Lending in the city of dreams
20 March 2018
Growth in Hong Kong and Asia’s securities lending market were hot topics at this year’s PASLA/RMA conference
Image: Shutterstock
Attendees at this year’s 15th Annual Pan Asian Securities Lending Association (PALSA) conference in Hong Kong heard how growth is continuing in Asia’s securities lending market, an update on those individual markets within the region and challenges facing the industry.
During the welcome speech, Dane Fannin, co-chair of the conference and head of capital markets for Asia Pacific at Northern Trust, addressed a record-number of attendees revealing that Asia’s significant growth profile is unlikely to change anytime soon.
Fannin suggested that conversations in this region are markedly “less defensive, more optimistic and focused more towards growth and opportunity, which is exciting, and it’s not hard to understand why”.
There are currently nine active lending markets in Asia, which continue to yield better returns than Europe and the US on a normalised basis, according to Fannin.
In addition, there are a range of emerging markets, such as the Philippines, India, Indonesia and China, which present “significant opportunity” for industry participants in the
long term.
Fannin explained that from a beneficial owners perspective the industry is seeing increased engagement in many institutions, who recognise the benefits of a securities lending programme.
He added that there has also been an increase in assets under management from hedge funds in the region, which is helping to steer a healthy demand profile in Asia.
Fannin noted that spectators should not forget about Asia’s fixed income and repo markets as they continue to develop. He suggested that this space is becoming a lot more relevant as firms pursue strategies of optimisation.
According to Fannin, there is a very vibrant securities lending market in Hong Kong and the securities lending framework is often used as a benchmark for others in the region.
Fannin said: “There is a lot of change here and the city does well to embrace the change, although it is not difficult to see why if one observes the successful implementation of innovative reform such as the connect platforms.”
A separate panel was also held on securities finance in China and Hong Kong. The stock markets in Hong Kong and China have had a collaborative relationship since China’s economic reforms in the 1980s. Since then many Chinese companies have since listed in Hong Kong. The securities markets trading links between Hong Kong and Mainland have become even more prominent since 2014 with the introduction of stock (Shanghai-Hong Kong and Shenzhen-Hong Kong) and bond connect platforms and more recently with the proposed exchange-traded funds (ETFs) connect between Hong Kong and the mainland.
During the panel, participants were asked to vote for what they thought were the key challenges to mainland securities lending expansion. Flying high as the biggest challenge was regulation at 80 percent, followed by inventory at 9 percent, willingness of market participants at 9 percent and information at 3 percent.
Commenting on the results, one panellist suggested that the landscape is still a little different in Hong Kong compared to the mainland, for example the difference in trading hours.
They explained that there is also a difference between the regulatory approach for the mainland authorities compared to Hong Kong authorities.
The panellist said: “There is a profile of investor difference, Hong Kong is predominantly participated by institutional investors, but if you look at the profile of securities that are eligible for lending, the Hong Kong market predominantly are Chinese-related listed names.”
In terms of new developments, one panellist suggested that Hong Kong needs to improve the way it connects to mainland platform, via connects and their central securities depository.
The panellist said: “One example is Hong Kong’s Investor ID initiative, which is due to launch this year. The new regime will be implemented for Northbound trading to entail the collection and use of personal data by the Stock Exchange of Hong Kong and its subsidiaries, as well as its transfer to the mainland exchanges and the China Securities Regulatory Commission.”
The Securities and Futures Commission has also revealed that it would implement the identification regime for Southbound trading “as soon as possible” after the Northbound implementation.
According to the panellist, the regime will provide “a number of considerations” and allow mainland authorities to better identify who investors are and how they are investing in the market.
The panellist also explained that new developments includes expansion in the market because the current securities borrowing and lending (SBL) market is limited.
PASLA also presented an update to the ASEAN markets, which focused on the launch of the Philippines short selling infrastructure, due to launch later on this year. However, a PASLA board member suggested that 2018 might not be a “realistic
launch date”.
After a consultation paper was released by the Philippines Stock Exchange (PSE) in November last year on the launch of the Philippines short selling infrastructure, a PASLA executive committee member suggested that there is still work to be done in certain areas, one being contracts.
A panellist explained that contracts are “tough” from an offshore perspective because they are controlled by Philippines law, not by the US or Europe.
There was also a discussion around if collateral was to be held onshore or offshore. The executive committee member said: “We are seeking further clarity from officials in the Philippines. We need these to be more clear-cut before the market can evolve.”
After the launch of the consultation paper in November last year, PASLA organised four dedicated board members for the Philippines from January this year to discuss the securities lending market and proposals they have implemented within the short selling framework.
A panellist suggested that the SBL model that is going to be used in conjunction with the short selling regime is going to be largely domestic-focused, but over time the PSE has indicated that they will look to encourage participants from offshore participants.
However, there will be restrictions on trading participants and also securities that can be short sold.
The panellist concluded: “As PASLA continues engagement with the PSE, we are looking forward to having more discussions throughout the year in making updates to the existing SBL model and the short selling rules.”
The panel also discussed updates in Taiwan. The board member revealed that the country is set to make further updates to its SBL model this year.
The panellist suggested that in 2018 it plans to make post-trade processes more efficient by establishing a pre-matching system as well as an information-exchange platform to increase the efficiency of daily trading between brokers and custodian banks.
Last year, Taiwan also made steps to improve its SBL model. As part of the update, it introduced extended trading hours, released an SBL daily short selling limit, introduced relax qualification for participating systems, as well as extending the rollover time from once to twice.
Based on the upcoming changes and those already made in 2017, another panellist suggested that the “changes we have seen are very positive”. They suggested that the rollover has been difficult to handle, so the extension was “great for us”.
The panellist said: “Increasing the quota from 20 to 30 percent is a big increase.”
According to a panellist, the Taiwan SBL market has remained stable for the last six years showing growth year-on-year since 2012.
During the panel, delegates were asked which market requires the most work to develop to full lender participation via an interactive voting system.
Taiwan was joint top with Malaysia at 37 percent. Thailand was in third place with 27 percent of the votes, followed by India with 3 percent.
The conference also focused on challenges in the industry. During one panel, attendees revealed that challenges from a lack of regulatory harmonisation remain the biggest hurdle in terms of managing the balance sheet.
Panellists asked delegates to vote via an interactive survey on what they felt were the biggest challenges affecting the management of the balance sheet.
Following on from the top answer, which was the lack of regulatory harmonisation at 35 percent, the second biggest challenge was the changing regulatory environment at 27 percent, followed by internal technology, structural considerations and restrictions at 19 percent and finally the development of systemic industry solutions at 8 percent.
A further 12 percent of delegates voted for ‘all of the above’ suggesting that all the challenges listed were affecting balance sheet management in some way. Panellists also agreed that all challenges were a hurdle when managing the balance sheet.
One panellist said you have to “manage challenges the best you can”, while another explained that while tools and resources are good to help overcome these challenges, “tools are only as good as the input”.
During the same panel, a second question was given to delegates, asking what solutions to capital constraints is the most important.
Both synthetic financing and specific counterparty selection come out on top, each receiving 27 percent of votes. Also on the list, was central counterparties at 24 percent and pledge at 21 percent.
Another panel discussed the growth and development of fixed income and repo trading across Asia Pacific, identifying key opportunities for participants. It also focused on the development of these markets in Asia relative to other major trading hubs, outlining some of the key issues likely to challenge future growth.
During the panel, attendees were asked via an interactive survey what factor drives future participation of your institution in the Asian fixed income repo market. In total, 40 percent of those who responded suggested that the biggest factor driver was to service the requirements of buy-side clients. This was followed by 33 percent of respondents voting that opportunities to invest surplus cash and liquidity was a driver.
One panellist said: “I was surprised to see the figure for opportunities to invest surplus cash and liquidity so strongly, you might see this as a good sign for the region and could be a positive thing.”
Another panellist explained that the industry doesn’t actually know how big the market is because there are limited statistics available.
He explained: “After speaking to market participants it’s quite clear that banks and the broker dealer community have experienced some growth over the past five years.”
Other drivers included access to liquidity pools to borrow US dollar funding, access to liquidity pools to borrow local currency funding and borrow or lending securities for ‘short cover’ transactions.
Attendees were also asked what they thought could trigger Asia’s growth in repo. Just over half (52 percent) of those who responded suggested that a regulatory push towards secured funding and more liquidity could trigger a growth, while 28 percent of respondents voted for the removal of legal/tax restrictions.
The use of collateral for investment management leading to collateral management expertise and creation of a pan-Asian collateral basket both received 10 percent of the vote from respondents.
Commenting on the results, a panellist said that having the right legal and tax framework is a first condition, repos have to be recognised in domestic law and must be enforceable in case of an insolvency situation.
The panellist added that it is also important to have the right framework to connect other regional players and international players to the market.
During the welcome speech, Dane Fannin, co-chair of the conference and head of capital markets for Asia Pacific at Northern Trust, addressed a record-number of attendees revealing that Asia’s significant growth profile is unlikely to change anytime soon.
Fannin suggested that conversations in this region are markedly “less defensive, more optimistic and focused more towards growth and opportunity, which is exciting, and it’s not hard to understand why”.
There are currently nine active lending markets in Asia, which continue to yield better returns than Europe and the US on a normalised basis, according to Fannin.
In addition, there are a range of emerging markets, such as the Philippines, India, Indonesia and China, which present “significant opportunity” for industry participants in the
long term.
Fannin explained that from a beneficial owners perspective the industry is seeing increased engagement in many institutions, who recognise the benefits of a securities lending programme.
He added that there has also been an increase in assets under management from hedge funds in the region, which is helping to steer a healthy demand profile in Asia.
Fannin noted that spectators should not forget about Asia’s fixed income and repo markets as they continue to develop. He suggested that this space is becoming a lot more relevant as firms pursue strategies of optimisation.
According to Fannin, there is a very vibrant securities lending market in Hong Kong and the securities lending framework is often used as a benchmark for others in the region.
Fannin said: “There is a lot of change here and the city does well to embrace the change, although it is not difficult to see why if one observes the successful implementation of innovative reform such as the connect platforms.”
A separate panel was also held on securities finance in China and Hong Kong. The stock markets in Hong Kong and China have had a collaborative relationship since China’s economic reforms in the 1980s. Since then many Chinese companies have since listed in Hong Kong. The securities markets trading links between Hong Kong and Mainland have become even more prominent since 2014 with the introduction of stock (Shanghai-Hong Kong and Shenzhen-Hong Kong) and bond connect platforms and more recently with the proposed exchange-traded funds (ETFs) connect between Hong Kong and the mainland.
During the panel, participants were asked to vote for what they thought were the key challenges to mainland securities lending expansion. Flying high as the biggest challenge was regulation at 80 percent, followed by inventory at 9 percent, willingness of market participants at 9 percent and information at 3 percent.
Commenting on the results, one panellist suggested that the landscape is still a little different in Hong Kong compared to the mainland, for example the difference in trading hours.
They explained that there is also a difference between the regulatory approach for the mainland authorities compared to Hong Kong authorities.
The panellist said: “There is a profile of investor difference, Hong Kong is predominantly participated by institutional investors, but if you look at the profile of securities that are eligible for lending, the Hong Kong market predominantly are Chinese-related listed names.”
In terms of new developments, one panellist suggested that Hong Kong needs to improve the way it connects to mainland platform, via connects and their central securities depository.
The panellist said: “One example is Hong Kong’s Investor ID initiative, which is due to launch this year. The new regime will be implemented for Northbound trading to entail the collection and use of personal data by the Stock Exchange of Hong Kong and its subsidiaries, as well as its transfer to the mainland exchanges and the China Securities Regulatory Commission.”
The Securities and Futures Commission has also revealed that it would implement the identification regime for Southbound trading “as soon as possible” after the Northbound implementation.
According to the panellist, the regime will provide “a number of considerations” and allow mainland authorities to better identify who investors are and how they are investing in the market.
The panellist also explained that new developments includes expansion in the market because the current securities borrowing and lending (SBL) market is limited.
PASLA also presented an update to the ASEAN markets, which focused on the launch of the Philippines short selling infrastructure, due to launch later on this year. However, a PASLA board member suggested that 2018 might not be a “realistic
launch date”.
After a consultation paper was released by the Philippines Stock Exchange (PSE) in November last year on the launch of the Philippines short selling infrastructure, a PASLA executive committee member suggested that there is still work to be done in certain areas, one being contracts.
A panellist explained that contracts are “tough” from an offshore perspective because they are controlled by Philippines law, not by the US or Europe.
There was also a discussion around if collateral was to be held onshore or offshore. The executive committee member said: “We are seeking further clarity from officials in the Philippines. We need these to be more clear-cut before the market can evolve.”
After the launch of the consultation paper in November last year, PASLA organised four dedicated board members for the Philippines from January this year to discuss the securities lending market and proposals they have implemented within the short selling framework.
A panellist suggested that the SBL model that is going to be used in conjunction with the short selling regime is going to be largely domestic-focused, but over time the PSE has indicated that they will look to encourage participants from offshore participants.
However, there will be restrictions on trading participants and also securities that can be short sold.
The panellist concluded: “As PASLA continues engagement with the PSE, we are looking forward to having more discussions throughout the year in making updates to the existing SBL model and the short selling rules.”
The panel also discussed updates in Taiwan. The board member revealed that the country is set to make further updates to its SBL model this year.
The panellist suggested that in 2018 it plans to make post-trade processes more efficient by establishing a pre-matching system as well as an information-exchange platform to increase the efficiency of daily trading between brokers and custodian banks.
Last year, Taiwan also made steps to improve its SBL model. As part of the update, it introduced extended trading hours, released an SBL daily short selling limit, introduced relax qualification for participating systems, as well as extending the rollover time from once to twice.
Based on the upcoming changes and those already made in 2017, another panellist suggested that the “changes we have seen are very positive”. They suggested that the rollover has been difficult to handle, so the extension was “great for us”.
The panellist said: “Increasing the quota from 20 to 30 percent is a big increase.”
According to a panellist, the Taiwan SBL market has remained stable for the last six years showing growth year-on-year since 2012.
During the panel, delegates were asked which market requires the most work to develop to full lender participation via an interactive voting system.
Taiwan was joint top with Malaysia at 37 percent. Thailand was in third place with 27 percent of the votes, followed by India with 3 percent.
The conference also focused on challenges in the industry. During one panel, attendees revealed that challenges from a lack of regulatory harmonisation remain the biggest hurdle in terms of managing the balance sheet.
Panellists asked delegates to vote via an interactive survey on what they felt were the biggest challenges affecting the management of the balance sheet.
Following on from the top answer, which was the lack of regulatory harmonisation at 35 percent, the second biggest challenge was the changing regulatory environment at 27 percent, followed by internal technology, structural considerations and restrictions at 19 percent and finally the development of systemic industry solutions at 8 percent.
A further 12 percent of delegates voted for ‘all of the above’ suggesting that all the challenges listed were affecting balance sheet management in some way. Panellists also agreed that all challenges were a hurdle when managing the balance sheet.
One panellist said you have to “manage challenges the best you can”, while another explained that while tools and resources are good to help overcome these challenges, “tools are only as good as the input”.
During the same panel, a second question was given to delegates, asking what solutions to capital constraints is the most important.
Both synthetic financing and specific counterparty selection come out on top, each receiving 27 percent of votes. Also on the list, was central counterparties at 24 percent and pledge at 21 percent.
Another panel discussed the growth and development of fixed income and repo trading across Asia Pacific, identifying key opportunities for participants. It also focused on the development of these markets in Asia relative to other major trading hubs, outlining some of the key issues likely to challenge future growth.
During the panel, attendees were asked via an interactive survey what factor drives future participation of your institution in the Asian fixed income repo market. In total, 40 percent of those who responded suggested that the biggest factor driver was to service the requirements of buy-side clients. This was followed by 33 percent of respondents voting that opportunities to invest surplus cash and liquidity was a driver.
One panellist said: “I was surprised to see the figure for opportunities to invest surplus cash and liquidity so strongly, you might see this as a good sign for the region and could be a positive thing.”
Another panellist explained that the industry doesn’t actually know how big the market is because there are limited statistics available.
He explained: “After speaking to market participants it’s quite clear that banks and the broker dealer community have experienced some growth over the past five years.”
Other drivers included access to liquidity pools to borrow US dollar funding, access to liquidity pools to borrow local currency funding and borrow or lending securities for ‘short cover’ transactions.
Attendees were also asked what they thought could trigger Asia’s growth in repo. Just over half (52 percent) of those who responded suggested that a regulatory push towards secured funding and more liquidity could trigger a growth, while 28 percent of respondents voted for the removal of legal/tax restrictions.
The use of collateral for investment management leading to collateral management expertise and creation of a pan-Asian collateral basket both received 10 percent of the vote from respondents.
Commenting on the results, a panellist said that having the right legal and tax framework is a first condition, repos have to be recognised in domestic law and must be enforceable in case of an insolvency situation.
The panellist added that it is also important to have the right framework to connect other regional players and international players to the market.
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