Country Profile: Australia's securities finance market
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.
BNY
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.”
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