A number of countries in Asia could still be defined as frontier markets and therefore require synthetic or other bespoke market access solutions. As a result, in many respects the region remains a fragmented CSD environment, further complicated by the fact that many banks still clear through their EU or US entities.
The Asian securities lending market is characterised by comparatively high volumes, offset by a rich specials market generating high returns, says Philip Morgan, head of business development at Pirum Systems.
“Settlement transaction costs are generally quite high, which when paired with both new loan and return volumes can be a significant factor in ensuring a profitable programme. There is typically more sensitivity around the recalls process and sell fails in Asian markets due to quite strict policies around settlement failures on the exchanges, which often results in clients holding higher buffers (up to 50% in some cases) for in-region securities. This means that significant specials revenue can be left on the table.”
By closing the right position and using tools that allow minimum duration and return size, agent lenders can limit their transaction costs. Additionally, markets such as India have very specific CCP requirements and unique operating models, which require local technology builds.
Without technology, trading and post-trade activities can be prone to errors from the manual processes involved. “Automated trading platforms and post-trade technology not only allow agent lenders and broker dealers to optimise their efficiency, but also reduce costs and minimise the risk of manual input errors,” says Andrew McCardle, head of EquiLend Asia.
“Market data allows lenders and borrowers to make informed trading decisions. However, there are still some domestic markets within the region that are reluctant to accept technology vendors as eagerly as the global participants have. Even when you have a global standard, it does not mean that those standards are adopted by all markets.”
McCardle suggests that beneficial owners in Asia Pacific face the same issues as their peers in other parts of the world and are demanding a similar level of clarification on performance. “There is certainly a better understanding of benchmarking by beneficial owners in smaller regional markets than there ever has been, due to the work agents have undertaken to educate these markets.”
Real-time processing and a obtaining a multi-asset view of all securities and associated collateral are becoming central requirements. Broadridge’s head of strategy and business development Asia, James Marsden, says that he is surprised by the number of legacy systems that are unable to cope with the shortening settlement cycles coming through in Asia Pacific markets, such as the move to T+2 in Australia and New Zealand and forthcoming changes in Japan.
“These shortening settlement cycles increase the need to borrow due to the higher likelihood of failed settlements with non-residents as a result of time zone differences,” says Marsden. “As the market evolves we expect this drive towards greater transparency to become a feature of Asian markets. The ability to aggregate data, visualise it in a way that supports strategic decision making and then automate internal, client and regulatory reporting of this data is the key to dealing with the demands of the new market and regulatory environment.”
The principal factors that strategic partners can provide are accurate and transparent data and analytical tools “The quality of corporate action and instrument reference data is vital, along with accurate management of collateral positions, with associated marking to market, to manage exposures,” adds Marsden.
Centralisation and standardisation of data across siloed business lines includining securities finance and derivatives enables a more holistic, real-time view of risk at different levels of the firm. The ability to source and deploy eligible collateral at low cost quickly and efficiently in an automated way can also provide huge benefits during times of market stress.
“From a buy-side perspective, there is a trend for moving down the liquidity curve in the collateral being accepted and demand from the sell side for longer term structures due to regulations such as the Basel III liquidity coverage ratio,” says Marsden. “The ability to manage the eligibility and concentration risk of this collateral using sophisticated technological solutions allows the buy side to increase returns from lending programmes and expand business opportunities in a way that is acceptable to the firm’s risk profile.”
Technology enables agent lenders to map supply with borrower demand regardless of the account structure and execute trades based on specific parameters, which reduces the amount of human intervention required for high volume daily flow activity, says Roy Zimmerhansl, global head of securities lending at HSBC.
“This facilitates increased volumes, but more importantly the borrower can direct their activity to lending clients that satisfy other criteria, such as the identity of the entity at a principal level, which determines the amount of capital the borrower has to set aside,” he says. “It also enables the borrower to allocate to the correct entity from a collateral perspective.”
This in turn supports more direct booking on a cost-effective basis, further improving transparency. Borrowers can identify who they are trading with to their regulator and the agent lender can show the borrowers where their exposures are. Zimmerhansl says that the head of HSBC’s trading desk in Asia talks about his team evolving from traders into engineers.
Once the trade has been agreed and auto-booked, most organisations have straight through processing so the trade is booked to the right account and instructions sent to the settlement agents, so it can also be auto-reconciled, he says. “All this means that there is a plethora of information available to customers, whereas in the past only some of this information would have been available or maybe it would have been available in its entirety only from select providers.”
While the benchmark rates delivered by market data service providers are helpful, technology is set to have an even greater impact on securities lending in Asia over the next 12 months as systems to support the Securities Financing Transaction Regulation (SFTR) are built out in the EU. Once implemented by the securities finance industry in EU, with support from vendors, it is seen as just a matter of time before this technology makes its way to Asia Pacific.
There has been a degree of negativity around the speed of some execution platform build outs, according to Morgan, with agent lenders expressing the view that there has been a lack of focus and knowledge in the region to assist with these transitions.
However, he observes that non-differentiated technology solutions are increasingly being considered by companies to improve market access as well as operational, regulatory and risk processes. “This is enabling participants to spend their limited technology budgets on alpha generation strategies that make them more attractive to their clients.”
Monitoring of corporate actions on assets lent out remains a key challenge, as does automating the collection of dividend payments/management of stock splits. Says Marsden: “Many systems still lack automation in these key workflows. Depending on the market there are often specific rules on closing out and re-opening loans if there is a change in the number of shares to simplify the operational flow. Of course, this is harder in the retail space where the number of open positions may be significant and clients may not have alternative collateral, so firms may vary their approach.”
The demands of central clearing and the forthcoming uncleared margin rules mean buyside firms are required to source greater quantities of higher quality collateral for margining derivatives trades. The buy side also needs to move this collateral more frequently to more demanding settlement cut-offs.
According to Marsden, technology solutions allow buy-side firms to identify internal inventory that can be used to meet these needs at low cost, minimising the drag on alpha from holding larger quantities of cash and high quality liquid assets (HQLA).
Securities finance can also facilitate source margin in a cost effective way through collateral upgrade trades. “For buy-side firms that are long HQLA, there is also an opportunity to finance these assets in the market in collateral downgrade trades to generate additional alpha,” he says. “Deploying technology solutions that can help the firm to manage this interplay between collateral supply and demand while also mobilising collateral in a more automated way can provide a strong return on investment and ease the burden of meeting regulatory deadlines.”
Morgan says that when it comes to paying for
services, agent lenders typically cover their own operational and transactional
costs while borrowers pay for tri-party collateral management. “Additionally,
agent lenders maintain an indemnification programme for many beneficial owners
and absorb the cost of this. Clearly, the fee split agreed with the beneficial
owner should be reflective of the value
McCardle adds that the firms that are paying directly for systems are the agent lenders and the prime brokers, but these costs and risk mitigation tools are part of the process that every agent lender highlights when they work with beneficial owners.
“There is obviously a cost to running a better risk management process, but global risk mitigation tools such as contract comparison are no longer a nice-to-have for many in Asia,” he adds. “They fall in line with global standards as expected products within the securities-based lending programme of participants. Many would argue that they are a small price to pay for the risk mitigation that they provide.”
Most clients take reporting from their agent lender, which is no different to how they would work with an investment manager, adds Zimmerhansl. “The most sophisticated clients might use more than one agent, in which case they need to aggregate the information. In some cases these clients are investing in specific technology that enables them to manage risk across multiple agents, but most are taking the agent data and running it through their existing risk engines.”