Ask the audience
24 March 2015
Despite being a region still in its securities lending infancy, Asia already has the dedicated PASLA/RMA conference to test the mood of its markets
Image: Shutterstock
Given the economic ascendency the Far East has experienced in recent decades, it is easy to understand why there was a tangible sense of excitement in the air at the Pan Asia Securities Lending Association/Risk Management Association (PASLA/RMA) Conference on Asian Securities Lending at the beginning on March.
The sessions were led by a variety of industry leaders and Asian experts, with panel discussions and audience participation very much the order of the day. During the first session, the past, present and future of the Chinese economy was discussed. The speaker claimed that China will be faced up with relatively lacklustre domestic and external environments, while the strong US dollar could well weigh down the renminbi exchange rate and undermine Chinese enterprises’ competitive edge in the export market.
The speaker also stated that domestic deflation pressure is looming as GDP growth and inflation retreats, with the government expected to relax policy measures across the board, vigorously promote implementation of the reform initiatives, and maintain abundant market liquidity. In addition, industry patterns are predicted to change in the coming years. According to the speaker, traditional industries are expected to re-gain the growth momentum after ‘downsizing’, the three industrial clusters will become the new pillars of the economy, and financial assets will become the first choice during asset allocation.
With the scene set for more detailed discussions on securities borrowing and lending in Asia, the next session was to focus on the Chinese markets themselves. Inevitably, it was not long before the ever-looming spectre of regulation reared its head. Perhaps unsurprisingly, an overwhelming 96 percent of the audience agreed that onshore China should lift its restrictions on local institutional participation in margin financing and securities borrowing and lending, such as mutual or pension funds and insurance companies.
The Shanghai-Hong Kong Stock Connect programme, which was launched as a conduit into onshore China in November last year, was also an ever-present issue at the PASLA/RMA sessions, and prompted much debate. Since its launch, there has been a lack of activity in southbound trading, due in part to the absence of genuine demand, according to 64 percent of attendees at the conference.
Fifty-six percent of the audience also felt that the reason for the northbound trading quota’s disappointing results, compared to pre-launch projections, was due to “operational issues”. Despite these responses, panellists were more optimistic, stating that the only market participants who meet the requisite thresholds for southbound trading have already invested. In relation to northbound trading, the panel claimed that the quota was not, in fact, at a level lower than expected pre-launch.
When asked whether they expected to generate more revenue from securities borrowing and lending in the Asia Pacific region in general during 2015, versus 2014, 65 percent answered to the affirmative.
More specifically, when asked to say which market in Asia they believed will be the most attractive in terms of revenue generation in the next couple of years out of India, China, Indonesia, Malaysia, and Thailand, 91 percent chose China.
While panellists and audience members alike seemed to share optimism for the Chinese market in the future, only 57 percent of the audience thought it was “likely” that agents and beneficial owners will be facilitating regular and consistent swap transactions within the next two or three years.
The PASLA/RMA panellists also felt that the use of central counterparties (CCPs) was another area of importance to the burgeoning Asian markets, with many audience members, by their own admission, in need of some enlightenment. Although 20 percent of the audience claimed to have a “good working knowledge” of CCPs, 38 percent felt they “understood but were interested to learn more” and 42 percent admitted to only possessing a “basic understanding”.
After a brief catch-up of the ins and outs of the CCP model, the panel moved onto predictions for developments to come in 2015.
The panel told the audience that there was increased membership at the Japan Securities Clearing Corporation, with trust banks joining the fold, and that the Clearing Corporation of India is currently working to develop netting framework and support for term.
On the securities borrowing and lending front, the panel also stated that India has approved the National Securities Clearing Corporation Limited (NSCCL) as an intermediary, while intermediated models available through the Korea Securities Depository, the Taiwan Stock Exchange and Bursa Malaysia have also become available.
Despite some of the audience’s knowledge of CCPs, only 14 percent were found to be currently live with open transactions. Another 32 percent said the implementation process was still ongoing, with open transactions expected within 2015. Perhaps more tellingly, the remaining 36 percent and 18 percent of the audience claimed they were “beginning to review options” and “inactive”, respectively.
As well as lowering the risk-weighted assets of broker-dealers, the use of CCPs can also aid the demand-side with issues around the recently finalised liquidity coverage ratio (LCR) and upcoming net stable funding ratio (NSFR) requirements. In recent times, despite much work being done, capital adequacy and liquidity risk have both emerged as big issues that remain unresolved, and each specific country is still unsure of exactly what its own NSFR will look like.
According to those at the conference, while the coming years will be littered with obstacles to overcome in the region, the evolving regulatory landscape will undoubtedly take its place front and centre for the foreseeable future.
The sessions were led by a variety of industry leaders and Asian experts, with panel discussions and audience participation very much the order of the day. During the first session, the past, present and future of the Chinese economy was discussed. The speaker claimed that China will be faced up with relatively lacklustre domestic and external environments, while the strong US dollar could well weigh down the renminbi exchange rate and undermine Chinese enterprises’ competitive edge in the export market.
The speaker also stated that domestic deflation pressure is looming as GDP growth and inflation retreats, with the government expected to relax policy measures across the board, vigorously promote implementation of the reform initiatives, and maintain abundant market liquidity. In addition, industry patterns are predicted to change in the coming years. According to the speaker, traditional industries are expected to re-gain the growth momentum after ‘downsizing’, the three industrial clusters will become the new pillars of the economy, and financial assets will become the first choice during asset allocation.
With the scene set for more detailed discussions on securities borrowing and lending in Asia, the next session was to focus on the Chinese markets themselves. Inevitably, it was not long before the ever-looming spectre of regulation reared its head. Perhaps unsurprisingly, an overwhelming 96 percent of the audience agreed that onshore China should lift its restrictions on local institutional participation in margin financing and securities borrowing and lending, such as mutual or pension funds and insurance companies.
The Shanghai-Hong Kong Stock Connect programme, which was launched as a conduit into onshore China in November last year, was also an ever-present issue at the PASLA/RMA sessions, and prompted much debate. Since its launch, there has been a lack of activity in southbound trading, due in part to the absence of genuine demand, according to 64 percent of attendees at the conference.
Fifty-six percent of the audience also felt that the reason for the northbound trading quota’s disappointing results, compared to pre-launch projections, was due to “operational issues”. Despite these responses, panellists were more optimistic, stating that the only market participants who meet the requisite thresholds for southbound trading have already invested. In relation to northbound trading, the panel claimed that the quota was not, in fact, at a level lower than expected pre-launch.
When asked whether they expected to generate more revenue from securities borrowing and lending in the Asia Pacific region in general during 2015, versus 2014, 65 percent answered to the affirmative.
More specifically, when asked to say which market in Asia they believed will be the most attractive in terms of revenue generation in the next couple of years out of India, China, Indonesia, Malaysia, and Thailand, 91 percent chose China.
While panellists and audience members alike seemed to share optimism for the Chinese market in the future, only 57 percent of the audience thought it was “likely” that agents and beneficial owners will be facilitating regular and consistent swap transactions within the next two or three years.
The PASLA/RMA panellists also felt that the use of central counterparties (CCPs) was another area of importance to the burgeoning Asian markets, with many audience members, by their own admission, in need of some enlightenment. Although 20 percent of the audience claimed to have a “good working knowledge” of CCPs, 38 percent felt they “understood but were interested to learn more” and 42 percent admitted to only possessing a “basic understanding”.
After a brief catch-up of the ins and outs of the CCP model, the panel moved onto predictions for developments to come in 2015.
The panel told the audience that there was increased membership at the Japan Securities Clearing Corporation, with trust banks joining the fold, and that the Clearing Corporation of India is currently working to develop netting framework and support for term.
On the securities borrowing and lending front, the panel also stated that India has approved the National Securities Clearing Corporation Limited (NSCCL) as an intermediary, while intermediated models available through the Korea Securities Depository, the Taiwan Stock Exchange and Bursa Malaysia have also become available.
Despite some of the audience’s knowledge of CCPs, only 14 percent were found to be currently live with open transactions. Another 32 percent said the implementation process was still ongoing, with open transactions expected within 2015. Perhaps more tellingly, the remaining 36 percent and 18 percent of the audience claimed they were “beginning to review options” and “inactive”, respectively.
As well as lowering the risk-weighted assets of broker-dealers, the use of CCPs can also aid the demand-side with issues around the recently finalised liquidity coverage ratio (LCR) and upcoming net stable funding ratio (NSFR) requirements. In recent times, despite much work being done, capital adequacy and liquidity risk have both emerged as big issues that remain unresolved, and each specific country is still unsure of exactly what its own NSFR will look like.
According to those at the conference, while the coming years will be littered with obstacles to overcome in the region, the evolving regulatory landscape will undoubtedly take its place front and centre for the foreseeable future.
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