A spot of confidence
15 March 2016
An abundance of optimism for the future of Asian securities lending markets was exuded at the annual PASLA/RMA Conference in Singapore
Image: Shutterstock
Delegates at this year’s PASLA/RMA Conference on Asian Securities Lending heard how overzealous and fragmented regulation has bred discontent and industry pushback in Europe, while Asia is enjoying overriding confidence in its steady growth.
Representatives from all aspects of the securities finance industry from around the world gathered in Singapore to review the progress of Asian securities lending markets in a global context.
Panellists and audience members alike voiced bullish sentiments that Asia’s potential was only just being realised as Asian early bloomers, like South Korea, begin to come of age, while the sleeping giants of China and India finally begin to show signs of life.
A lot of the positive change that had occurred in the past few years was attributed to the work of organisations such as PASLA and its global partners, which were highlighted repeatedly as a genuine driving force for reform and progress in the region.
South Korea was considered the most promising securities lending market, while China “will have a huge impact on the global securities borrowing and lending market”, if it ever opens, according to one PASLA panellist.
The South Korean two-tier system, which offers central counterparty (CCP) and bilateral trading, was given unanimous praise by the panel made up of both buy- and sell-side representatives.
South Korea was described by industry experts based in Asia as a liquid and accessible market that is rapidly gaining offshore attention and investment.
Just over half of PASLA delegates voted to hear primarily about either South Korea or China out of the six Asian securities lending markets. When asked to define how important China could potentially be for the global securities borrowing and lending industry, one panellist claimed: “It will be the most significant market of our careers.”
The Hong Kong-Shenzhen Stock Connect was highlighted as a potential driver that could kick-start the securities lending industry in China, although the latest unofficial launch date is Q3 2017.
Panellists also voiced hopes that agent lenders, which are currently excluded from the Shanghai-Hong Kong Stock Connect, will soon be allowed to participate on both platforms and boost liquidity in the process.
One panellist and Stock Connect participant summarised, saying: “We still see challenges [in the Stock Connect] but we are closer than we were.”
India was the next market that most captured the imaginations of delegates.
As the only Asian market with a mandatory CCP model, India presents a certain number of unique challenges, which several market participants are currently grappling with.
The Securities and Exchange Board of India (SEBI) has recently taken on industry concerns around the lack of offshore securities lending activity and general lack of liquidity.
“It’s very reassuring to see that they [SEBI] understand there is a problem with the product in their market,” said a panellist.
Representatives from a wide variety of established institutional investment banks to newcomers to the Asian markets all claimed to be making moves towards entering the Indian securities lending market, and named it as the most appealing frontier market in the region.
On the regulatory front, audience members heard how Asia had lagged behind in its overall economic development because of a lack of a unified governing body like in the EU.
The patchwork quilt of Asian regulations was cited by one panellist as one of the key issues that the region needs to address in the coming years.
Another panellist also argued that the way Asia has grown as a region, by relying heavily on international funding, has created an environment when small Asian firms are not being given a seat at the table by the big institutional banks.
Although some relationships have been formed between offshore and onshore entities, the panellist suggested that this was only being done for regulatory compliance reasons, and not due to the smaller player being genuinely valued in the partnership.
A further concern was raised that as EU equivalency regulations began to form in Asian markets, these smaller participants would be priced out the market under the weight of implementation costs.
Despite these obstacles, the sense of optimism throughout the conference still shone through.
In contrast to the blossoming Asian industry being presented to attendees of the conference, the European market was painted as troublesome and stuttering.
Panellists were split between acknowledging that, following the 2008 crash, things had to change and complaining that the process was being managed poorly and unfairly penalised the securities finance industry.
‘Shadow banking’ has finally come onto EU regulators radars and bodies such as the G20’s Financial Stability Board (FSB) are now dedicating themselves to shedding more light on this growing sector.
Paul Landless, partner at Clifford Chance, described how national regulators are beginning to introduce rules to tackle shadow banking, but their priorities and timing differ. “Not everyone can agree on what shadow banking is,” he explained.
The FSB has chosen to focus on financial stability risks. “The key issue is whether regulators differ and expand on the FSB’s aims and policy approaches and if the debate becomes politically charged,” added Landless.
The EU, meanwhile, has opted for a blanket approach to its reporting requirements and will request information from all financial entities. “The Europeans are speeding ahead [of other regions]. They have a much better idea of who needs to be reporting what.”
The EU’s Securities Financing Transactions Regulation (SFTR), which came into effect in February, requires the reporting for all transactions, excluding those concluded with central banks, to trade repositories.
Reporting requirements will be implemented at a regional level between 12 to 21 months after the SFTR came into force.
As EU regulators continue full steam ahead with the latest batch of requirements, industry confidence in the Basel Committee on Banking Supervision’s recommended regulatory framework is being tested by several member states and senior financial figures.
The governments of Denmark and Japan, along with the chair of the European Banking Authority, Andrea Enria, have all voiced concerns that the sheer volume and scope of financial regulation set to come into effect might not be in the best interests of markets.
Panel moderator Greg Lyons, partner at Debevoise & Plimpton, said: “Until now, no one has gone to look back at how all of these regulations fit together, or asked if they actually do more than they should be doing.”
According to Lyons, a state that amends or disregards minor aspects of the Basel framework may not have significant repercussions in its treatment by more compliant markets.
But to fall substantially out of step with the wider consensus could pose serious problems for continuity in the wider market and invite extra burdens on businesses working within states with different frameworks.
“They [sovereign states] have a lot of scope to change [the Basel framework], but a lack of equality between states could be a problem,” added Lyons.
Lyons explained that in contrast to some EU and Asian states, the US was imposing regulation that in many cases went above and beyond those suggested by the Basel Committee on Banking Supervision.
The emerging trend of increasing divergence of the opinion on regulations, such as Basel III and the Financial Transaction Tax, could spell trouble for Europe, whose economy has so far benefitted from greater compatibility and cohesion across the region.
Looking forward at the major events scheduled for this year, the panel agreed that, in the current political climate, the UK referendum on EU membership, set for 23 June, could lead to an open revolt against what are seen as overbearing and unnecessary financial constraints.
Asia may have successfully dethroned Latin America as the most engaging emerging region, but its substantial dependence on EU and US investors, at a time when these countries are beginning to look inwards, means the confidence enjoyed by the conference’s attendees may be soon put to the test.
Representatives from all aspects of the securities finance industry from around the world gathered in Singapore to review the progress of Asian securities lending markets in a global context.
Panellists and audience members alike voiced bullish sentiments that Asia’s potential was only just being realised as Asian early bloomers, like South Korea, begin to come of age, while the sleeping giants of China and India finally begin to show signs of life.
A lot of the positive change that had occurred in the past few years was attributed to the work of organisations such as PASLA and its global partners, which were highlighted repeatedly as a genuine driving force for reform and progress in the region.
South Korea was considered the most promising securities lending market, while China “will have a huge impact on the global securities borrowing and lending market”, if it ever opens, according to one PASLA panellist.
The South Korean two-tier system, which offers central counterparty (CCP) and bilateral trading, was given unanimous praise by the panel made up of both buy- and sell-side representatives.
South Korea was described by industry experts based in Asia as a liquid and accessible market that is rapidly gaining offshore attention and investment.
Just over half of PASLA delegates voted to hear primarily about either South Korea or China out of the six Asian securities lending markets. When asked to define how important China could potentially be for the global securities borrowing and lending industry, one panellist claimed: “It will be the most significant market of our careers.”
The Hong Kong-Shenzhen Stock Connect was highlighted as a potential driver that could kick-start the securities lending industry in China, although the latest unofficial launch date is Q3 2017.
Panellists also voiced hopes that agent lenders, which are currently excluded from the Shanghai-Hong Kong Stock Connect, will soon be allowed to participate on both platforms and boost liquidity in the process.
One panellist and Stock Connect participant summarised, saying: “We still see challenges [in the Stock Connect] but we are closer than we were.”
India was the next market that most captured the imaginations of delegates.
As the only Asian market with a mandatory CCP model, India presents a certain number of unique challenges, which several market participants are currently grappling with.
The Securities and Exchange Board of India (SEBI) has recently taken on industry concerns around the lack of offshore securities lending activity and general lack of liquidity.
“It’s very reassuring to see that they [SEBI] understand there is a problem with the product in their market,” said a panellist.
Representatives from a wide variety of established institutional investment banks to newcomers to the Asian markets all claimed to be making moves towards entering the Indian securities lending market, and named it as the most appealing frontier market in the region.
On the regulatory front, audience members heard how Asia had lagged behind in its overall economic development because of a lack of a unified governing body like in the EU.
The patchwork quilt of Asian regulations was cited by one panellist as one of the key issues that the region needs to address in the coming years.
Another panellist also argued that the way Asia has grown as a region, by relying heavily on international funding, has created an environment when small Asian firms are not being given a seat at the table by the big institutional banks.
Although some relationships have been formed between offshore and onshore entities, the panellist suggested that this was only being done for regulatory compliance reasons, and not due to the smaller player being genuinely valued in the partnership.
A further concern was raised that as EU equivalency regulations began to form in Asian markets, these smaller participants would be priced out the market under the weight of implementation costs.
Despite these obstacles, the sense of optimism throughout the conference still shone through.
In contrast to the blossoming Asian industry being presented to attendees of the conference, the European market was painted as troublesome and stuttering.
Panellists were split between acknowledging that, following the 2008 crash, things had to change and complaining that the process was being managed poorly and unfairly penalised the securities finance industry.
‘Shadow banking’ has finally come onto EU regulators radars and bodies such as the G20’s Financial Stability Board (FSB) are now dedicating themselves to shedding more light on this growing sector.
Paul Landless, partner at Clifford Chance, described how national regulators are beginning to introduce rules to tackle shadow banking, but their priorities and timing differ. “Not everyone can agree on what shadow banking is,” he explained.
The FSB has chosen to focus on financial stability risks. “The key issue is whether regulators differ and expand on the FSB’s aims and policy approaches and if the debate becomes politically charged,” added Landless.
The EU, meanwhile, has opted for a blanket approach to its reporting requirements and will request information from all financial entities. “The Europeans are speeding ahead [of other regions]. They have a much better idea of who needs to be reporting what.”
The EU’s Securities Financing Transactions Regulation (SFTR), which came into effect in February, requires the reporting for all transactions, excluding those concluded with central banks, to trade repositories.
Reporting requirements will be implemented at a regional level between 12 to 21 months after the SFTR came into force.
As EU regulators continue full steam ahead with the latest batch of requirements, industry confidence in the Basel Committee on Banking Supervision’s recommended regulatory framework is being tested by several member states and senior financial figures.
The governments of Denmark and Japan, along with the chair of the European Banking Authority, Andrea Enria, have all voiced concerns that the sheer volume and scope of financial regulation set to come into effect might not be in the best interests of markets.
Panel moderator Greg Lyons, partner at Debevoise & Plimpton, said: “Until now, no one has gone to look back at how all of these regulations fit together, or asked if they actually do more than they should be doing.”
According to Lyons, a state that amends or disregards minor aspects of the Basel framework may not have significant repercussions in its treatment by more compliant markets.
But to fall substantially out of step with the wider consensus could pose serious problems for continuity in the wider market and invite extra burdens on businesses working within states with different frameworks.
“They [sovereign states] have a lot of scope to change [the Basel framework], but a lack of equality between states could be a problem,” added Lyons.
Lyons explained that in contrast to some EU and Asian states, the US was imposing regulation that in many cases went above and beyond those suggested by the Basel Committee on Banking Supervision.
The emerging trend of increasing divergence of the opinion on regulations, such as Basel III and the Financial Transaction Tax, could spell trouble for Europe, whose economy has so far benefitted from greater compatibility and cohesion across the region.
Looking forward at the major events scheduled for this year, the panel agreed that, in the current political climate, the UK referendum on EU membership, set for 23 June, could lead to an open revolt against what are seen as overbearing and unnecessary financial constraints.
Asia may have successfully dethroned Latin America as the most engaging emerging region, but its substantial dependence on EU and US investors, at a time when these countries are beginning to look inwards, means the confidence enjoyed by the conference’s attendees may be soon put to the test.
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