Developments in Hong Kong and Taiwan hint at a more progressive view of securities based lending regulation in Asia, although efforts to expand activity across the region are held back by limited infrastructure in a number of jurisdictions. Martin Corrall, chairman of the Pan Asia Securities Lending Association (PASLA) recognises that the regulatory environment for securities lending in the region is far from uniform. “Clearly some markets – for example, Indonesia – have yet to develop an infrastructure,” he says. “Others have nuances that may make them more challenging to operate in, although they might consider themselves developed.”
Considering regulation from an equity market perspective, Ed Oliver, managing director of product development at eSecLending agrees that the regulatory disparity across the region is a key consideration when considering whether it lend its clients’, say, Indonesian assets.
“Some markets such as Hong Kong are mature, but there are several others – such as Taiwan and Malaysia – which remain challenged in terms of regulation,” he says. “In these markets, lending occurs but in an imperfect structure. There are also a number of jurisdictions, including India, Indonesia and the Philippines, that do not yet allow foreign institutional investors.”
In some Asian markets, borrowers are required to confirm that the stock is available before they can execute a short sale. Indeed, it is not just that the agent has to confirm the availability of the stock, it also has to identify which investor owns the securities, explains Roy Zimmerhansl, global head of securities lending at HSBC. Korea and Malaysia have specific identifiers for the investor that the agent has to give to the borrower so it can execute the short sale.
Several Asian regulators have tweaked their securities lending rules in recent years. The Hong Kong Stock Exchange added a number of securities to its short selling list last year, while changes to Taiwan Stock Exchange Corporation’s securities borrowing and lending rules in 2016 were also designed to boost securities lending.
“The capacity for securities-based lending was enlarged, thus enhancing market liquidity,” explains a spokesperson for the Taiwan Stock Exchange Corporation, adding that the number of securities eligible for day trading varies slightly on daily basis.
This is just one reason why it is vital to be cognisant of the different rules in each market. Elsewhere, Korea recently introduced some changes to its short selling regulations, while in Malaysia there is a difference in terms of the settlement times between buys and sells, which impacts securities lending activity observes Zimmerhansl.
“The regulatory requirements for securities lending activity in Asia are not onerous, but regulators in the region are extremely vigilant in relation to buy-ins,” he continues. “They want efficiency in the markets and they don’t want failed trades to add risk. This explains the focus on covered short sales and that if trades fail, you are more likely to get bought in than would be the case in other regions.”
Asian regulators have gained a greater appreciation of the fact that short selling and contrarian trading adds liquidity to the market but, more importantly from a regulatory perspective, tends to have a moderating effect on the peaks and troughs of the market, adds Zimmerhansl.
In some respects, the lack of standardised frameworks can present an opportunity for clients. Those that are actively investing in these markets tend to be familiar with infrastructural and operational situations, so once the lending agent has completed is due diligence on a market it is able to work with individual clients to explain the way securities lending works, the challenges that may exist and the risk mitigation that it believes should make them comfortable, explains Oliver.
“In general, the less standardised a market the bigger the revenue opportunity,” he adds. “These are definitely markets where we feel we can make a strong impact on our clients’ programmes. We work actively to educate clients and, where there is interest, implement an appropriate risk-managed securities lending programme.”
Attitudes to repo
Regulators in Asia have supported the repo market and usually sponsored CCP solutions, says Nicolas Faust, BNP Paribas collateral and valuation services product specialist for Asia-Pacific. “However, the upcoming impacts of Basel III’s ratios – LCR and especially NSFR – will put a lot of pressure on the repo business.”
These regulations could severely restrict the ability of repo dealers to provide liquidity to the market according to Nasser Khodri, group managing director Asia Pacific institutional & wholesale at FIS. “Out of the 70 or so counterparties in the market trading repo we have found that a large portion have increased their use of total return swaps in order to improve balance sheet usage,” he says. “This has led some banks to believe their derivatives system can also cover all of their physical financing needs.”
Tri-party repo is becoming more prevalent as non-traditional lenders look to put cash to work, while central clearing of repos is also being seen as a potential solution. In this scenario, the regulatory capital charges faced by the dealer community are reduced, which leads to favourable rates being passed on to the borrower. However, John Southgate, head of derivatives & collateral management EMEA at Northern Trust, warns that both of these solutions may increase complexity from a collateral management perspective.