Asian repo relies on standard best practices
25 August 2015 Hong Kong
Image: Shutterstock
An efficient Asian repo market could help to develop infrastructure and benefit the economy, but it is being held back by inconsistencies between countries, according to a report by the Asia Securities Industry and Financial Markets Association (ASIFMA) and the International Capital Market Association (ICMA).
The report states that establishing best practices in the region is essential for developing the market. It puts forward best practices for trading and settlement of cross-border repos in Asia, in a bid to encourage efficient trading and to bring Asia in line with international standards.
According to the report, integrating bond and repo markets in Asia would improve access to finance, and reduce reliance on banks for lending. It could also support the development of local currency bond markets, bond futures markets and over-the-counter derivatives markets.
ASIFMA and ICMA also suggest that improving bond and repo markets would encourage the retention of savings for more regional investment, and improve mobility of securities, which would counter the effects of asset encumbrance driven by regulatory change.
But the markets face significant challenges in the region, including inconsistent legal systems between Asian countries. There is also a lack of creditor protection in cases of bankruptcy, and close out rights are not generally established in law.
On top of this, there is a lack of liquidity in the market, barriers against investor access, and unfavourable tax regimes in place.
The report sets out comprehensive suggestions for best practice throughout the entire repo trade lifecycle, including performing anti-money laundering (AML) and know-your-client (KYC) requirements in line with both their home and host jurisdictions, and sharing the information, and agreeing on various operational protocols.
It also puts forward parameters that parties should agree upon before trading, including minimum transfer amounts, which price sources will be used to value collateral both routinely and in the event of a dispute, and deadlines for delivering cash margin and margin securities.
Guidelines cover fixing repurchase dates, messaging standards, confirmations, managing collateral, margining, and more. The full report can be found here.
The report states that establishing best practices in the region is essential for developing the market. It puts forward best practices for trading and settlement of cross-border repos in Asia, in a bid to encourage efficient trading and to bring Asia in line with international standards.
According to the report, integrating bond and repo markets in Asia would improve access to finance, and reduce reliance on banks for lending. It could also support the development of local currency bond markets, bond futures markets and over-the-counter derivatives markets.
ASIFMA and ICMA also suggest that improving bond and repo markets would encourage the retention of savings for more regional investment, and improve mobility of securities, which would counter the effects of asset encumbrance driven by regulatory change.
But the markets face significant challenges in the region, including inconsistent legal systems between Asian countries. There is also a lack of creditor protection in cases of bankruptcy, and close out rights are not generally established in law.
On top of this, there is a lack of liquidity in the market, barriers against investor access, and unfavourable tax regimes in place.
The report sets out comprehensive suggestions for best practice throughout the entire repo trade lifecycle, including performing anti-money laundering (AML) and know-your-client (KYC) requirements in line with both their home and host jurisdictions, and sharing the information, and agreeing on various operational protocols.
It also puts forward parameters that parties should agree upon before trading, including minimum transfer amounts, which price sources will be used to value collateral both routinely and in the event of a dispute, and deadlines for delivering cash margin and margin securities.
Guidelines cover fixing repurchase dates, messaging standards, confirmations, managing collateral, margining, and more. The full report can be found here.
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