Country Profile: Taiwan's securities finance market

Country Profile: Taiwan's securities finance market

Taiwan equity data supplied by IHS Markit
  • Taiwan is the fourth largest market in Asia Pacific
  •  Revenues jumped by a fifth to $87m in 2016
  •  Balances fell by a tenth to $3.6bn but fees counterbalanced this by jumping by a third
  •  Tech firms continue to drive revenues in the market
  • The value of lendable inventory grew by 14% to $39bn

Taiwan’s bourse made it easier for market participants to look up rules and regulations on securities borrowing and lending (SBL) in February. The welcome move saw the Taiwan Stock Exchange (TWSE) collect 14 letters of interpretation regarding the practical aspect of SBL and place them under the respective chapters and articles.

Eventually, the exchange plan is to have all the rules covering SBL rules in one place – including regulations governing the opening of an SBL account at a brokerage, how to price SBL and how a lender makes a request for an earlier than planned return of securities.

At the same time, TWSE also announced a new piece of legislation which forbids securities borrowers from taking out any new loans within 10 days of the deadline of an existing outstanding loan.

The calculation of collateral value, related to submission, withdrawal, and the marking-tomarket of foreign currency collaterals, were updated.

Officials have continuously modified SBL rules over the last several years, showing careful thought and commitment to the securities lending industry. The 2016 changes to the regulations were also designed to boost securities lending.

“The capacity for securities-based lending was enlarged, thus enhancing market liquidity,” a spokesperson said at the time, adding that the number of securities eligible for day trading varies slightly on daily basis.

Regulators have also reduced the securities transaction tax (STT). Regardless of the gain or loss derived from trading of securities, the STT is imposed based on the transaction amount. The move by finance ministers to lower the rate to 0.15% from the previous 0.3% from the start of 2017 pleased local stock investors and could boost market turnover going forward.

 In part, these modifications combined with regulatory flexibility have led to Taiwan becoming one of the hottest Asian SBL markets. Healthcare and biotech stocks saw strong demand from borrowers in 2016. OBI Pharma was one of the top-grossing name in the Taiwanese securities lending market.

 In 2016, IHS Markit equity statistics show the average lendable totalled $39bn during 2016 with $3.6bn out on loan. The loans commanding an average fee of 2.31%, beating 2015’s 1.71% figure even through more assets were then out on loan ($4bn on average).

Even so, total lendable assets and revenues in Taiwan still fall behind the likes of Japan, Hong Kong, and South Korea. Lending occurs, but in an imperfect structure.

Looking ahead, lenders and borrowers should keep a close eye on the global macro environment and domestic issues impacting Taiwanese securities.

 “There has been improvement in near-term earnings momentum and a tech-led cyclical recovery in Taiwan. Positive export/production momentum appears to also be building in some non-tech sectors, such as metals, chemicals and machineries,” HSBC analysts wrote in a monthly investment outlook in February.

“Taiwan maintains its competitiveness in the global themes of Internet of things and electric vehicles. The government focuses on revamping the economy through cultivating high-tech/ innovative industries and trade & investment policies (to diversify the product mix & markets).”

Meanwhile, there are potential threats to equity market prices. US trade, tax and foreign policies under a Trump administration casts significant uncertainty over Taiwan’s economic and market outlook, according to HSBC. This is due to a combination of openness to trade, large direct and indirect exports to the US, equity market exposure to exporter sectors, and current security relationships with the US.

The tech sector is also facing challenges from muted global end demand and increasing competition throughout the supply from China. Alternative growth drivers – other than tech, manufacturing and exports – have not been built.

“Any tension in the Sino-US-Taiwan relations or deterioration in cross-strait relationship under the new government remains a concern, with pressure from China continuing to complicate Taiwan’s progress in negotiating free trade agreements with major trading partners and Chinese tourist arrivals in Taiwan slowing sharply,” HSBC’s note added. “Currency and commodity price volatility is a swing factor for exports, the economy and earnings.”

ICBC Standard Bank: Expert eye on repo

Taiwan is a large market for repo and the presence of large financial groups, such as Sinopac, KGI and Yuanta, along with a number of other significant asset holders, means that there is a considerable scope for financing. The participants are experienced users of GMRA, and the open and transparent legal system places no issues around netting.

The amount of international business conducted locally depends on the attractiveness of repo interest rates compared to the Taiwan Futures Exchange (TAIFEX), which tracks the provision of cash from the Central Bank. The market is flexible and adaptable, and statistics show that the bulk of trades in the market are in the short-term.

Eric Li, repo trader at KGI Securities, sees the need for financing to further expand in the domestic market in 2017. “Given the low interest rate environment in the domestic market and the relatively lucrative US dollar-denominated papers, Taiwan’s market has been showing strong demand since last year, and is expected to remain in its strong momentum for growth in 2017.”

In general, the diversity of names and the overall liquidity in Taiwan’s repo market grew steadily during 2016 and it is expected to remain highly active and favourable for trading among the dealers.