Securities lending in Asia is looking increasingly attractive in spite of challenges around regulation and technology, according to a panel at the Pasla/RMA Conference on Asian Securities Lending in Tokyo.
“We’ve definitely seen momentum in Asia,” said Eric Champion, director, Bank of America Merrill Lynch, Hong Kong.
He noted several reasons for why the region is important for the lending business, the first being growth in the hedge fund industry where AuM has returned to pre-Lehman levels and that there have been “quite a few” hedge fund launches.
Secondly, it is difficult to find good spreads in the US and Europe where the average lending fee is “around 40 to 50 basis points”. By contrast, spreads in Asia are much higher.
“Regulatory issues around capital and pressure on balance sheets are pushing market participants to look at where spreads are highest - which is in Asia,” Champion said.
Gareth Mitchell, global head of securities finance, Citi, agreed with Champion.
“Over the last few years we’ve seen increased asset allocation from our underlying beneficial owners in the Asia region… There’s been interest in emerging market (EMs) returns that the US and European markets haven’t been achieving.”
Some of the most attractive EMs in Asia include Taiwan, Korea, and Malaysia.
Mitchell said that the percentage of revenue his business generates is increasingly flowing from Asia.
“There is a lot of untapped territory in Asia for asset managers”, said John Vaughan, MD and head of Japan prime services, Credit Suisse, adding that the region’s growth prospects are “some of the best in the world”.
As Vaughan pointed out, there are some 22,000 listed companies in Asia, of which 2,300 have a market cap of more than $1bn. Out of those 2,300 companies, only around 1,000 are covered by research banks, he said.
While Asia does present opportunities for beneficial owners, there are several challenges including higher risk and vast diversity among regulatory regimes that can make trading difficult.
John Shellard, director and global head of trading, JPMorgan said: “I wouldn’t necessarily say that Asia is more attractive than other regions. Some markets in Asia do offer high spreads but this is offset against greater risk.”
Vaughan said there are sometimes capacity issues in finding managers that have expertise in Asia.
But Shellard acknowledged there is room for growth in existing and emerging Asian securities lending markets whereas the markets in the US and Europe are very mature.