Asia-Pacific securities finance panel
20 February 2024
Key participants in APAC securities finance speak about market dynamics, the impact of short sale bans, the advance of emergent markets and growth prospects for 2024 and beyond
Image: stock.adobe/nuttawutnuy
Panellists
Jansen Chua, head of financing solutions, APAC, State Street
Phil Garrett, head of securities finance, APAC, Northern Trust
David Lai, product manager, agency securities finance, APAC, J.P. Morgan
Reona Sasaki, director, institutional sales department, Japan Securities Finance
Paul Solway, head of securities finance, APAC, BNY Mellon
How do you assess the performance of APAC securities lending markets during 2023? What key lessons have you learnt from this period that will help guide your business through the next 12 months?
Reona Sasaki: The APAC market was strong overall in 2023 as EquiLend and other sources have indicated. Japan, in particular, has attracted attention from foreign investors in an unprecedented way. This is partly due to the Bank of Japan’s (BOJ’s) monetary policy, and such global recognition benefitted JSF’s business as well. We have had more opportunities to do transactions with overseas financial institutions. Therefore, we feel it is crucial to analyse international market trends to obtain a better understanding of the background of our business partners’ needs.
Over the past few years, APAC securities lending markets have been subject to regulatory revisions related to collateral and short-selling. As a result, expectations for APAC as a growth market are increasing steadily. Our immediate priority is to further strengthen our commitment in the APAC region outside of Japan.
Jansen Chua: Performance across the region was mostly in line with expectations and demonstrated growth. However, the short sale ban in South Korea did register as an unfortunate surprise in the later part of the year and this dampened further demand for borrowing.
Phil Garrett: Like most other years, 2023 produced winners and losers across the APAC markets. Japan was the strongest performing stock market, buoyed by investor inflows, and this drove the Nikkei 225 to its highest level for 33 years. Stricter governance rules, performance pressures and an increase in activist shareholder activity were catalysts to drive stock valuations higher and foster an environment ripe for M&A deals, placements and other corporate activity. The long-held taboo of hostile takeovers in Japan is also slowly eroding, further encouraging dealmaking, drawing in the arbitrageurs and giving a significant boost to securities lending revenues. This pushed Japan into the top spot for 2023.
Taiwan also performed strongly once again, with the mania surrounding artificial intelligence driving the technology-heavy TWSE index higher. This provided a fertile hunting ground for directional, relative value and long-short strategies. Elsewhere, China’s stock market suffered from post-Covid blues, with the troubled property market and low consumer confidence dragging on the economy. Hong Kong’s stock market, intrinsically linked to China’s fortunes, remained subdued. While there was strong borrow demand across certain sectors, including real estate and electric vehicle (EV) manufacturers, the depressed market valuations resulted in lower outright lending returns relative to other markets. South Korea (EVs) and Australia (lithium miners) produced other pockets of good performance.
If 2023 taught us anything, it reinforced the lesson that we should always expect the unexpected. At the beginning of 2023, investors hoped that the end of Covid lockdowns in China would stimulate growth and drive markets higher. The consequence would be to allow share prices to be driven by fundamental factors, allowing short sellers to make better informed decisions and increase market exposures, as well as inducing the type of conditions we have seen in Japan, perhaps giving rise to increased deals and capital raising activity. As we now know, this has been far from the case.
In early 2023, there was also a growing confidence that South Korea’s regulator would remove the short selling ban for constituents of the KOSPI 200 and KOSDAQ 150 indices. Again, this did not happen — and, in fact, a total short sell ban across all listed stocks was implemented in early November and this is set to remain in place until at least the end of June 2024. It is therefore a dangerous tactic to rely heavily on any single market to produce next year's performance numbers. Diversity is the key. For Northern Trust, this means diversity across our product suite, working with our clients to capture opportunities by providing access across multiple financing markets and asset classes through customised and innovative technology-driven solutions.
David Lai: In 2023, the Hang Seng Index in Hong Kong experienced a tough year compared to some of the other markets. China's post-Covid recovery was slower than anticipated, coupled with widespread credit concerns in the property sector, and this has adversely affected investor and consumer sentiments. The Chinese tech sector faced headwinds in 2023 off the back of tightening regulations initiated in 2020. This resulted in some diversion of foreign tech investments away from China. Industries such as Quantum Computing, Artificial Intelligence, and Advanced Semiconductors witnessed significant reductions in investment.
In Japan, the Japanese stock market saw strong increases in the first half of 2023, with momentum continuing into the second half of last year. The Nikkei 225 recorded its strongest performance since the late 1980s. The continued strength of the US dollar against the Japanese Yen further boosted offshore investments into Japan, contributing to overall market increases. Upbeat sentiments in Japan promoted an increase in capital-raising activities, resulting in the highest number of IPO listings in nine years, including substantial offerings like Kokusai Electric and Rakuten Bank. In addition to primary listings, increased stock placements and takeover activities have contributed to heightened borrower demand. Japan continues to lead in terms of overall market lending revenues in APAC, owing to the size and depth of its equity markets.
Investor confidence remained high in Taiwan, particularly tech-heavy and chipmaker sectors, attracting foreign investments into the equity markets last year. The stock market approached an all-time high, last seen at the beginning of 2022, making it one of Asia's best performers last year. The surge in the market has led to strong demand for borrowing Taiwanese equities across both large and small-cap spaces. Despite onshore lenders becoming more sophisticated, the demand for stable and efficient offshore supplies remains strong, solidifying Taiwan's position as a key revenue market globally for beneficial owners and market participants.
Paul Solway: On the backdrop of the Nasdaq, S&P and MSCI All World index rallying more than 44.22 per cent, 24.58 per cent and 20.38 per cent respectively, the Hang Seng Index has been losing investors’ interest as one of the worst performing benchmarks globally (-13.93 per cent) in 2023. Q4 marked the surprise imposition of new gaming curbs, reviving market fears of a government crackdown on the Internet sector. Riding on the AI-Tech theme, South Korea and Taiwan indexes have been again excelling in Q4 (TWSE +9.64 per cent, KOSPI +7.72 per cent) and have achieved a year-to-date positive gain (TWSE +26.83 per cent, KOSPI +18.73 per cent)
South Korea’s securities market lending revenue was up around 23 per cent YoY, but dropped close to 25 per cent QoQ in Q4 with the introduction of another short sell ban which drove the closure of fund positions. Hong Kong’s market revenue was slightly up, with Taiwan’s revenue slightly down. Japanese specials took a more active role in 2023 with significant revenue inflow across the market.
2023 will be remembered for increased geopolitical tensions, high interest rates, banking balance-sheet scrutiny, market volatility, heightened regulatory oversight, and a continued investor search for safe-havened, sustainable, quality investments. S&P called 2023 a ‘banner’ year for securities lending, producing the highest revenues (US$12.9 billion) since 2008 — with APAC coming in at US$2.2 billion. DataLend has it at US$10.7 billion, representing a record year for the region across a decade of data.
This is a reminder that uncertainty and volatility are fundamental factors that help to drive the industry’s revenues.
Lai: I will provide an update on two further markets. In South Korea, the market operated under a partial short-sell ban, where only the constituents of the KOSPI200 and KOSDAQ150 could be short sold. Despite this restriction, the Korean market still saw strong demand, remaining one of the highest-spread markets in Asia along with Taiwan. Top lending revenue stocks for the second half of 2023 were dominated by stocks from both Korea and Taiwan. However, market sentiment took a downturn towards the end of 2023 as the country's regulators re-implemented a full short sell ban from November 2023 until at least June 2024. The Financial Services Commission is exploring improved regulations and frameworks as part of its ongoing investigations.
The Australian Securities Exchange faced pressure in the second half of 2023, declining to a 52-week low at the end of October before rallying in the last two months of 2023 to approach all-time highs. Market optimism was fuelled by easing inflation locally and the anticipation of the central banks easing monetary policies earlier than expected in 2024. Australia's resource dominance once again underpinned domestic performance, receiving tailwinds from China's reopening after its Covid recovery. The lithium sector, in particular, garnered attention as spot prices declined amid increasing global supply. M&A activity for smaller resource players surged as global mining giants and investors sought to dominate the supply of commodities crucial to the clean energy transition.
In which APAC markets do you identify new opportunities for growth of your lending business during 2024?
Lai: There have been recent market developments and announcements that are encouraging for the industry. For instance, the Philippines Stock Exchange recently allowed short selling of certain designated securities and the Securities and Exchange Board of India (SEBI) has updated its short-selling framework. These developments highlight the region’s progress, though it is noted that other countries are at different stages of their development work.
As an established agent lender, J.P. Morgan Agency Securities Finance is committed to working with our clients, stakeholders, as well as external partners, to align with the established securities lending frameworks.
It is important to recognise that developments in short selling and the introduction of new securities lending frameworks are also beneficial to the respective marketplace. For instance, numerous articles highlight how short selling contributes to enhanced liquidity in financial products by facilitating hedging and arbitrage strategies.
Moreover, recent articles have sought to establish a correlation between increased liquidity and the criteria for defining a market as developed.
Solway: Respective overhangs remain for the Hong Kong property sector and, for China, ‘have we bottomed?’ Taiwan tech will always have a place in the hearts of directional investors — especially as AI chips become the norm.
In 2023, the Tokyo Stock Exchange (TSE) pushed corporate governance and shareholder value by requesting listed companies with low price-to-book ratio to action which included — but was not limited to — dividend hikes and share buybacks. Corporate events such as merger and acquisitions (M&A) have been more active, with cash-heavy Japanese companies deploying capital to add value. We believe this will continue in 2024, with more companies making concerted efforts to raise return on equity amid TSE reform.
In a high interest rate environment, we see rising interest in rights issues, which some issuers believe offers a cheaper funding option than debt financing.
Last November, The Philippine Stock Exchange gave the green light to introduce short selling for the first time to boost trading volume and to improve market liquidity. However, we do not have a new market ready for domestic and foreign participation just yet. Legal remediation in the Philippines is only being considered at this point by the financial authorities and this will not fly for the heavyweight offshore lenders or borrowers. However, we hope this legal landscape will open up soon.
Garrett: There have been extremely encouraging developments in the ASEAN securities lending space, with the Philippines and Indonesia both making great strides to develop their domestic SBL models. China offers huge potential and its evolution is attracting close attention from the majority of international lenders. More recently, we heard news from the SEBI that short selling will be allowed in India. However, at the time of writing, few details have been provided. Given the lead times necessary to get to the point of first trade execution, it is unlikely that any of these market development stories will have a material impact on revenue growth for 2024.
At Northern Trust, we will deliver continued growth through our multi-pronged, client-focused approach to bring differentiated solutions. Regulation and alpha generation are the driving forces. On the one hand, we are working with our lending clients to deliver tools that will help with optimal asset deployment, enhanced liquidity solutions and bespoke collateral profiles. On the other, engaging with our market counterparts to deliver balance sheet efficient trading strategies is key to this growth.
Sasaki: We see business opportunities in Taiwan, Hong Kong and South Korea, and opportunities in Malaysia, Indonesia and the Philippines have been growing rapidly. We have now started funding with securities from these countries. APAC has diverse regulations and characteristics for each country and therefore we identify opportunities to provide solutions in these markets. Although we have no office outside of Japan, we are collaborating with triparty collateral management services to conduct transactions that comply with local rules. The APAC market is expected to develop further beyond 2024. We will continue to concentrate on this region and would like to contribute to its expansion as a player from an Asian country.
Chua: We anticipate increasing demand from both buy-side and sell-side firms across the APAC region for central clearing solutions in the US Treasury securities market. This is to get ahead of rule changes for repo activity adopted by the Securities and Exchange Commission (SEC) in late 2023. Having collaborated closely with the Fixed Income Clearing Corporation (FICC) for many years on their centrally cleared repo offering in the US, we are actively engaging with our clients in preparation for the proposed rule changes.
Which regulatory initiatives in APAC markets will consume most attention for your agency lending and collateral management teams over the coming 12 months? What programmes are ongoing within PASLA, and at industry-level more broadly, to support this agenda?
Solway: In November, South Korea re-imposed (for a fourth time) a short sell ban until June 2024 to improve the short-selling mechanism. The previous ban was lifted in May 2021 for KOSPI 200 and KOSDAQ 150, with short selling now accounting for about 0.6 per cent of the KOSPI’s market value and 1.6 per cent of the KOSDAQ. The ban might complicate South Korea’s bid to seek developed market status in the MSCI indices.
In October, the China Securities Regulatory Commission (CSRC) announced that steps will be taken to strengthen management of securities lending and re-lending businesses, including higher margin requirements (the margin ratio is to increase from 50 per cent to 80 per cent for ordinary securities borrowing and to 100 per cent for hedge funds), as well as restricting lending of shares by strategic investors and senior management in newly listed companies. Unfortunately, the CSRC has just published a press release announcing that it will suspend the lending of 'restricted stocks', effective from 29 January 2024.
PASLA continues to lobby and proactively interact with the Korean (FSS, FSC, KSD) and Chinese (CSRC, CSFC) authorities to shape market practices, ideas and solutions for all stakeholders — domestic and foreign.
Garrett: The current ongoing regulatory review on short selling by the South Korean authorities was the focus of attention for Northern Trust, PASLA and most of the securities finance industry in APAC in the latter part of 2023. This will continue until at least June 2024 while the short selling ban remains in place. The importance of engagement across the key Korean institutions cannot be underestimated and this will shape the future of short selling and securities lending in South Korea for years to come. It is critical that open and candid dialogue leads to a consensus-based outcome that supports an open, transparent and liquid market. This will be beneficial for both domestic and international investors.
APAC markets which are still in the early stages of their SBL and short selling journeys will continue to evolve. For some, including China, Philippines and Indonesia, regulatory clarifications or adjustments are still necessary to allow for full international investor participation in those markets. Northern Trust is well represented within PASLA through the executive committee and working groups and it is committed to driving the advancement of our industry. The important work being undertaken by PASLA, engaging with regulators and regional stakeholders to promote securities lending and short selling in capital markets, will continue through 2024.
Chua: The APAC region remains an area of huge opportunity for our clients and we are engaged with various industry bodies such as PASLA and the Asia Securities Industry & Financial Markets Association (ASIFMA) to advocate for market structure development and reform. We believe markets such as China, Indonesia and the Philippines will require further collaboration to promote market evolution and adoption of best practices — and there will need to be continued engagement with South Korean regulators on short-selling issues.
Lai: J.P. Morgan Agency Securities Finance now has representatives actively participating in two PASLA working groups, including a native speaker who previously served on the executive committee. This transition aims to enhance value and synergies, leveraging their expertise more effectively within these groups.
From a regional perspective, our firm proactively monitors regulatory initiatives in terms of their applicability to our business — for example, recent updates regarding the management of ‘outsourced services’ and various developments in the area of digital assets.
This year marks the implementation of the T+1 settlement cycle in the US, Canada and Mexico and it is likely that some APAC markets will look to move towards a similar set-up. This will be interesting in markets which can impose mandatory buy-ins for unsettled sale trades. Therefore, at J.P. Morgan, we have advanced our efforts to identify and develop the support and tools our clients require, spanning from trade instruction to trade processing.
What investments and adaptations to technology and working practices have you made during 2023 to sustain and grow your securities lending activity in the Asia Pacific region?
Solway: The complexities of the individual markets must always be accounted for: differing rules and regulations, settlement cycles, intermediaries, reporting requirements, and buy-in or no-fail requirements dictate how we approach our internal processes. This, in turn, defines our commercial client offerings.
Globalising and unifying settlement teams across time zones is critical. Investing in people talent remains a key directive at BNY Mellon. While London has traditionally been the ‘quarterback’ region for international settlements and collateral, we continue to invest in our teams across India, Hong Kong, Singapore and Japan for local talent and expertise — powering our culture in every region.
Technological advancement is crucial as we run our company and businesses better across the globe, connecting our technology either with external partners, including Pirum and HQLAX, or internally across lines of business such as custody, triparty, liquidity and margin or treasury. Securities finance enables timely optimisation and allocation of securities and cash.
Lai: We have progressed the client experience by enhancing transparency across all aspects of the J.P. Morgan Agency Securities Finance programme. This builds on recently completed initiatives such as digitising our Rules and Limits framework to help define a client’s programme. In 2023, additional investment was made to enhance data accessibility further through API gateways. New data sets were made available, capturing the series of activities that represent the full trade lifecycle of a loan transaction. The enhanced reporting offers an additional dimension, capturing upcoming changes to loan positions.
Our client portal, Securities Finance Central, hosted within the J.P. Morgan Markets platform, remains a valuable resource for gaining insights into programme performance. The platform empowers end-users to analyse revenue, and we have enriched it further by incorporating analytics, highlighting simulated revenue opportunities, while also supporting oversight and governance.
Chua: We developed and launched our operating model to support APAC clients within the FICC’s Sponsored Member Repo (SMR) programme. The FICC SMR programme provides clients with access to highly liquid investment and financing at competitive rates with the benefit of reduced counterparty credit risk. Our operating model allows APAC clients to access this liquidity during APAC business hours, supported by a high-touch client service and operational support element in the region.
Our client-facing treasury and liquidity platform, Venturi, offers cutting-edge pre- and post-trade decision-making tools while allowing them to seamlessly execute optimal strategies in an industry-first peer-to-peer (P2P) marketplace. We have seen a lot of traction across the suite of modules, with a major focus on three: the P2P repo marketplace, the liquidity optimisation engine and the Agency Lending Portal (ALP). The P2P platform brings new liquidity opportunities to repo markets by directly connecting participants (or peers) on a stable, secured and trusted system. Participants can trade bilaterally, and State Street guarantees the payment of the repurchase price to the buyer, inclusive of proceeds from liquidating the repo securities.
The liquidity optimisation engine offers solutions to drive greater portfolio transparency and decision-making through its margin analytics and optimisation modules in derivatives and collateral trading. Finally, ALP allows direct connection and execution for our Agency Lending product, delivering real-time availability and a self-service request for quote (RFQ) workflow for all lendable assets. The industry sees this as a cost-efficient venue and a resiliency option for lending transactions.
Garrett: Nexus is our multi-year transformational project to reinvent securities finance data, consolidating it into a single platform which supports a suite of new and existing financing solutions. Making use of both cloud-based architecture and event-driven data streams, Nexus performs calculations and provides access to transaction level information on a real-time basis, enabling data-driven decision making.
Northern Trust launched Nexus in early 2023 and, as part of a multi-year investment, the platform is continuously evolving to bring together a suite of new and existing services across securities lending, borrowing, financing, liquidity and collateral management that would serve as the single point of interface with our capability set.
Foundationally, this includes the provision of real-time securities lending data across the client portfolio and will enable users to evaluate datasets via various pre- and post-trade analytical tools.
Through interrogation of data, users will be equipped to make data-driven decisions, to identify optimal use of financial resources while realising efficiencies and enhanced alpha within their desired risk framework.
The continuous, agile development of Nexus and regular addition of new data, views and functionality enables Northern Trust to act on user feedback, delivering benefits more quickly to clients.
In June, the Monetary Authority of Singapore published its findings on Project Guardian which reviewed designing open and interoperable networks for digital assets. How do you interpret the use of digital assets and the stability of its future incorporation in the region?
Chua: The Monetary Authority of Singapore has taken a lead regionally in establishing an operable framework for tokenisation. Project Guardian is a collaborative initiative with policymakers and the financial industry that seeks to test the feasibility of application in asset tokenisation and decentralised finance (DeFi), while managing risks to financial stability and integrity. While we applaud efforts taken by the industry in cooperation with financial regulators, investors should be aware that tokenisation is relatively nascent and has yet to receive regulatory backing across any jurisdiction. We continue to work with regulators and industry groups to advance the discussion around digital assets and to participate actively in conversations with clients expressing interest in this cutting-edge technology.
Solway: There are many proof of concept projects surrounding the digital asset space – either at a corporate, exchange or regulatory framework, often resulting in a partnership or memorandum of understanding (MOU) across participants.
There are further examples, in addition to Singapore, that explore digital assets, tokenisation and other technologies that aim to provide better real-time data synchronisation, improved scalability and other steps to improve the speed, efficiency and transparency of security and cash processing. Bursa Malaysia established a project to explore blockchain in 2019, for example. There is also the Hong Kong Exchange’s Synapse in 2023 and ABD’s Project Tridecagon relating to bond cross-border settlements.
Garrett: MAS has long been an advocate for digital asset innovation and continues to nurture an environment in the region for financial institutions to research, develop and pilot new capabilities via initiatives such as Project Guardian. Its emphasis on creating an ecosystem via a cohort of participants enables all to learn from the journey in a safe space, with MAS themselves then able to craft appropriate guardrails and risk-based regulatory regimes to foster progress and adoption.
At Northern Trust, we absolutely see a role for digital assets to be incorporated into our future state vision and servicing for our client base. In our “Custody reimagined” paper launched in 2021, we estimated that 10 per cent of our asset universe could be digital by 2030. We still believe this number is reasonable and we will continue to invest in this space to be ready for these eventualities. The digital asset landscape is made up of a broad range of sectors and can offer value and efficiencies to different parts of the value chain.
The range of potential use cases is vast — whether digitally issued (or tokenised) assets or digital cash or equivalents — and these should be in unison to unlock the promise that is on offer through gains in capital efficiency, settlement or increased liquidity.
Through the mission and efforts of our Digital Assets and Financial Markets group, we continue to drive the exploration and development of new digital asset capabilities which will position us to support clients in their pursuit of digital assets. For us, market access, connectivity and asset safety will remain critical in our offering as a trusted partner across both traditional and digital ecosystems.
Lai: Onyx by J.P. Morgan serves as the firm’s blockchain-focused business unit, leveraging blockchain technology to transform the movement of money and assets for our clients.
Last year, as a part of Project Guardian, Onyx by J.P. Morgan and Apollo Global Management collaborated with various partners to develop a technical proof of concept, where we demonstrated how the implementation of tokenisation and smart contracts could significantly improve the management of discretionary portfolios, including streamlined incorporation of alternative investment funds in these portfolios. Having proven the technological feasibility of automating portfolio management for asset managers, our aim is to productionise this through 2024 and beyond.
Onyx Digital Assets (ODA) is J.P. Morgan's digital assets platform that enables the creation of innovative financial products through tokenised traditional assets. Through our current live products, we enable our clients to enhance utilisation of their assets, boost settlement efficiency and mitigate settlement risks.
We created the first application on ODA — called Digital Financing — to significantly enhance active intraday liquidity management and to reduce reliance on unsecured funding. Through this application, we provide access to secured financing through the exchange of cash for tokenised collateral using the mechanics of repo.
In October 2023, we launched the Tokenized Collateral Network (TCN), the second offering on the ODA platform. Focused initially on tokenising money market fund (MMF) units, TCN aims to bring greater mobility to collateral, expanding the universe of assets available for use as collateral.
How have monetary conditions shaped securities lending opportunities in the Japanese market? How are you positioning yourself to maximise opportunities for lenders and borrowers in this environment?
Lai: The Bank of Japan’s monetary policy normalisation is likely to start adjusting from March or April and market consensus is that the negative interest rate policy is likely to be removed in around mid-2024. On the other hand, the market is almost certain that the Fed has completed its rate hike cycle and the next move will be a cut in interest rates. The resulting USD and JPY cross-currency spread could bring increased opportunities in JPY funding requirements. Also, Japanese Government Bonds (JGBs) could continue to grow, given borrowers’ requirement for both liquidity and directional trading. In November, the Philippines Stock Exchange welcomed the decision to permit short selling of index stocks within the region, while South Korea’s Financial Services Commission has posed a ban on stock short selling in domestic markets.
Solway: Japan was a big winner in the region for securities lending during 2023: the Topix and Nikkei 225 both touched 33-year highs with a YoY increment of 25.09 per cent and 28.24 per cent respectively.
Specials and seasonal activity have always upheld sustainable alpha revenues for Japanese equity portfolios for our clients and we expect 2024 to be no different, despite proxy voting (and subsequent recalls) becoming more in focus to many ESG-aware clients. We look forward to helping our clients to balance such needs with educated, commercial outcomes in the year ahead.
In the fixed income space, JGB lending is picking up via ‘specials’ activity and we are looking forward to monetising those assets as demand grows.
Garrett: Continued loose monetary policy allowed the cross-currency basis spread between the USD and the JPY to remain wide through 2023, while heightened geopolitical concerns and banking crises also acted to drive the dollar premium wider. This meant that arbitrage opportunities remained strong, notably the US Treasuries versus JGB as the standout trade. In addition, volatility in the JGB curve prompted significant specials value, meaning lenders could finally enjoy intrinsic value from lending in-demand assets. Low interest rates and the cheaper yen also played a material role in the heightened M&A activity and the ability to do deals.
2024 is likely to see the end of Japan’s yield curve control policy as inflation starts to take hold. At some point during Q2 or Q3 it is expected that the BoJ will raise rates. This will lead to a shift in market dynamics which may affect the status quo of the past few years. However, geopolitical risk remains a constant theme that is impacting sentiment in the wider market and in securities finance activity. The war in Ukraine continues to threaten geopolitical stability and, more recently, the Israel-Palestinian conflict has further heightened market risk. Any escalation is likely to prompt a flight-to-quality bid for US treasuries and dollar-denominated assets in general, therefore pushing the USD-JPY cross-currency basis wider and increasing on-loan fees when accepting JGBs as collateral.
Lastly, with market participants preparing for new Basel Endgame regulations, we should expect regulatory capital efficient trades, while constraints on dealers’ balance sheets might force them away from capital intensive, low reward cross-currency FX and repo trades. As such, lenders and beneficial owners should remain nimble to take advantage of these opportunities when they arise.
Chua: The negative rate environment has presented both challenges and opportunities. Our JPY cash collateral facility was established more than 10 years ago and continues to deliver significant competitive differentiation for our clients and counterparties. The facility supports cross-currency trading, enabling lenders to achieve higher utilisation of their assets and, for borrowers, a means of generating value from their JPY cash collateral holdings.
Sasaki: Short transactions of JGBs, mainly implemented by hedge funds and other overseas firms, have been increasing due to speculation about changes in the BOJ’s monetary policy. In the equity market, the rising market price of Japanese equities has led to increased demand from investors and traders for all Japanese assets. JSF has more than 70 years of history operating domestic margin transactions and covers most financial institutions in Japan. Having this strength, we play an important role as an intermediary between the domestic and overseas repo markets. Furthermore, in accepting a wide range of collateral and supplying liquidity across a range of durations, we provide an optimal solution to each of our customers.
In November, the Philippines Stock Exchange welcomed the decision to permit short selling of index stocks within the region, while South Korea’s Financial Services Commission has posed a ban on stock short selling in domestic markets.
How do you assess potential for growth of securities lending and short selling activity in APAC?
Garrett: Potential is an often used term when it comes to the opportunities that APAC presents. There is still so much untapped opportunity in markets such as China and India. The developmental progress in Indonesia and Philippines during 2023 is just the start for those markets. International lender participation will take time to grow, but they are moving in the right direction. On the farther horizon are markets including Vietnam and Sri Lanka. We see a region filled with potential, which is integral to the future success of Northern Trust’s securities finance offering.
It is obviously a drawback when regulatory decisions are made that result in a contraction in lending activity. However, we will always face challenges, whether these are caused by economic uncertainty, geopolitics, disruptive technology or some other unforeseen event. These challenges also present opportunities. With South Korea, the opportunity is there for the regulators and market participants to build a consensus-driven solution for short selling and securities lending activity which will hopefully reduce or eliminate the need for future intervention.
Solway: No two markets are the same in APAC when it comes to short-selling rules and guardrails for investors, whether retail or institutional. While this can be challenging as clients navigate the region, it also provides a natural diversification of opportunities for lending. We saw this during 2023, with Korea tightening its regulations while the Philippines did exactly the opposite — within days of each other.
At BNY Mellon, we have made significant investments and improved our lifecycle management for Taiwanese equities. This will enable more of our clients to take advantage of the significant fees that are available in Taiwan, with an average fee of 250 bps in 2023.
How do you assess the outlook for APAC securities lending markets for 2024?
Sasaki: Although the current focus is on the growing uncertainty in the Chinese market, other markets in APAC are steadily growing. Regarding securities lending markets, many countries are in the process of developing market systems to attract overseas investors — such as the recent launch of a short-selling system in the Philippines. We expect that this growing trend in APAC’s securities lending markets will continue as they become more attractive. With such expectation, we recently assisted in the establishment of PT Pendanaan Efek Indonesia, an Indonesian securities finance company. We will continue to foster our unique business to connect the rapidly growing Asian market with the global market. By doing so, we will enhance our presence as Asia’s leading institution specialising in securities finance.
Solway: There is a lot ahead in 2024. Retailers are coming out to play. Advanced and progressive brokerage platforms now have inventory and scale, mostly born out of the meme era of 2020. Global brokers are actively asking about lending participation. I sometimes fear that the more traditional asset owners will be left behind as more modern, versatile supply sources expand and become more attractive.
Settlement and reporting standards are not just in APAC anymore. T+1 settlement and 10c-1 reporting is coming to the US. If we compare with Korea or Taiwan, these are similar challenges involving tight settlement cycles and stringent reporting mechanisms. In fact, the cultural expectation right across Asia is to settle on time while meeting specific obligatory reporting requirements.
US central clearing for US Treasuries will have a significant impact globally, especially in Asia where timing will be key for navigating solutions in the US time zone. Fortunately, BNY Mellon has turnkey solutions for our clients that are seeking to repo or reverse-repo US Treasuries.
Given the relative consolidation of global brokers in APAC, there is the constant drumbeat of competition, relative de-globalisation and optimisation of finite resources. BNY Mellon continues to seek out quality regional counterparties that add diversified and differentiated distribution channels for both equities and fixed income.
Finally, expanding into new segments such as Chinese qualified domestic institutional investors (QDII), which connects previously restricted supply to global demand, is an exciting opportunity for 2024 and beyond.
Chua: The Philippine and Indonesian authorities made positive strides to align their securities-based lending (SBL) rules to global industry standards in 2023 and we expect this momentum to continue through 2024. Changes in monetary conditions, and the continued push by authorities to increase competition and accountability in ‘Corporate Japan’, should also support corporate event deal flow. This, in turn, will assist stock borrowing and lending demand.
The de-risking theme by offshore investors from China and Hong Kong investments is likely to remain a challenge for these markets and will continue to negatively impact SBL demand in those markets. The industry will also continue to innovate for capital efficiency solutions (such as central clearing, pledge collateral) with the Basel III endgame approaching, thereby creating opportunities for borrowers and lenders. However, the fragmentation of jurisdictions in the region will continue to present a significant challenge in making central clearing platforms a reality in 2024.
Garrett: We are looking forward to a strong year in the APAC securities finance markets. As I mentioned previously, most years will see some markets win and some markets lose a little. 2024 will be no different. The effects of higher interest rates in Japan and the pivot to lower rates elsewhere will change market dynamics. It will be interesting to see how this plays out across the APAC markets, the impact on regional investment deployment, and ultimately lending demand.
Finally, we look forward to continued long term growth across all APAC markets enabled by development of legal, regulatory and operational infrastructure forged through the collaboration and partnership of market participants and supported by industry bodies such as PASLA.
Lai: Ongoing credit concerns across the China and Hong Kong property sector stocks will affect consumer and investor confidence throughout 2024. Asset prices are at decade lows in Hong Kong and indications that the US Federal Reserve will pause or reverse its rate hiking cycle could help to encourage more spending again. The outcome of the Taiwanese presidential elections could influence US-China relations going forward. Taiwan’s semiconductor industry continues to trend strongly and its broader equity markets are trading near historical highs.
In South Korea, securities-based lending activity will continue to be muted in the first half of the year as the short-sell ban will limit demand to borrow stock. The Korean presidential elections in April could address the ban and bring some clarity to the government’s stance on this issue as we head into the middle of 2024. In 2023, the Japanese stock market was one of the strongest globally and there is expectation that this strength will continue in 2024. The Tokyo Stock Exchange’s corporate governance reforms in 2023 have helped to boost company performance while promoting the efficient use of capital.
Finally, the focus in Australia will be on the Reserve Bank of Australia’s (RBA’s) easing of monetary policy. Prospective interest rate cuts will help keep bank debt levels low and spark a lift in borrowing activity, aiding higher profits in the financial sector. This will be accompanied by continued strong commodity demand for the all-important resources sector.
Jansen Chua, head of financing solutions, APAC, State Street
Phil Garrett, head of securities finance, APAC, Northern Trust
David Lai, product manager, agency securities finance, APAC, J.P. Morgan
Reona Sasaki, director, institutional sales department, Japan Securities Finance
Paul Solway, head of securities finance, APAC, BNY Mellon
How do you assess the performance of APAC securities lending markets during 2023? What key lessons have you learnt from this period that will help guide your business through the next 12 months?
Reona Sasaki: The APAC market was strong overall in 2023 as EquiLend and other sources have indicated. Japan, in particular, has attracted attention from foreign investors in an unprecedented way. This is partly due to the Bank of Japan’s (BOJ’s) monetary policy, and such global recognition benefitted JSF’s business as well. We have had more opportunities to do transactions with overseas financial institutions. Therefore, we feel it is crucial to analyse international market trends to obtain a better understanding of the background of our business partners’ needs.
Over the past few years, APAC securities lending markets have been subject to regulatory revisions related to collateral and short-selling. As a result, expectations for APAC as a growth market are increasing steadily. Our immediate priority is to further strengthen our commitment in the APAC region outside of Japan.
Jansen Chua: Performance across the region was mostly in line with expectations and demonstrated growth. However, the short sale ban in South Korea did register as an unfortunate surprise in the later part of the year and this dampened further demand for borrowing.
Phil Garrett: Like most other years, 2023 produced winners and losers across the APAC markets. Japan was the strongest performing stock market, buoyed by investor inflows, and this drove the Nikkei 225 to its highest level for 33 years. Stricter governance rules, performance pressures and an increase in activist shareholder activity were catalysts to drive stock valuations higher and foster an environment ripe for M&A deals, placements and other corporate activity. The long-held taboo of hostile takeovers in Japan is also slowly eroding, further encouraging dealmaking, drawing in the arbitrageurs and giving a significant boost to securities lending revenues. This pushed Japan into the top spot for 2023.
Taiwan also performed strongly once again, with the mania surrounding artificial intelligence driving the technology-heavy TWSE index higher. This provided a fertile hunting ground for directional, relative value and long-short strategies. Elsewhere, China’s stock market suffered from post-Covid blues, with the troubled property market and low consumer confidence dragging on the economy. Hong Kong’s stock market, intrinsically linked to China’s fortunes, remained subdued. While there was strong borrow demand across certain sectors, including real estate and electric vehicle (EV) manufacturers, the depressed market valuations resulted in lower outright lending returns relative to other markets. South Korea (EVs) and Australia (lithium miners) produced other pockets of good performance.
If 2023 taught us anything, it reinforced the lesson that we should always expect the unexpected. At the beginning of 2023, investors hoped that the end of Covid lockdowns in China would stimulate growth and drive markets higher. The consequence would be to allow share prices to be driven by fundamental factors, allowing short sellers to make better informed decisions and increase market exposures, as well as inducing the type of conditions we have seen in Japan, perhaps giving rise to increased deals and capital raising activity. As we now know, this has been far from the case.
In early 2023, there was also a growing confidence that South Korea’s regulator would remove the short selling ban for constituents of the KOSPI 200 and KOSDAQ 150 indices. Again, this did not happen — and, in fact, a total short sell ban across all listed stocks was implemented in early November and this is set to remain in place until at least the end of June 2024. It is therefore a dangerous tactic to rely heavily on any single market to produce next year's performance numbers. Diversity is the key. For Northern Trust, this means diversity across our product suite, working with our clients to capture opportunities by providing access across multiple financing markets and asset classes through customised and innovative technology-driven solutions.
David Lai: In 2023, the Hang Seng Index in Hong Kong experienced a tough year compared to some of the other markets. China's post-Covid recovery was slower than anticipated, coupled with widespread credit concerns in the property sector, and this has adversely affected investor and consumer sentiments. The Chinese tech sector faced headwinds in 2023 off the back of tightening regulations initiated in 2020. This resulted in some diversion of foreign tech investments away from China. Industries such as Quantum Computing, Artificial Intelligence, and Advanced Semiconductors witnessed significant reductions in investment.
In Japan, the Japanese stock market saw strong increases in the first half of 2023, with momentum continuing into the second half of last year. The Nikkei 225 recorded its strongest performance since the late 1980s. The continued strength of the US dollar against the Japanese Yen further boosted offshore investments into Japan, contributing to overall market increases. Upbeat sentiments in Japan promoted an increase in capital-raising activities, resulting in the highest number of IPO listings in nine years, including substantial offerings like Kokusai Electric and Rakuten Bank. In addition to primary listings, increased stock placements and takeover activities have contributed to heightened borrower demand. Japan continues to lead in terms of overall market lending revenues in APAC, owing to the size and depth of its equity markets.
Investor confidence remained high in Taiwan, particularly tech-heavy and chipmaker sectors, attracting foreign investments into the equity markets last year. The stock market approached an all-time high, last seen at the beginning of 2022, making it one of Asia's best performers last year. The surge in the market has led to strong demand for borrowing Taiwanese equities across both large and small-cap spaces. Despite onshore lenders becoming more sophisticated, the demand for stable and efficient offshore supplies remains strong, solidifying Taiwan's position as a key revenue market globally for beneficial owners and market participants.
Paul Solway: On the backdrop of the Nasdaq, S&P and MSCI All World index rallying more than 44.22 per cent, 24.58 per cent and 20.38 per cent respectively, the Hang Seng Index has been losing investors’ interest as one of the worst performing benchmarks globally (-13.93 per cent) in 2023. Q4 marked the surprise imposition of new gaming curbs, reviving market fears of a government crackdown on the Internet sector. Riding on the AI-Tech theme, South Korea and Taiwan indexes have been again excelling in Q4 (TWSE +9.64 per cent, KOSPI +7.72 per cent) and have achieved a year-to-date positive gain (TWSE +26.83 per cent, KOSPI +18.73 per cent)
South Korea’s securities market lending revenue was up around 23 per cent YoY, but dropped close to 25 per cent QoQ in Q4 with the introduction of another short sell ban which drove the closure of fund positions. Hong Kong’s market revenue was slightly up, with Taiwan’s revenue slightly down. Japanese specials took a more active role in 2023 with significant revenue inflow across the market.
2023 will be remembered for increased geopolitical tensions, high interest rates, banking balance-sheet scrutiny, market volatility, heightened regulatory oversight, and a continued investor search for safe-havened, sustainable, quality investments. S&P called 2023 a ‘banner’ year for securities lending, producing the highest revenues (US$12.9 billion) since 2008 — with APAC coming in at US$2.2 billion. DataLend has it at US$10.7 billion, representing a record year for the region across a decade of data.
This is a reminder that uncertainty and volatility are fundamental factors that help to drive the industry’s revenues.
Lai: I will provide an update on two further markets. In South Korea, the market operated under a partial short-sell ban, where only the constituents of the KOSPI200 and KOSDAQ150 could be short sold. Despite this restriction, the Korean market still saw strong demand, remaining one of the highest-spread markets in Asia along with Taiwan. Top lending revenue stocks for the second half of 2023 were dominated by stocks from both Korea and Taiwan. However, market sentiment took a downturn towards the end of 2023 as the country's regulators re-implemented a full short sell ban from November 2023 until at least June 2024. The Financial Services Commission is exploring improved regulations and frameworks as part of its ongoing investigations.
The Australian Securities Exchange faced pressure in the second half of 2023, declining to a 52-week low at the end of October before rallying in the last two months of 2023 to approach all-time highs. Market optimism was fuelled by easing inflation locally and the anticipation of the central banks easing monetary policies earlier than expected in 2024. Australia's resource dominance once again underpinned domestic performance, receiving tailwinds from China's reopening after its Covid recovery. The lithium sector, in particular, garnered attention as spot prices declined amid increasing global supply. M&A activity for smaller resource players surged as global mining giants and investors sought to dominate the supply of commodities crucial to the clean energy transition.
In which APAC markets do you identify new opportunities for growth of your lending business during 2024?
Lai: There have been recent market developments and announcements that are encouraging for the industry. For instance, the Philippines Stock Exchange recently allowed short selling of certain designated securities and the Securities and Exchange Board of India (SEBI) has updated its short-selling framework. These developments highlight the region’s progress, though it is noted that other countries are at different stages of their development work.
As an established agent lender, J.P. Morgan Agency Securities Finance is committed to working with our clients, stakeholders, as well as external partners, to align with the established securities lending frameworks.
It is important to recognise that developments in short selling and the introduction of new securities lending frameworks are also beneficial to the respective marketplace. For instance, numerous articles highlight how short selling contributes to enhanced liquidity in financial products by facilitating hedging and arbitrage strategies.
Moreover, recent articles have sought to establish a correlation between increased liquidity and the criteria for defining a market as developed.
Solway: Respective overhangs remain for the Hong Kong property sector and, for China, ‘have we bottomed?’ Taiwan tech will always have a place in the hearts of directional investors — especially as AI chips become the norm.
In 2023, the Tokyo Stock Exchange (TSE) pushed corporate governance and shareholder value by requesting listed companies with low price-to-book ratio to action which included — but was not limited to — dividend hikes and share buybacks. Corporate events such as merger and acquisitions (M&A) have been more active, with cash-heavy Japanese companies deploying capital to add value. We believe this will continue in 2024, with more companies making concerted efforts to raise return on equity amid TSE reform.
In a high interest rate environment, we see rising interest in rights issues, which some issuers believe offers a cheaper funding option than debt financing.
Last November, The Philippine Stock Exchange gave the green light to introduce short selling for the first time to boost trading volume and to improve market liquidity. However, we do not have a new market ready for domestic and foreign participation just yet. Legal remediation in the Philippines is only being considered at this point by the financial authorities and this will not fly for the heavyweight offshore lenders or borrowers. However, we hope this legal landscape will open up soon.
Garrett: There have been extremely encouraging developments in the ASEAN securities lending space, with the Philippines and Indonesia both making great strides to develop their domestic SBL models. China offers huge potential and its evolution is attracting close attention from the majority of international lenders. More recently, we heard news from the SEBI that short selling will be allowed in India. However, at the time of writing, few details have been provided. Given the lead times necessary to get to the point of first trade execution, it is unlikely that any of these market development stories will have a material impact on revenue growth for 2024.
At Northern Trust, we will deliver continued growth through our multi-pronged, client-focused approach to bring differentiated solutions. Regulation and alpha generation are the driving forces. On the one hand, we are working with our lending clients to deliver tools that will help with optimal asset deployment, enhanced liquidity solutions and bespoke collateral profiles. On the other, engaging with our market counterparts to deliver balance sheet efficient trading strategies is key to this growth.
Sasaki: We see business opportunities in Taiwan, Hong Kong and South Korea, and opportunities in Malaysia, Indonesia and the Philippines have been growing rapidly. We have now started funding with securities from these countries. APAC has diverse regulations and characteristics for each country and therefore we identify opportunities to provide solutions in these markets. Although we have no office outside of Japan, we are collaborating with triparty collateral management services to conduct transactions that comply with local rules. The APAC market is expected to develop further beyond 2024. We will continue to concentrate on this region and would like to contribute to its expansion as a player from an Asian country.
Chua: We anticipate increasing demand from both buy-side and sell-side firms across the APAC region for central clearing solutions in the US Treasury securities market. This is to get ahead of rule changes for repo activity adopted by the Securities and Exchange Commission (SEC) in late 2023. Having collaborated closely with the Fixed Income Clearing Corporation (FICC) for many years on their centrally cleared repo offering in the US, we are actively engaging with our clients in preparation for the proposed rule changes.
Which regulatory initiatives in APAC markets will consume most attention for your agency lending and collateral management teams over the coming 12 months? What programmes are ongoing within PASLA, and at industry-level more broadly, to support this agenda?
Solway: In November, South Korea re-imposed (for a fourth time) a short sell ban until June 2024 to improve the short-selling mechanism. The previous ban was lifted in May 2021 for KOSPI 200 and KOSDAQ 150, with short selling now accounting for about 0.6 per cent of the KOSPI’s market value and 1.6 per cent of the KOSDAQ. The ban might complicate South Korea’s bid to seek developed market status in the MSCI indices.
In October, the China Securities Regulatory Commission (CSRC) announced that steps will be taken to strengthen management of securities lending and re-lending businesses, including higher margin requirements (the margin ratio is to increase from 50 per cent to 80 per cent for ordinary securities borrowing and to 100 per cent for hedge funds), as well as restricting lending of shares by strategic investors and senior management in newly listed companies. Unfortunately, the CSRC has just published a press release announcing that it will suspend the lending of 'restricted stocks', effective from 29 January 2024.
PASLA continues to lobby and proactively interact with the Korean (FSS, FSC, KSD) and Chinese (CSRC, CSFC) authorities to shape market practices, ideas and solutions for all stakeholders — domestic and foreign.
Garrett: The current ongoing regulatory review on short selling by the South Korean authorities was the focus of attention for Northern Trust, PASLA and most of the securities finance industry in APAC in the latter part of 2023. This will continue until at least June 2024 while the short selling ban remains in place. The importance of engagement across the key Korean institutions cannot be underestimated and this will shape the future of short selling and securities lending in South Korea for years to come. It is critical that open and candid dialogue leads to a consensus-based outcome that supports an open, transparent and liquid market. This will be beneficial for both domestic and international investors.
APAC markets which are still in the early stages of their SBL and short selling journeys will continue to evolve. For some, including China, Philippines and Indonesia, regulatory clarifications or adjustments are still necessary to allow for full international investor participation in those markets. Northern Trust is well represented within PASLA through the executive committee and working groups and it is committed to driving the advancement of our industry. The important work being undertaken by PASLA, engaging with regulators and regional stakeholders to promote securities lending and short selling in capital markets, will continue through 2024.
Chua: The APAC region remains an area of huge opportunity for our clients and we are engaged with various industry bodies such as PASLA and the Asia Securities Industry & Financial Markets Association (ASIFMA) to advocate for market structure development and reform. We believe markets such as China, Indonesia and the Philippines will require further collaboration to promote market evolution and adoption of best practices — and there will need to be continued engagement with South Korean regulators on short-selling issues.
Lai: J.P. Morgan Agency Securities Finance now has representatives actively participating in two PASLA working groups, including a native speaker who previously served on the executive committee. This transition aims to enhance value and synergies, leveraging their expertise more effectively within these groups.
From a regional perspective, our firm proactively monitors regulatory initiatives in terms of their applicability to our business — for example, recent updates regarding the management of ‘outsourced services’ and various developments in the area of digital assets.
This year marks the implementation of the T+1 settlement cycle in the US, Canada and Mexico and it is likely that some APAC markets will look to move towards a similar set-up. This will be interesting in markets which can impose mandatory buy-ins for unsettled sale trades. Therefore, at J.P. Morgan, we have advanced our efforts to identify and develop the support and tools our clients require, spanning from trade instruction to trade processing.
What investments and adaptations to technology and working practices have you made during 2023 to sustain and grow your securities lending activity in the Asia Pacific region?
Solway: The complexities of the individual markets must always be accounted for: differing rules and regulations, settlement cycles, intermediaries, reporting requirements, and buy-in or no-fail requirements dictate how we approach our internal processes. This, in turn, defines our commercial client offerings.
Globalising and unifying settlement teams across time zones is critical. Investing in people talent remains a key directive at BNY Mellon. While London has traditionally been the ‘quarterback’ region for international settlements and collateral, we continue to invest in our teams across India, Hong Kong, Singapore and Japan for local talent and expertise — powering our culture in every region.
Technological advancement is crucial as we run our company and businesses better across the globe, connecting our technology either with external partners, including Pirum and HQLAX, or internally across lines of business such as custody, triparty, liquidity and margin or treasury. Securities finance enables timely optimisation and allocation of securities and cash.
Lai: We have progressed the client experience by enhancing transparency across all aspects of the J.P. Morgan Agency Securities Finance programme. This builds on recently completed initiatives such as digitising our Rules and Limits framework to help define a client’s programme. In 2023, additional investment was made to enhance data accessibility further through API gateways. New data sets were made available, capturing the series of activities that represent the full trade lifecycle of a loan transaction. The enhanced reporting offers an additional dimension, capturing upcoming changes to loan positions.
Our client portal, Securities Finance Central, hosted within the J.P. Morgan Markets platform, remains a valuable resource for gaining insights into programme performance. The platform empowers end-users to analyse revenue, and we have enriched it further by incorporating analytics, highlighting simulated revenue opportunities, while also supporting oversight and governance.
Chua: We developed and launched our operating model to support APAC clients within the FICC’s Sponsored Member Repo (SMR) programme. The FICC SMR programme provides clients with access to highly liquid investment and financing at competitive rates with the benefit of reduced counterparty credit risk. Our operating model allows APAC clients to access this liquidity during APAC business hours, supported by a high-touch client service and operational support element in the region.
Our client-facing treasury and liquidity platform, Venturi, offers cutting-edge pre- and post-trade decision-making tools while allowing them to seamlessly execute optimal strategies in an industry-first peer-to-peer (P2P) marketplace. We have seen a lot of traction across the suite of modules, with a major focus on three: the P2P repo marketplace, the liquidity optimisation engine and the Agency Lending Portal (ALP). The P2P platform brings new liquidity opportunities to repo markets by directly connecting participants (or peers) on a stable, secured and trusted system. Participants can trade bilaterally, and State Street guarantees the payment of the repurchase price to the buyer, inclusive of proceeds from liquidating the repo securities.
The liquidity optimisation engine offers solutions to drive greater portfolio transparency and decision-making through its margin analytics and optimisation modules in derivatives and collateral trading. Finally, ALP allows direct connection and execution for our Agency Lending product, delivering real-time availability and a self-service request for quote (RFQ) workflow for all lendable assets. The industry sees this as a cost-efficient venue and a resiliency option for lending transactions.
Garrett: Nexus is our multi-year transformational project to reinvent securities finance data, consolidating it into a single platform which supports a suite of new and existing financing solutions. Making use of both cloud-based architecture and event-driven data streams, Nexus performs calculations and provides access to transaction level information on a real-time basis, enabling data-driven decision making.
Northern Trust launched Nexus in early 2023 and, as part of a multi-year investment, the platform is continuously evolving to bring together a suite of new and existing services across securities lending, borrowing, financing, liquidity and collateral management that would serve as the single point of interface with our capability set.
Foundationally, this includes the provision of real-time securities lending data across the client portfolio and will enable users to evaluate datasets via various pre- and post-trade analytical tools.
Through interrogation of data, users will be equipped to make data-driven decisions, to identify optimal use of financial resources while realising efficiencies and enhanced alpha within their desired risk framework.
The continuous, agile development of Nexus and regular addition of new data, views and functionality enables Northern Trust to act on user feedback, delivering benefits more quickly to clients.
In June, the Monetary Authority of Singapore published its findings on Project Guardian which reviewed designing open and interoperable networks for digital assets. How do you interpret the use of digital assets and the stability of its future incorporation in the region?
Chua: The Monetary Authority of Singapore has taken a lead regionally in establishing an operable framework for tokenisation. Project Guardian is a collaborative initiative with policymakers and the financial industry that seeks to test the feasibility of application in asset tokenisation and decentralised finance (DeFi), while managing risks to financial stability and integrity. While we applaud efforts taken by the industry in cooperation with financial regulators, investors should be aware that tokenisation is relatively nascent and has yet to receive regulatory backing across any jurisdiction. We continue to work with regulators and industry groups to advance the discussion around digital assets and to participate actively in conversations with clients expressing interest in this cutting-edge technology.
Solway: There are many proof of concept projects surrounding the digital asset space – either at a corporate, exchange or regulatory framework, often resulting in a partnership or memorandum of understanding (MOU) across participants.
There are further examples, in addition to Singapore, that explore digital assets, tokenisation and other technologies that aim to provide better real-time data synchronisation, improved scalability and other steps to improve the speed, efficiency and transparency of security and cash processing. Bursa Malaysia established a project to explore blockchain in 2019, for example. There is also the Hong Kong Exchange’s Synapse in 2023 and ABD’s Project Tridecagon relating to bond cross-border settlements.
Garrett: MAS has long been an advocate for digital asset innovation and continues to nurture an environment in the region for financial institutions to research, develop and pilot new capabilities via initiatives such as Project Guardian. Its emphasis on creating an ecosystem via a cohort of participants enables all to learn from the journey in a safe space, with MAS themselves then able to craft appropriate guardrails and risk-based regulatory regimes to foster progress and adoption.
At Northern Trust, we absolutely see a role for digital assets to be incorporated into our future state vision and servicing for our client base. In our “Custody reimagined” paper launched in 2021, we estimated that 10 per cent of our asset universe could be digital by 2030. We still believe this number is reasonable and we will continue to invest in this space to be ready for these eventualities. The digital asset landscape is made up of a broad range of sectors and can offer value and efficiencies to different parts of the value chain.
The range of potential use cases is vast — whether digitally issued (or tokenised) assets or digital cash or equivalents — and these should be in unison to unlock the promise that is on offer through gains in capital efficiency, settlement or increased liquidity.
Through the mission and efforts of our Digital Assets and Financial Markets group, we continue to drive the exploration and development of new digital asset capabilities which will position us to support clients in their pursuit of digital assets. For us, market access, connectivity and asset safety will remain critical in our offering as a trusted partner across both traditional and digital ecosystems.
Lai: Onyx by J.P. Morgan serves as the firm’s blockchain-focused business unit, leveraging blockchain technology to transform the movement of money and assets for our clients.
Last year, as a part of Project Guardian, Onyx by J.P. Morgan and Apollo Global Management collaborated with various partners to develop a technical proof of concept, where we demonstrated how the implementation of tokenisation and smart contracts could significantly improve the management of discretionary portfolios, including streamlined incorporation of alternative investment funds in these portfolios. Having proven the technological feasibility of automating portfolio management for asset managers, our aim is to productionise this through 2024 and beyond.
Onyx Digital Assets (ODA) is J.P. Morgan's digital assets platform that enables the creation of innovative financial products through tokenised traditional assets. Through our current live products, we enable our clients to enhance utilisation of their assets, boost settlement efficiency and mitigate settlement risks.
We created the first application on ODA — called Digital Financing — to significantly enhance active intraday liquidity management and to reduce reliance on unsecured funding. Through this application, we provide access to secured financing through the exchange of cash for tokenised collateral using the mechanics of repo.
In October 2023, we launched the Tokenized Collateral Network (TCN), the second offering on the ODA platform. Focused initially on tokenising money market fund (MMF) units, TCN aims to bring greater mobility to collateral, expanding the universe of assets available for use as collateral.
How have monetary conditions shaped securities lending opportunities in the Japanese market? How are you positioning yourself to maximise opportunities for lenders and borrowers in this environment?
Lai: The Bank of Japan’s monetary policy normalisation is likely to start adjusting from March or April and market consensus is that the negative interest rate policy is likely to be removed in around mid-2024. On the other hand, the market is almost certain that the Fed has completed its rate hike cycle and the next move will be a cut in interest rates. The resulting USD and JPY cross-currency spread could bring increased opportunities in JPY funding requirements. Also, Japanese Government Bonds (JGBs) could continue to grow, given borrowers’ requirement for both liquidity and directional trading. In November, the Philippines Stock Exchange welcomed the decision to permit short selling of index stocks within the region, while South Korea’s Financial Services Commission has posed a ban on stock short selling in domestic markets.
Solway: Japan was a big winner in the region for securities lending during 2023: the Topix and Nikkei 225 both touched 33-year highs with a YoY increment of 25.09 per cent and 28.24 per cent respectively.
Specials and seasonal activity have always upheld sustainable alpha revenues for Japanese equity portfolios for our clients and we expect 2024 to be no different, despite proxy voting (and subsequent recalls) becoming more in focus to many ESG-aware clients. We look forward to helping our clients to balance such needs with educated, commercial outcomes in the year ahead.
In the fixed income space, JGB lending is picking up via ‘specials’ activity and we are looking forward to monetising those assets as demand grows.
Garrett: Continued loose monetary policy allowed the cross-currency basis spread between the USD and the JPY to remain wide through 2023, while heightened geopolitical concerns and banking crises also acted to drive the dollar premium wider. This meant that arbitrage opportunities remained strong, notably the US Treasuries versus JGB as the standout trade. In addition, volatility in the JGB curve prompted significant specials value, meaning lenders could finally enjoy intrinsic value from lending in-demand assets. Low interest rates and the cheaper yen also played a material role in the heightened M&A activity and the ability to do deals.
2024 is likely to see the end of Japan’s yield curve control policy as inflation starts to take hold. At some point during Q2 or Q3 it is expected that the BoJ will raise rates. This will lead to a shift in market dynamics which may affect the status quo of the past few years. However, geopolitical risk remains a constant theme that is impacting sentiment in the wider market and in securities finance activity. The war in Ukraine continues to threaten geopolitical stability and, more recently, the Israel-Palestinian conflict has further heightened market risk. Any escalation is likely to prompt a flight-to-quality bid for US treasuries and dollar-denominated assets in general, therefore pushing the USD-JPY cross-currency basis wider and increasing on-loan fees when accepting JGBs as collateral.
Lastly, with market participants preparing for new Basel Endgame regulations, we should expect regulatory capital efficient trades, while constraints on dealers’ balance sheets might force them away from capital intensive, low reward cross-currency FX and repo trades. As such, lenders and beneficial owners should remain nimble to take advantage of these opportunities when they arise.
Chua: The negative rate environment has presented both challenges and opportunities. Our JPY cash collateral facility was established more than 10 years ago and continues to deliver significant competitive differentiation for our clients and counterparties. The facility supports cross-currency trading, enabling lenders to achieve higher utilisation of their assets and, for borrowers, a means of generating value from their JPY cash collateral holdings.
Sasaki: Short transactions of JGBs, mainly implemented by hedge funds and other overseas firms, have been increasing due to speculation about changes in the BOJ’s monetary policy. In the equity market, the rising market price of Japanese equities has led to increased demand from investors and traders for all Japanese assets. JSF has more than 70 years of history operating domestic margin transactions and covers most financial institutions in Japan. Having this strength, we play an important role as an intermediary between the domestic and overseas repo markets. Furthermore, in accepting a wide range of collateral and supplying liquidity across a range of durations, we provide an optimal solution to each of our customers.
In November, the Philippines Stock Exchange welcomed the decision to permit short selling of index stocks within the region, while South Korea’s Financial Services Commission has posed a ban on stock short selling in domestic markets.
How do you assess potential for growth of securities lending and short selling activity in APAC?
Garrett: Potential is an often used term when it comes to the opportunities that APAC presents. There is still so much untapped opportunity in markets such as China and India. The developmental progress in Indonesia and Philippines during 2023 is just the start for those markets. International lender participation will take time to grow, but they are moving in the right direction. On the farther horizon are markets including Vietnam and Sri Lanka. We see a region filled with potential, which is integral to the future success of Northern Trust’s securities finance offering.
It is obviously a drawback when regulatory decisions are made that result in a contraction in lending activity. However, we will always face challenges, whether these are caused by economic uncertainty, geopolitics, disruptive technology or some other unforeseen event. These challenges also present opportunities. With South Korea, the opportunity is there for the regulators and market participants to build a consensus-driven solution for short selling and securities lending activity which will hopefully reduce or eliminate the need for future intervention.
Solway: No two markets are the same in APAC when it comes to short-selling rules and guardrails for investors, whether retail or institutional. While this can be challenging as clients navigate the region, it also provides a natural diversification of opportunities for lending. We saw this during 2023, with Korea tightening its regulations while the Philippines did exactly the opposite — within days of each other.
At BNY Mellon, we have made significant investments and improved our lifecycle management for Taiwanese equities. This will enable more of our clients to take advantage of the significant fees that are available in Taiwan, with an average fee of 250 bps in 2023.
How do you assess the outlook for APAC securities lending markets for 2024?
Sasaki: Although the current focus is on the growing uncertainty in the Chinese market, other markets in APAC are steadily growing. Regarding securities lending markets, many countries are in the process of developing market systems to attract overseas investors — such as the recent launch of a short-selling system in the Philippines. We expect that this growing trend in APAC’s securities lending markets will continue as they become more attractive. With such expectation, we recently assisted in the establishment of PT Pendanaan Efek Indonesia, an Indonesian securities finance company. We will continue to foster our unique business to connect the rapidly growing Asian market with the global market. By doing so, we will enhance our presence as Asia’s leading institution specialising in securities finance.
Solway: There is a lot ahead in 2024. Retailers are coming out to play. Advanced and progressive brokerage platforms now have inventory and scale, mostly born out of the meme era of 2020. Global brokers are actively asking about lending participation. I sometimes fear that the more traditional asset owners will be left behind as more modern, versatile supply sources expand and become more attractive.
Settlement and reporting standards are not just in APAC anymore. T+1 settlement and 10c-1 reporting is coming to the US. If we compare with Korea or Taiwan, these are similar challenges involving tight settlement cycles and stringent reporting mechanisms. In fact, the cultural expectation right across Asia is to settle on time while meeting specific obligatory reporting requirements.
US central clearing for US Treasuries will have a significant impact globally, especially in Asia where timing will be key for navigating solutions in the US time zone. Fortunately, BNY Mellon has turnkey solutions for our clients that are seeking to repo or reverse-repo US Treasuries.
Given the relative consolidation of global brokers in APAC, there is the constant drumbeat of competition, relative de-globalisation and optimisation of finite resources. BNY Mellon continues to seek out quality regional counterparties that add diversified and differentiated distribution channels for both equities and fixed income.
Finally, expanding into new segments such as Chinese qualified domestic institutional investors (QDII), which connects previously restricted supply to global demand, is an exciting opportunity for 2024 and beyond.
Chua: The Philippine and Indonesian authorities made positive strides to align their securities-based lending (SBL) rules to global industry standards in 2023 and we expect this momentum to continue through 2024. Changes in monetary conditions, and the continued push by authorities to increase competition and accountability in ‘Corporate Japan’, should also support corporate event deal flow. This, in turn, will assist stock borrowing and lending demand.
The de-risking theme by offshore investors from China and Hong Kong investments is likely to remain a challenge for these markets and will continue to negatively impact SBL demand in those markets. The industry will also continue to innovate for capital efficiency solutions (such as central clearing, pledge collateral) with the Basel III endgame approaching, thereby creating opportunities for borrowers and lenders. However, the fragmentation of jurisdictions in the region will continue to present a significant challenge in making central clearing platforms a reality in 2024.
Garrett: We are looking forward to a strong year in the APAC securities finance markets. As I mentioned previously, most years will see some markets win and some markets lose a little. 2024 will be no different. The effects of higher interest rates in Japan and the pivot to lower rates elsewhere will change market dynamics. It will be interesting to see how this plays out across the APAC markets, the impact on regional investment deployment, and ultimately lending demand.
Finally, we look forward to continued long term growth across all APAC markets enabled by development of legal, regulatory and operational infrastructure forged through the collaboration and partnership of market participants and supported by industry bodies such as PASLA.
Lai: Ongoing credit concerns across the China and Hong Kong property sector stocks will affect consumer and investor confidence throughout 2024. Asset prices are at decade lows in Hong Kong and indications that the US Federal Reserve will pause or reverse its rate hiking cycle could help to encourage more spending again. The outcome of the Taiwanese presidential elections could influence US-China relations going forward. Taiwan’s semiconductor industry continues to trend strongly and its broader equity markets are trading near historical highs.
In South Korea, securities-based lending activity will continue to be muted in the first half of the year as the short-sell ban will limit demand to borrow stock. The Korean presidential elections in April could address the ban and bring some clarity to the government’s stance on this issue as we head into the middle of 2024. In 2023, the Japanese stock market was one of the strongest globally and there is expectation that this strength will continue in 2024. The Tokyo Stock Exchange’s corporate governance reforms in 2023 have helped to boost company performance while promoting the efficient use of capital.
Finally, the focus in Australia will be on the Reserve Bank of Australia’s (RBA’s) easing of monetary policy. Prospective interest rate cuts will help keep bank debt levels low and spark a lift in borrowing activity, aiding higher profits in the financial sector. This will be accompanied by continued strong commodity demand for the all-important resources sector.
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