Moving on up
12 July 2017
The big names of Asia remain at the forefront of participants’ minds, but less developed markets are increasingly coming to the fore. Drew Nicol reports
Image: Shutterstock
Securities lending plays a larger part in Asia each year, but at the same time, misplaced stigma attached to practices, such as short selling, continues to recede in the face of open dialogue and education. Liquidity remains a primary concern across Asia, however, partly due to the embryonic nature of some country’s securities financing markets—but progress is being made.
J.P. Morgan’s Asia Pacific head of agent lending, Stewart Cowan, comments: “We have seen a number of regulatory changes to assist liquidity, specifically Malaysia’s reforms to the uptick rule, Taiwan’s consideration of a reduction to the securities transaction tax rate and the expansion of Stock Connect to include Shenzhen. These changes are all designed to improve liquidity and, in turn, pricing transparency.”
Of all Asia’s securities lending markets, Hong Kong proves to be one of the most reliable for offshore investors. Its regulators pushed through a number of initiatives in 2016 that further augmented the attractiveness of the market.
Dane Fannin, head of capital markets for the Asia Pacific at Northern Trust, explains: “Hong Kong made positive moves for securities borrowing and lending with its much-anticipated launch of the Shenzhen-Hong Kong Stock Connect scheme in late 2016.”
“This complements the existing Shanghai-Hong Kong initiative and importantly gives international investors access to China’s two main bourses.”
On the other side of the Stock Connect, China continues to frustrate lenders and their agents. Rob Chiuch, global head of equity and fixed income finance at BNY Mellon, says: “One challenge is that only domestic participants are able to engage in securities lending and borrowing in China, so this limits the development of a more globally active securities finance market.”
“Additionally, in regard to China’s same-day settlement period, you don’t have time to recall loaned securities to cover trades. Share suspensions in Hong Kong and/or China also remain a hot topic especially for exchange-traded funds (ETF) issuers in that space. ETFs are, furthermore, reportedly being considered as potential eligible securities in the Stock Connect.”
Despite facing some headwinds, many in Hong Kong and China remain positive that the Stock Connect will eventually become another jewel in the crown of the jurisdiction. Fannin adds: “This [Shenzhen-Hong Kong Stock Connect] marked an important milestone towards achieving an approved and feasible solution for lenders and borrowers of Chinese A-shares.”
“This achievement could also potentially serve as a catalyst for China to be included in major indices, which would help to drive the liquidity pool of lendable assets ahead of any securities borrowing and lending structure being approved.”
State Street’s head of securities finance Asia Pacific, Jansen Chua, says: “China continues to be a story for tomorrow rather than today. We believe one of the main growth stories in 2017 will be the continued development of institutional investors in China, driving the shift from a predominantly retail market to one that is more institutional.”
Francois Maury, head of equity finance for Asia at Natixis, offers a further reality check to anyone hoping to crack the Chinese market in the near future.
“China is indeed the key country,” he explains. “We are hoping for legal progress on the subject of transfer of securities to lead to the development of a real onshore stock lending market. In our recent conversations with regulators we have been under the impression that it would take some time.”
Selling the market short
South Korea’s financial regulator managed to provoke a backlash from buy-side participants with a new set of “politically motivated” strict short selling rules, set to come into force on 27 March, that have the potential to significantly impair that aspect of their business.
Primarily, the Korean Stock Exchange will be handed new powers to withdraw “overheated” stocks for a 24-hour cooling off period.
According to the Korea Exchange, the new rules will help to mitigate information asymmetry in short selling, while forcing short selling violators to pre-deliver securities prior to short-selling will enhance the effectiveness of penalties and bolster market transparency.
A source operating the South Korean market, who did not wish to be named, comments: “The biggest concern is not this particular [short selling] regulation per se, but whether this will be the start of more regulations to come, essentially creating a market unattractive to offshore hedge funds.”
He continues: “Industry participants are hoping [for] little impact, as majority of daily flow comes from along based offshore hedge funds that trade based on more breadth than depth of names to being with.”
“The criteria are not set in stone and, thus, more details in the near future will be pivotal in how much impact the recent regulation will have.”
Crucially, the source suggests that no attempt was made to consult the industry prior to the finalisation of this controversial rule.
“This does go against deregulating the industry. Industry participants view this recent regulation as politically motivated versus creating an industry attractive to hedge funds,” the source states.
Away from the spotlight, a number of less develop lending markets continued to be prove their worth last year.
Fannin says: “Malaysia also continues attract focus. Here, while market demand remains highly sporadic, which fundamentals such as currency and commodity price fluctuation largely driving activity, it is a market where supply continues to grow. We expect this to drive further liquidity and spur a greater allocation of capital from investors.”
Brown Brothers Harriman’s head of Asian securities lending trading, Zubair Nizami, agrees, stating: “Although spreads have compressed in Malaysia and Taiwan, both still offer attractive returns.”
J.P. Morgan’s Asia Pacific head of agent lending, Stewart Cowan, comments: “We have seen a number of regulatory changes to assist liquidity, specifically Malaysia’s reforms to the uptick rule, Taiwan’s consideration of a reduction to the securities transaction tax rate and the expansion of Stock Connect to include Shenzhen. These changes are all designed to improve liquidity and, in turn, pricing transparency.”
Of all Asia’s securities lending markets, Hong Kong proves to be one of the most reliable for offshore investors. Its regulators pushed through a number of initiatives in 2016 that further augmented the attractiveness of the market.
Dane Fannin, head of capital markets for the Asia Pacific at Northern Trust, explains: “Hong Kong made positive moves for securities borrowing and lending with its much-anticipated launch of the Shenzhen-Hong Kong Stock Connect scheme in late 2016.”
“This complements the existing Shanghai-Hong Kong initiative and importantly gives international investors access to China’s two main bourses.”
On the other side of the Stock Connect, China continues to frustrate lenders and their agents. Rob Chiuch, global head of equity and fixed income finance at BNY Mellon, says: “One challenge is that only domestic participants are able to engage in securities lending and borrowing in China, so this limits the development of a more globally active securities finance market.”
“Additionally, in regard to China’s same-day settlement period, you don’t have time to recall loaned securities to cover trades. Share suspensions in Hong Kong and/or China also remain a hot topic especially for exchange-traded funds (ETF) issuers in that space. ETFs are, furthermore, reportedly being considered as potential eligible securities in the Stock Connect.”
Despite facing some headwinds, many in Hong Kong and China remain positive that the Stock Connect will eventually become another jewel in the crown of the jurisdiction. Fannin adds: “This [Shenzhen-Hong Kong Stock Connect] marked an important milestone towards achieving an approved and feasible solution for lenders and borrowers of Chinese A-shares.”
“This achievement could also potentially serve as a catalyst for China to be included in major indices, which would help to drive the liquidity pool of lendable assets ahead of any securities borrowing and lending structure being approved.”
State Street’s head of securities finance Asia Pacific, Jansen Chua, says: “China continues to be a story for tomorrow rather than today. We believe one of the main growth stories in 2017 will be the continued development of institutional investors in China, driving the shift from a predominantly retail market to one that is more institutional.”
Francois Maury, head of equity finance for Asia at Natixis, offers a further reality check to anyone hoping to crack the Chinese market in the near future.
“China is indeed the key country,” he explains. “We are hoping for legal progress on the subject of transfer of securities to lead to the development of a real onshore stock lending market. In our recent conversations with regulators we have been under the impression that it would take some time.”
Selling the market short
South Korea’s financial regulator managed to provoke a backlash from buy-side participants with a new set of “politically motivated” strict short selling rules, set to come into force on 27 March, that have the potential to significantly impair that aspect of their business.
Primarily, the Korean Stock Exchange will be handed new powers to withdraw “overheated” stocks for a 24-hour cooling off period.
According to the Korea Exchange, the new rules will help to mitigate information asymmetry in short selling, while forcing short selling violators to pre-deliver securities prior to short-selling will enhance the effectiveness of penalties and bolster market transparency.
A source operating the South Korean market, who did not wish to be named, comments: “The biggest concern is not this particular [short selling] regulation per se, but whether this will be the start of more regulations to come, essentially creating a market unattractive to offshore hedge funds.”
He continues: “Industry participants are hoping [for] little impact, as majority of daily flow comes from along based offshore hedge funds that trade based on more breadth than depth of names to being with.”
“The criteria are not set in stone and, thus, more details in the near future will be pivotal in how much impact the recent regulation will have.”
Crucially, the source suggests that no attempt was made to consult the industry prior to the finalisation of this controversial rule.
“This does go against deregulating the industry. Industry participants view this recent regulation as politically motivated versus creating an industry attractive to hedge funds,” the source states.
Away from the spotlight, a number of less develop lending markets continued to be prove their worth last year.
Fannin says: “Malaysia also continues attract focus. Here, while market demand remains highly sporadic, which fundamentals such as currency and commodity price fluctuation largely driving activity, it is a market where supply continues to grow. We expect this to drive further liquidity and spur a greater allocation of capital from investors.”
Brown Brothers Harriman’s head of Asian securities lending trading, Zubair Nizami, agrees, stating: “Although spreads have compressed in Malaysia and Taiwan, both still offer attractive returns.”
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