwan, have more centralised trading activity, and nuances in a market such as South Korea may influence how we process things from the actual loan transaction, or even things like collateral considerations or corporate actions.
When we are exploring our ability to work with beneficial owners in a new market, we also have to consider whether there are established rules for lending, what they are and any relevant tax rules. Ultimately, both sides have to work in harmony: the structure has to be one that supports lending activity and at the same time, lending in a particular market needs to work for the beneficial owners.
How responsive do you find regulators in the various markets?
We have seen several cases where regulators have been very responsive and proactive in terms of getting feedback from the different players in the region, with Taiwan being one example. In general, the regulators are good at trying to understand how things work and what the participants in the market would like to see from an operational standpoint. That is not to say that the regulators would necessarily implement all of the market participants’ suggestions, but I think that discussion and dialogue is important, and regulators in Asia demonstrate a willingness to listen.
We see it as a reciprocal relationship. We appreciate the fact that regulators must be comfortable with how securities lending will work in their respective markets. And, we are supportive of these rules being implemented in Asia as they promote clarity, which gives us a good chance of developing a workable product.
Do you see impacts in Asia from other global regulations?
As for the US Dodd-Frank Act, Basel III, and the others, I don’t currently see a direct impact on the markets here. That is, there is no Asian version of Dodd-Frank, for example, that would have an impact on how lending works in a market. While we are waiting for further clarifications on some of the pending US and European regulations and what the implications could be for securities lending, I do think that there could be some impact in Asia. It is likely that global lending agents or other global market participants will need to comply with one or more of these rules, and that will most likely have an effect on how business is conducted by global firms in places such as Asia. There could be a lot of crossover, but it remains to be seen how the actual rules will play out.
Do you have any final thoughts?
Asset growth and developments in the Asian securities lending markets give us cause to be quite optimistic about the future of our business in this region.
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