Australia equity data supplied by IHS Markit:
- Australia is the fourth largest market in Asia Pacific
- Australian equity securities lending revenue grew by 15% to $73.3m
- The 4bps in fees registered was offset by an 18% jump in average balances
- Material firms were heavily represented among highest revenue generators including Fortescue Metals
- Inventories grew by 17% for the year to $195bn
Australia is a mature lending market with a diverse range of supply and demand dynamics. It is well developed, with a robust regulatory framework and attractive liquidity profile. “These attributes make it an obvious destination for investors to deploy their trading strategies,” says Dane Fannin head of capital markets, Asia Pacific, Northern Trust.
Australia has stable supply for the main index securities. “Overall, supply within the market has increased due to new participants and capital inflows to superannuation and managed investment schemes,” says Stewart Cowan, head of securities lending, Asia Pacific, J.P.Morgan.
“As 2017 gets underway we continue to see strong appetite from beneficial owners to participate in securities lending. This is reflected in the lendable inventory in both equities and fixed income which has increased year-on-year.”
Australia has a vibrant and dynamic onshore market and it is also open to offshore participants. In terms of specials, the supply versus demand dynamic is no different other mature markets except for the franking or imputation credit. “The franking credit is only available to onshore lenders, hence, there is differential pricing and certain demand dynamics between the onshore and offshore supply,” adds Cowan.
Unfortunately, demand to borrow remains subdued due to Basel III and other regulations. “We saw increased volatility within the fixed income book as banks and broker-dealers needed to manage their balance sheet activities,” added Cowan.
However, despite demand not keeping up with supply, the Australian market is expected to continue to generate reasonable returns buoyed by the commodity and retail sectors.
In September 2008, ASIC introduced a short selling ban which covered both naked and covered short sales. The ban was in response to concerns around market volatility which raised concerns around fair and orderly operation of markets. The ban was lifted in May 2009 and ASIC released a post-implementation report REP302 (see http://bit.ly/2lyuHfX). It provided an interesting insight: “It should be noted, however, that the ban on short selling may have exacerbated market volatility.
It also potentially inhibited price discovery in the market and may have reduced market liquidity.”
It is also improving in the eyes of beneficial owners, says Fannin: “Perceptions of securities lending are changing in a positive way, particularly in the context of a low interest environment. The idea that it can generate an attractive stream of alpha at relatively low risk is driving increased interest from beneficial owners.”
The Australian Securities and Investment Commission (ASIC) issued Regulatory Guide 196 (RG196) in April 2011, which prohibits naked short selling and introduced short selling disclosure obligations. There are currently rules in place for naked short selling as well as various reporting obligations in relation to short sales and loans transactions. ASIC provides the market with transparency in relation to these positions and they are published on its website (see http://bit.ly/2mfmIo5).
The most recent change has been to expand the reporting obligations for APRA (Australian Prudential Regulation Authority) regulated entities. SRF 720 & SRF 721 were introduced in July 2016 and request specific information related to stock loan and repo positions.
Industry participants can access inventory via all the traditional routes to market, although there are certain elements of Australia’s infrastructure that are ripe for further development, according to Fannin. “Many participants still rely on bilateral collateralisation rather than leverage a tri-party solution – making trading flows relatively less efficient and expensive,” he says. “However, we feel this situation will evolve as the market continues to grow and attract investment.”
The Australian market has increasingly diverse and well-serviced range of collateral management offerings. The Australian Securities Exchange (ASX) recently launched a fixed income service with plans to expand to equities. The ASX partnered with Clearstream for its domestic tri-party offering, ASX Collateral. Other agents offer international tri-party.
Davin Cheung, global funding and financing sales, APAC, Clearstream Banking, says that activity is “picking up quite nicely”. “The tri-party activity has really been going up significantly over this year – so you have the CCP, commercial banks and the central bank all in the tri-party platform that is operated currently by the ASX and supported by Clearstream. That’s a good sample for tri-party activities.”
“The trend for this year will definitely be a pick-up in momentum. There will be more local players looking to sign up for the platform and existing ones will increase their balances – I have no doubt about its growth. The global margin requirements, the LCR requirement and the domestic Australian regulatory requirements are all factors pushing for tri-party activity.”
Traditionally, the Australian financing and stock loan activity was seen as largely between domestic counterparts, but this is now evolving to include global market participants. True domestic onshore trades are now enhanced by EMEA, US or Pan-Asian counterparts using global collateral.
Tri-party collateral managers are able to support the Australian superannuation funds and the global borrowing community, working to safeguard equity and fixed income collateral.
Mellon is one of these tri-party providers. Natalie Wallder, head of collateral
management & segregation, Asia Pacific, BNY Mellon, says: “We see an
opportunity to support our clients in two key market developments. The first of
which recognises the continued emergence of a domestic repo market and
expansion over the coming year of regulatory OTC derivatives collateral needs.”