Country Profile: Hong Kong's securities finance market

Country Profile: Hong Kong's securities finance market

Hong Kong equity data supplied by IHS Markit:
  • Hong Kong is the second largest market in Asia Pacific
  • The $247m of revenues generated in 2016 missed the 2015 total by over 30%
  • The disappointment was driven by fees which shrank by a quarter to 1.52%
  • Balances also contributed to falling revenues as they fell by 10% on average to $15.4bn
  • Holders of China Huishan Dairy generated over $31m of revenues
  • Inventories also fell, with an 8% decrease in lendable to $237bn

Last year was not a particularly good one for securities lending in Hong Kong. Gross revenue totalled (US) $238m in 2016, down 34% from US$358m the previous year, swopping places in the league tables with Japan (which increased from US$196m by 50% to US$294m). Nonetheless, it was the second greatest revenue generating market in Asia Pacific.

“Average rates decreased a lot over the past year,” notes Ariel Winiger, head of secured financing Asia Pacific, Societe Generale. “Rates reduced on average by about 30%. I see no indication for this to turn upwards again – it could go lower – but this really depends on corporate activity.”

There are still isolated pockets of high fees. “The only exception is China-based ETFs, which are heavily in demand,” says Winiger. “The fees come in and out – sometimes they are traded at a really high level but it is quite volatile. It is definitely a good trade but the problem here is that not many lenders can lend ETFs so the holdings are relatively modest.”

At the moment there is not enough supply, in part because interest in China is not particularly high, investors are typically more cautious than bullish. However, there is also the question of ownership. “The main investors are retail ones and these stocks do not normally come to the lending market,” notes Winiger.

Chamil Ioussoupov, head of equity finance Hong Kong, Natixis says: “The biggest impact we saw in 2016 was the development of the Chinese story. China ETFs absolutely hijacked the story of the Hong Kong stock lending market.”

At the beginning of the year the inventory of private banks was not targeted but as soon as Chinese ETFs became hot people rushed to the private banks to fund the supply.

“The interesting thing was that the market corrected itself,” says Ioussoupov. “The effort of people trying to get the ETF supply in the first part of the year paid off and the market naturally cooled off in the second part. Because ETFs were very hot, people found an alternative way to fund the supply and the market normalised, as happens in Europe.”

The only major change to the equity market was the Shenzhen Connect going live at the end of last year. As with the established Shanghai Connect, the stock lending facility is not really workable. It is reasonable to assume that the facility has been consciously implemented in a way that does not foster activity and that Chinese regulator will make changes if and when its wants lending to take off.

 While investors can almost get near full access to the Chinese markets, the two Connects are not being utilised for stock lending for several reasons including issues around title transfer and the CNY repo market. It all adds up to not being commercially viable.

 The reconciliation of these issues is under consideration by the Chinese authorities but is not thought to be a top priority. Says Ioussoupov: “I would say the key regulatory factor is now the development of China – the Shanghai and Shenzhen Connects and the all new bond channel. Beyond that the next step is of course the opening of derivatives.”

 By contrast, the Hong Kong regulator is widely considered to be supportive of securities lending. “HKMA is a very pragmatic body – it always consults on the impact on market participants,” says Ioussoupov.

 Tri-party collateral management

 “Hong Kong collateral continues to be easily accessible to source and a popular choice of asset to hold for many financing and stock lending traders,” says Natalie Wallder, head of collateral management & segregation, Asia Pacific, BNY Mellon.

“China continues to increase in importance as the market explores new infrastructure to connect to China. BNY Mellon already supports offshore renminbi tri-party repo transactions and offshore renminbi collateral assets in tri-party, both settling through Hong Kong. It is certainly exciting times ahead, with room for more innovative ways to help support this market evolution including facilitating tri-party access to Connect, which is an area where we are currently supporting within our asset servicing solutions.”

Davin Cheung, global funding and financing sales, APAC, Clearstream Banking, says: “We are seeing quite a number of major Chinese investment banks setting up repo and securities finance desks in Hong Kong. They are looking at tri-party, because they are holding quite large portfolios of paper that they are looking to finance as a basket.”

ICBC Standard Bank: Expert eye on repo

Hong Kong is the traditional hub for the repo market in Northern Asia. Like Singapore to the south, it is home to a number of banks and many professionals operating in a varied financing market. Business conducted in Hong Kong does not often involve securities denominated in HK dollar (HKD) and is incredibly varied in terms of collateral, currency and tenor. Typically, as a percentage of overall volume, there are more structured transactions conducted in Hong Kong than in any other major centres in Asia. 

The international banks tend to have local Hong Kong teams in place to ensure thorough regional coverage, but trade using their main balance sheet either domiciled in Europe or the US.

Simon Clairet, who co-ordinates ICBC Standard Bank’s regional operations from the Hong Kong office, says: “Hong Kong is a busy financing market. Together with a good deal of interest in structuring longer-term financing trades there is very regular flow financing business, which provides the collateral to deliver returns to a number of our tri-party accounts domiciled in Europe.” The market is mature and well-developed and the bulk of collateral is US dollar-denominated and settled in Euroclear.