Regulation: Rules of engagement
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.
Evolving structures
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.”
Moderating
influence
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.
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