Country Profile: Taiwan's securities finance market
- 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.
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