Asia Pacific Securities Finance Guide 2022

Securities Finance Asia Pacific Guide 2022 SHORT-SELLING BANS: still contentious Repo market has yen for Japanese currency Beneficial owners outline their APAC market strategies COUNTRY PROFILES

Key developments in the major Asian markets

Flexibility.

Reliability.

Durability.

There’s No Substitute for Certainty. certainty-bnymellon.com

CONTENTS

Contents 4

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Short selling - Market participants reflect on how Asian regulators responded to calls for a relaxation of short selling bans and the impact of these moves Beneficial owners – How regional/national trends, regulatory developments and innovation in the use of collateral have affected the use of securities lending by beneficial owners Repo – A review of key regional markets and how they are being used by participants as this segment of the securities finance industry continues to evolve ASIFMA – A look at the challenges and opportunities of intraday liquidity management and the work being done to promote industry diversity, artificial intelligence regulation and tokenised securities

23 ESG - In common with other regions, sustainable principles are having a growing impact on securities finance across APAC 32 BNP Paribas Securities Services explores the integration of securities lending and collateral management 36 J.P. Morgan leading the way on collateral optimisation and mobilisation in Australia 39 PASLA – Industry body is promoting a more open market for securities lending in China as well as the harmonisation of regional market standards 42 Country profiles – A round-up of the major developments in securities finance in Australia, Hong Kong, Japan and South Korea over the last 12 months

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EDITORIAL Managing editor Paul Golden paul@goldencomms.ie Derivatives editor Radi Khasawneh Tel: +44 (0) 20 7779 7210 radi.khasawneh@euromoneyplc.com Senior reporter, Securities Finance Ramla Soni Tel +44 (0) 20 7779 7246 ramla.soni@euromoneyplc.com Design and production Antony Parselle aparselledesign@me.com BUSINESS DEVELOPMENT Business development executive Jamie McKay Tel: +44 (0) 207 779 8248 jamie.mckay@globalinvestorgroup.com Sales manager Federico Mancini federico.mancini@euromoneyplc.com Head of sales, News & Insight Sunil Sharma Tel: +44 (0)20 7779 8556 sunil.sharma@totalderivatives.com Divisional director Jeff Davis Chairman Leslie Van de Walle Chief executive Andrew Rashbass Directors Jan Babiak, Colin Day, Imogen Joss, Wendy Pallot, Tim Pennington, Lorna Tilbian © Euromoney Institutional Investor PLC London 2022 SUBSCRIPTIONS UK hotline (UK/ROW) Tel: +44 (0)20 7779 8999 US hotline (Americas) Tel: +1 212 224 3570 hotline@globalinvestorgroup.com RENEWALS Tel: +44 (0)20 7779 8938 renewals@globalinvestorgroup.com CUSTOMER SERVICES Tel: +44 (0)20 7779 8610 customerservices@globalinvestorgroup.com GLOBAL INVESTOR 8 Bouverie Street, London, EC4Y 8AX, UK globalinvestorgroup.com Global Investor (USPS No 001-182) is a full service business website and e-news facility with supplementary printed magazines, published by Euromoney Institutional Investor PLC. ISSN 0951-3604 Published in June 2022

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Short bans continue to divide opinion Market participants reflect on how Asian regulators responded to calls for a relaxation of short selling bans – and how they have been impacted by disparities across different Asian markets.

Lending Association (PASLA). In its 2021 review of the regional securities lending market, the association noted that the short selling bans around the region that had impacted the growth of the market had been brought to an end – or at least relaxed – and said it was encouraging to see the industry moving on from that restrictive environment.

However, it also observed that these

In last year’s guide we reported that more than 12 months on from the outbreak of the Covid pandemic, many of the ‘temporary’ short selling bans imposed by Asian national regulators in early 2020 remained in place despite calls from trade associations and securities financiers to have them lifted.

Some of the strongest criticism of these bans came from the Pan-Asia Securities

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disruptions meant that many anticipated new developments had taken a back seat at least temporarily.

One interesting development that did emerge over the last 12 months was China’s decision to authorise insurers to take part in securities lending, potentially boosting shortselling activity. A report from Reuters in December noted that the China Banking and Insurance Regulatory Commission (CBIRC) had published rules allowing insurers to participate in securities lending.

The CBIRC stated that this would help insurers improve returns on their long term and sizable stock and bond holdings as well as improving market liquidity.

Chinese insurers hold trillions of yuan worth of bonds, stocks and securities funds.

In the Philippines there is a pending regulatory change to allow offshore collateral to be accepted and to recognise the industry standard Global Master Securities Lending Agreement (GMSLA). It also announced the intended launch of rules and regulations for short selling

China catalyst Elsewhere in Asia Pacific, China’s regulatory clampdown on a number of domestic sectors including technology, private education, gaming and most notably property were all catalysts for healthy short interest in Hong Kong and beyond.

Of the jurisdictions that announced bans, Malaysia announced in March 2020 that intraday short selling, regulated short selling and intraday short selling by proprietary day traders would be suspended temporarily.

The suspension for regulated short selling was lifted on 1 January 2021, but remained in place for intraday short selling until the end of last year.

The ban on short selling was not unique – South Korea implemented a similar ban in the aftermath of the 2008 global financial crisis – although it was extended in that country multiple times into 2021 and only partially lifted in May 2021 for the country’s largest stocks on the KOSPI 200 and KOSDAQ 150.

In March 2020 the Indonesia Stock Exchange (IDX) placed a temporary ban on

- Adnan Hussain, HSBC

short selling and stated that it would not be publishing a list of stocks eligible for short selling until further notice. Under normal circumstances local brokers are allowed to short sell with the IDX publishing the list of securities eligible for short selling and margin trading on the last trading day of each month.

From an asset class perspective, increasing demand to borrow ETFs was particularly prevalent in those that tracked emerging market indices (where traditional securities lending is not supported) or those tracking high yield corporate debt indices. This asset provided an efficient mechanism of capturing broad based short exposure, especially in periods of heightened market volatility.

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Key pipelines Key pipelines include mainland China and the Philippines, where the market continues to see positive updates to lending or short selling guidelines and regulators have taken significant steps to engage the market in efforts to enhance the guidelines and to promote increased activity.

“In the Philippines there is a pending regulatory change to allow offshore collateral to be accepted and to recognise the industry standard Global Master Securities Lending Agreement (GMSLA),” explains Adnan Hussain, global head of securities lending at HSBC. “It also announced the intended launch of rules and regulations for short selling.”

that short sell bans do little to stop the slide in stock prices, significantly increase costs of liquidity, and are detrimental for liquidity especially for stocks with small capitalisation and no listed options.

“We have also learned that they have a slow price discovery, do not achieve any certainty regarding reducing return volatility, and can have negative spillover effects in alternative OTC products/markets, especially for emerging markets,” he adds.

“At the start of the pandemic, the three APAC markets to ban short selling were South Korea, Malaysia, and Indonesia. With the massive quantitative easing and support that all central banks and governments enacted during 2020 and 2021, it is nearly impossible to say whether the bans in isolation served their purpose.”

Andrew McCardle, head of EquiLend Asia agrees that short selling bans in Asia were controversial as there was disagreement in the market about whether it would result in the stability which the regulators looked to secure with the decision. In fact, it was argued by market participants that it could bring greater volatility and even once the regulators were convinced, the bans were lifted at varied paces for a range of reasons.

“Those regions which implemented short selling bans find a significant portion of ownership stocks weighted to retail investors, a factor that regulators in the West do not worry about nearly as much,” he says. “Retail

Bans controversial In response to the question of whether these bans served their purpose, John Moran, head of securities finance business development at BNY Mellon says that based on everything we have seen and learned in the space, short selling bans rarely achieve the purpose that people think they should achieve.

“Bans are usually enacted only during extreme periods of market risk or volatility caused by extreme economic or geopolitical events,” he says. “By the very nature of the many factors involved, there is no way of empirically demonstrating the true effect that a short sell ban has on a security or index.” From past industry and independent research, Morgan says it is possible to observe

Bans are usually enacted only during extreme periods of market risk or volatility caused by extreme economic or geopolitical events. By the very nature of the many factors involved, there is no way of empirically demonstrating the true effect that a short sell ban has on a security or index John Moran, BNY Mellon

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At the start of the pandemic, the three APAC markets to ban short selling were South Korea, Malaysia, and Indonesia

removal of the short selling ban and because it did not lift the ban with limitations. Korea set limitations that only a small subset of shares may be shorted.”

McCardle observes that since there is rarely a single reason for imposing bans, it is difficult to tell if they achieved their purpose.

“Certainly, they demonstrated to retail investors that their concerns around market volatility were understood, offering reassurance there,” he adds. “As a measure for minimising market volatility, comparable markets without bans performed similarly, so for short selling bans as a safety lever in volatile times the impact is inconclusive.”

According to McCardle it is also difficult to say definitively whether markets where the ban was lifted early performed better than those where the regulator was slow to reintroduce short selling.

“I would hazard against using data from such a short period of time as a benchmark for success in supporting or undermining short selling bans,” he says. “Certainly, agent lenders or beneficial owners looking

investors in Asian markets can exceed 30% of the market, which can mean that market regulators feel compelled to protect those investors.”

In recent years the retail sector has had a negative view on short selling and as such, in some areas, while the bans were not appreciated by the institutional investors, the retail sectors of the market were more favourable.

Flow factors The disparate regulatory nature of Asia meant that while bans were put in place by some regulators, not all countries followed suit and therefore the focus of activity flowed according to where short selling was possible.

An example was the growth in trading in Taiwan once the short selling ban was lifted.

“Prior to the short selling bans, while a key market of the region, Taiwan was less significant from a revenue generating perspective by comparison to Korea,” explains McCardle. “However, it is now a larger revenue market due to the earlier

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Prior to the short selling bans, while a key market of the region, Taiwan was less significant from a revenue generating perspective by comparison to Korea. However, it is now a larger revenue market due to the earlier removal of the short selling ban and because it did not lift the ban with limitations Andrew McCardle, EquiLend Asia

Reviewing the operating conditions of the last few years, the combination of the global impact from the pandemic, geopolitical stressors and the introduction of new regulation, in addition to short selling bans, creates an impossible comparison point from which to assess impact.

It is also important to recognise the differing views around the intersection between short selling and securities lending and how these might impact how securities finance is viewed through an ESG lens suggests Simon Kellaway, Greater China and North Asia head of the financing & securities services team at Standard Chartered.

“On one hand, securities lending is important as it brings liquidity and price discovery to capital markets generally and enhanced returns to investors who lend,” he says. “On the other, securities lending can be intrinsically linked to short selling and can be perceived negatively by those who are less familiar with its broad benefits.”

In April it was reported that the Oman Capital Market Authority was preparing to authorise the use of short selling for the first time to attract new market makers and boost liquidity in the sultanate’s capital market.

Haitham bin Salim al Salmi, CEO of Muscat Stock Exchange was quoted in local media as saying that plans for the authorisation of short selling would be announced soon and that it would be enabled alongside the introduction of securities lending and borrowing.

at revenue would see better performance in markets where the ban was lifted sooner, as the lending volume and revenue will have returned sooner to those markets.”

Comparing Taiwan and Korea, for example, we see that the general performance of the benchmark indices for the two markets tracked roughly the same trend over the period of the ban. Bans were implemented in March 2020 and lifted in June 2022 and May 2021 respectively.

“For less established markets like Malaysia and Indonesia where short sell bans were implemented, it is harder again to assess the impact on performance,” adds McCardle. “As less established markets with generally less flow from a securities borrowing and lending perspective, the impact of the bans compared to those in more established markets in a time of crisis is difficult to discern.”

Performance factors The above observations underline the challenge of isolating the impact of short selling bans from other factors impacting market performance.

“Assessing the impact of one measure in market control is difficult at the best of times,” acknowledges McCardle. “While we can look at other similar markets in the region that did not implement a short selling ban and observe that they performed as well, better, or worse, we can only infer what that may have meant to other markets as the factors are all slightly different in normal times.”

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Feeling the benefits Paul Golden looks at how beneficial owners across Asia have used the securities lending market over the last 12 months with reference to notable regional/national trends, significant regulatory developments, and examples of innovation in the use of collateral.

Following the latest phase of Uncleared Margin Rules (UMR) with market participants required to post additional collateral under the ISDA Regulatory Initial Margin CSAs, organisations that fall within the threshold of the rules are required to have access to greater liquidity.

“We have found access to the securities lending markets to be a key driver in helping support the regulations,” notes Darren Crowther, general manager securities finance and collateral management at Broadridge.

In line with what we have seen in the EMEA and US regions, there has been an increase in the number of beneficial owners in Asia participating in lending programmes over the last 12 months. This is the result of a combination of institutions that had lent prior to the financial crisis and returned after a hiatus, and those that are lending for the first time.

Simon Lee, managing director, head of business development for the EMEA and APAC regions at eSecLending

Increased participation That is the view of Simon Lee, managing director, head of business development for the EMEA and APAC regions at eSecLending, who says this increased participation is expected to continue through 2022 and has been supported by a combination of factors including: • Continued downward pressure on fund management fees and consequential impact on profitability for investment managers • Further growth in the passive and ETF sector, funds for whom securities lending is often an integral strategic component

• The level of comfort investors have around securities lending seemingly rising every year we move further away from 2008, helped by the increase in regulation, education, and transparency in the industry As is the case elsewhere, Asian beneficial owners are looking at ways to optimise their lending programmes through their collateral schedules, explains Lee. “As borrowers are ever-more focused on the regulatory expense of doing business and how this translates into balance sheet usage and associated

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ing in lending programmes has been common in Asia and initially driven by looking at the collateral,” observes Andrew McCardle, head of EquiLend Asia.

When asked about significant regulatory developments he says the biggest regulatory impact recently was the lifting of the Korean short-selling ban, but only for a subset of securities in comparison to what was possible prior to the ban.

“This has meant that while Korea still offers revenue opportunities, it is nowhere near the levels pre-ban,” adds McCardle.

collateral costs, we see better outcomes for those lenders that can best meet these dynamics via a flexible approach to non-cash collateral.”

More recently this has played out in the expansion of equity collateral schedules to include ETF and ADR issues, which are proving to be important elements of the lenders’ toolbox as the market evolves.

Where the beneficial owner community in Asia has historically lagged its counterparts in the rest of the world is in the adoption of the third party/non-custody model, which has been commonplace elsewhere for over two decades. Whilst there have always been Asian beneficial owners that have lent on a third party basis, they have been the exception.

Key factors According to John Moran, head of securities finance business development at BNY Mellon, the way in which beneficial owners in Asia have used the securities lending market over the past 12 months really comes down to two key factors.

The first factor is their level of sophistication, and the second is their risk appetite (often correlated to their entity type).

“Lending revenue could be their main stream of investment income and also an area where they are willing to expand the lending programme into new collateral types or parameters (for example, Stock Connect) to cope with the market development and needs,” he explains.

A very few conservative beneficial owners see lending revenue as only an additional income, so they will strictly follow their internal requirement, which provides guidelines that do not expand regardless of how the market

Third party movement “We noted a shift in this regard last year with a notable increase in the number of conversations we were having with beneficial owners exploring the third party agency model,” says Lee. “We expect this to grow significantly over the coming years as we see increasing commonality in all aspects of the securities lending marketplace across the regions.”

As they have done for many years, a large number of beneficial owners continue to use the Asian markets as an area to gain additional returns by allowing their holdings to be lent out.

“In common with the rest of the world, the trend for beneficial owners seeking to best to meet their ESG desires while still participat-

As borrowers are ever-more focused on the regulatory expense of doing business and how this translates into balance sheet usage and associated collateral costs, we see better outcomes for those lenders that can best meet these dynamics via a flexible approach to non-cash collateral Simon Lee, eSecLending

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moves. What Moran is seeing, however, is the need for accelerated reporting, both in terms of timing and delivery routes.

“By using API technology, real time client reporting is not only achievable, but allows for easier customisation,” he says. “Real time reporting allows beneficial owners to instantly see positions, including on-loan and collateral. This, in turn, provides optionality for further efficiency in financing their longs and analysing their collateral for different risk scenarios, both internal and external.”

Adnan Hussain is global head of securities lending at HSBC. He refers to a growing trend in lending participation across Asia resulting from key drivers including new lenders entering the securities lending space in pursuit of portfolio efficiency management and performance objectives, as well as new inflows into the lending pool such as ETFs that are already in lending programmes.

“Such was the case when we partnered with an ETF asset manager to launch the first-ofits-kind securities lending programme for two SGX-listed ETFs in Singapore last year,” he observes.

“The increasing trend of considering securities lending as part of an initial fund launch is also a positive sign of growing acceptability and encouraging for continued growth in the region,” adds Hussain. “An example was the first Hang Seng Tech Index ETF in the market that adopted securities lending on day one of its launch.”

In common with the rest of the world, the trend for beneficial owners seeking to best to meet their ESG desires while still participating in lending programmes has been common in Asia and initially driven by looking at the collateral Andrew McCardle, head of EquiLend Asia

new administrative measures for securities borrowing and lending in the China interbank bond market, which are expected to come into effect during the second half of 2022,” explains Hussain. “These changes are eagerly anticipated by all participants, given the rising allocations towards this asset class.”

In Indonesia, regulators have been focused on not just the opening up of the equity market to foreign investors, but also potentially the fixed income market. The latter is likely to initially focus on opportunities for domestic investors, but may extend to foreign investors over time.

Exchanges changes When asked to outline notable regional/national trends, he says that although the pace of this development has been slower than expected, the industry is expecting more exchanges in Asia to start implementing changes to rules in order to facilitate securities borrowing and lending activities.

“The People’s Bank of China has released

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transparency in the marketplace.”

Collateral mobility and optimisation remain a key focus in APAC where there has been a broadening of collateral mandates, meaning many securities financing participants are now looking to pledge collateral further down the credit curve to facilitate a higher internal benefit.

According to Hussain, collateral providers have turned to instruments including American depositary receipts, exchange traded funds, and investment grade and sub-investment grade credit, which have seen both high volume and a depth of issuance. From an APAC perspective, this extends to foreign investor identification markets such as South Korea, Taiwan and Stock Connect.

“The pledge structure (Pledge GMSLA) is also generating strong interest,” he continues.

“As spreads narrow on historically higher fee lending markets, collateral costs are becoming increasingly important. Local regulations for some of the foreign investor ID markets present very specific regional opportunities - particularly in APAC - enabling wider use of non-cash collateral globally by beneficial owners.”

Lenders can also access demand and create increased revenue opportunities if they are able to adapt to the innovative use of collateral. The centralisation of balance sheet management at a borrower level, including collateral optimisation, has encouraged synergies across regions, providing potential upside to beneficial owners across their global portfolios.

Hussain notes that certain central counterparty or CCP lending structures can only be used by some types of beneficial owners with regard to handling collateral and cost efficiencies. India is an example of a country where only a CCP model currently exists for facilitating securities lending, which means securities lending activities can be carried out by a very specific set of onshore participants.

“Other live markets in Asia - including Singapore and Malaysia - generally have the CCP model co-existing alongside the widely utilised bilateral model, which provides flexibility for market participants to utilise a model appropriate to their needs,” he adds.

In terms of regulatory developments, transparency and regulatory oversight remain the key themes of the securities lending industry while regulators are now more open to securities borrowing and lending activities.

New initiatives With the go live of the Central Securities Depositories Regulation (CSDR) in February 2022 and the imminent SEC Rule 10c-1 reporting in the US, market participants have redirected resources towards new regulatory initiatives.

“This could also influence some of the new markets to consider introducing transparency reporting requirements and steps to enhance operational efficiency across market participants,” suggests Hussain. “Increased regulation can bring positives too. The Securities Financing Transactions Regulation (SFTR) and data sharing have led to more

Real time reporting allows beneficial owners to instantly see positions, including on-loan and collateral. This, in turn, provides optionality for further efficiency in financing their longs and analysing their collateral for different risk scenarios, both internal and external John Moran, BNY Mellon

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Diverse markets offer contrasting opportunities

Global Investor looks at which Asian markets are most interesting at the moment and what market participants are doing to realise those opportunities. billion with an average deal size of about $63 million. Repos were on average larger than reverse repos ($94 million versus $49 million).

The Japan survey sample was a net cash lender and net securities borrower - 69% of outstanding value was in reverse repos, down sharply from 95% in 2020 - except in Australian dollar cash and collateral, repos against JGBs, gensaki (repos configured as transactions consisting of a bond purchase with a promise to conduct a repurchase in the future) and repos with only one day remaining to maturity.

A survey of the Asia-Pacific repo market published by the Asia Securities Industry and Financial Markets Association (ASIFMA) and the International Capital Market Association (ICMA) in December 2021 found that the regional repo market had declined in value from 2020.

The survey - which divides the market into Japan and the rest of the APAC region – found that Japan had an outstanding value of repos and reverse repos of $202.9 billion, compared with $215.7 billion in 2020.

Average daily turnover was almost $33

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transacted electronically. As in the Japan survey, most of the business reported in the non-Japan APAC survey had been transacted directly between parties.

The survey identified a quarter of outstanding value as having been negotiated between counterparties in the same country (down from 38% in 2020), three quarters negotiated cross-border and just 1% negotiated anonymously.

The non-Japan APAC survey reported $260.1 billion in outstanding value and an average daily turnover of $29 billion, compared with $216.7 billion and almost $37 billion per day in 2020. Average deal size was $56 million, compared with $76 million in the last survey.

The non-Japan APAC survey sample switched in 2021 to being a net cash lender and therefore a net securities borrower - 58% of outstanding value was in reverse repo, compared with 43% in the 2020 survey.

Europe dominates Of the cross-border business, 27% was with counterparties in other APAC countries, 31% with European counterparties (up from one fifth in 2020) and 17% with counterparties in other regions, including the US. The trading analysis differs from the geographical analysis in that it shows a lower share for counterparties in Europe. This is likely to be due to differences between where a trade is executed and where it is booked and managed.

The survey sample switched to net cash lending to counterparties in the same country (62% of the outstanding value of domestic trades was in reverse repos, compared with 27% in 2020) and in cross-border transactions with Europe where reverse repos were 60%, up from 41%.

There was also a switch to net cash borrowing in cross-border transactions with ‘other regions’. Cross-border business with APAC counterparties continued to be net cash lending, while CCP-cleared and electronically-traded transactions continued to be overwhelmingly net cash borrowing.

There was also a switch to net cash lending through directly-negotiated repos (58% was in reverse repos, the inverse of 2020) and the survey sample remained a net cash lender via voice-brokers with just under two thirds in reverse repos and a net cash borrower through electronic trading.

Cross-border business The major share of the outstanding business reported in the non-Japan APAC survey was cross-border with counterparties in the APAC region, and European counterparties whose share jumped from the previous year at the expense of counterparties in Australia, Hong Kong, other APAC countries, the US and other regions.

The survey sample was a net cash borrower from China and the US. It switched to being a net cash lender to Australia, Hong Kong and Europe.

Parties in the Japan survey transacted 86% of their repos and reverse repos directly with their counterparties and the remainder via voice-brokers. Electronic trading remained negligible but almost 18% of outstanding value had been CCP-cleared, although this was down from the 30% reported in the previous year.

The survey sample continued to be a net cash lender to direct counterparties (although only three quarters of the outstanding value of direct transactions was in reverse repo, compared with 94% in 2020) and net cash borrowers in voice-brokered repo - 70% of the outstanding value of voice-brokered transactions were in repo, compared with zero the previous year.

A very small amount of reverse repo was

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Japanese shift A similar proportion of the outstanding value reported in the Japan survey was in gentan (where cash is used as collateral to borrow securities). This high share is surprising given the general shift in the Japanese market since 2018 towards the updated form of new gensaki, which accounted for 30% of the latest survey with international style repurchase transactions (typically under the GMRA) accounting for only 8%.

Gentan provided net cash lending, whereas gensaki switched from net cash lending to net cash borrowing. Repurchase transactions were primarily for net cash lending and once again, no tri-party repos were reported despite this type of transaction accounting for a significant share of the general collateral repo market in Japan in the form of subsequent collateral allocation repo.

The authors of the report suggest that this discrepancy probably reflects the international focus of the business of the survey sample, which is likely to be securities rather than cash driven and therefore less likely to use general collateral and tri-party repos.

The primary type of repo reported in the non-Japan APAC survey continued to be repurchase transactions. Just over 10% of the outstanding value of the survey was triparty repo (down from 20% in 2020) and net cash lending and securities borrowing was focused through GMRA-style repurchase transactions and net cash borrowing through the other types of repo.

All the repo reported in the Japan survey continued to be fixed rate. The share of fixed rate repos in the non-Japan APAC survey jumped to 97% from four fifths in 2020, with floating rate dropping to 3% from 14%.

The overwhelming share of the collateral reported in the Japan survey was again in domestic fixed-income securities, almost

The growth of subsequent collateral allocation repos has grown to account for a sizable proportion of Gensaki repo market.

However, there is lots of interest in China despite other less popular foreign policy decisions as it continues to liberalise its capital markets to attract and increase foreign money flows Darren Crowther, Broadridge

entirely JGBs. However, this is much lower than in the Bank of Japan statistics for the domestic market where JGBs account for almost 98%. A very small amount of Japanese non-government securities were repoed by the survey sample.

Network relationships A network analysis of the JGB repo market published by Bank of Japan’s financial markets department at the end of last year concluded that highly important financial institutions in

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largest pool of collateral was in US treasuries, eurozone government securities, and Australian securities. The share of issues by international financial institutions was unchanged, as were ‘other APAC’ securities.

US non-government securities increased to 10% from 3% and eurobonds to 6% from 2% while equity dropped to zero. The overall share of government securities was 31%.

Overall, the survey sample became a net borrower of government securities (62% were reverse repos, compared with half in 2020) and was a net lender only of securities issued in non-eurozone Europe and Japan and by non-government borrowers in the US. In 2020, the survey sample was a net borrower only of securities issued in Hong Kong or by international financial institutions and eurobonds.

The vast majority (90%) of the legal agreements reported in the Japan survey were GMRAs, reflecting the cross-border nature of the survey sample’s business. However, this statistic is at odds with the share of gentan repos, which are documented under a local master agreement.

In the non-Japan APAC survey, the bulk of legal agreements continue to be GMRAs and there was little cross-border use of other agreements. Around 6% were local master agreements including the South Korean gretai.

Darren Crowther, general manager securities finance and collateral management at Broadridge notes that the Japanese yen continues to be the main APAC currency traded and despite increased interest rate volatility, the classic arbitrage between JGB and US treasury repo continues.

“The growth of subsequent collateral allocation repos has grown to account for a sizable proportion of Gensaki repo market,” he says. “However, there is lots of interest in China despite other less popular foreign

the network act as intermediaries and that continuous transaction relationships were established within groups formed around them.

According to the report authors, these characteristics suggest that the JGB repo market is efficient but has a network structure in which shocks to a few financial institutions can easily spread throughout the entire market.

They acknowledge that in order to assess the network structure of the market, it is important to consider whether the market strikes a balance between the aspects that impart transaction efficiency and the aspects that impart robustness and add that it would be beneficial to continuously monitor the functioning of this market in Japan while keeping in mind these characteristics of the network structure.

Bank of Japan hopes that the results of this analysis will serve as a reference for market participants when considering the stability and efficiency of transactions through further transparency of the market.

Future research topics include an analysis of the background factors of the network structure and a more in-depth analysis of the behaviour of the network structure in response to market shocks as more timeseries data is accumulated.

The only other significant source of collateral in the ASIFMA/ICMA Japan survey was US treasuries. The survey sample was a net borrower of JGBs, US securities, and eurozone government securities.

Collateral changes In the non-Japan APAC survey there were some significant changes in collateral composition. The share of APAC securities dropped to two fifths from 62% in 2020, reflecting a fall in the share of Japanese fixed income securities, mainly JGBs. The

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policy decisions as it continues to liberalise its capital markets to attract and increase foreign money flows. Limited solutions for hedging is still an obstacle for hedge funds.”

Treasury demand Depending on the type of beneficial owners in BNY Mellon’s lending programme, US treasuries are still the most sought after for repo activities given their liquidity and HQLA status explains John Moran, head of securities finance business development.

“In Asian markets, JGBs and Australian government bonds are being used the most for repo and/or transformation trade purposes,” he says. “From a collateral perspective, although the start of the year has seen outflows there are several interesting markets in which clients are engaged.”

In China, there continues to be significant interest in being able to finance these assets, although solutions only really exist offshore through Stock & Bond Connect. However, a significant level of excitement has been generated by the new announcement on future netting law, particularly in how this may change how regulation may govern use of collateral, expanding its use to more closely align with international best practices.

“Although there are still several changes required, this positive step is a continuation of the journey in expanding to international investors in this market,” says Moran.

John Moran, BNY Mellon

Australian developments In APAC, Indonesia, Philippines, Hong Kong and Australia are key markets for repo.

Australia is a well-developed and highly rated market, attracting a wide range of investors attracted by the AAA rating as well as the depth and liquidity of the local market.

“With further projections of rate hikes for the year, we are seeing stronger demand in repo activities in Australia,” observes Jansen Chua,

head of securities finance APAC State Street.

“Other regional markets such as Indonesia and Philippines have been attractive to hedge funds as they offer a relatively liquid market and enhanced yields, with resultant interest in issues from these markets from a refinancing perspective.”

Moran notes that there also continues to be demand across both Korea (Korean treasury

In Asian markets, JGBs and Australian government bonds are being used the most for repo and/or transformation trade purposes. From a collateral perspective, although the start of the year has seen outflows there are several interesting markets in which clients are engaged

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REPO

the predominant source of liquidity, investors have been engaging and exploring liquidity pools sourced from sponsored facilities through a central counterparty - such as the fixed income clearing corporation, and other non-bank sources of liquidity such as peerto-peer networks.”

He believes these alternative sources of liquidity will continue to grow in size and relevance in the region.

When asked whether there have been any notable regulatory changes over the last 12 months affecting the repo market, Chua refers to Australia bringing in changes to repo instructions in November last year which created some operational challenges across the market and an increase in repo fails.

“As volatility hit in the first quarter of this year these challenges were most acute amongst participants outside of the interbank market who had to adapt to new ways of instructing repos and repricing,” he says.

“In China, the most important change announced recently was in relation to NAFMII following the approval of the Futures and Derivatives Law,” concludes Chua. “Concerns around the linkage of filing of master agreements with regulatory authorities were addressed, which should give repo participants greater comfort in executing their contracts. This law is set to be effective from 1 August 2022.”

bonds/equities) and Taiwan (equities) from clients interested in financing these assets.

Although scalable solutions now exist on pledge for Korean equities, there are still some difficulties for agent lenders in being able to receive these for the underlying lenders.

“Both Korean treasury bonds and Taiwanese equities have several limitations which are limiting their wider use as collateral,” he explains. “Conversations with regulators continue and despite significant market advocacy, progress is slow. With an abundance of liquidity being made available within the global financial system - combined with record low interest rates - secured funding has become more pivotal upon the collateral type in terms of risk/haircut and structure (platform/legals), especially as long portfolios become more diverse in the drive for yield.”

Capital driver Chua observes that bank capital requirements remain the main drivers of changes in funding models in the post GFC-era. These regulatory changes place constraints and limit on bank balance sheets, including in the context of bilateral uncleared repo.

“Against that backdrop, we are seeing growing awareness of different secured financing options for Asian customers,” he says. “While bilateral uncleared repo remains

With further projections of rate hikes for the year, we are seeing stronger demand in repo activities in Australia. Other regional markets such as Indonesia and Philippines have been attractive to hedge funds as they offer a relatively liquid market and enhanced yields, with resultant interest in issues from these markets from a refinancing perspective Jansen Chua, State Street

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ASIFMA

Promoting market development

The Asia Securities Industry & Financial Markets Association outlines the challenges and opportunities of intraday liquidity management and its work in the areas of industry diversity, AI regulation, and tokenised securities.

As most central banks are ending their quantitative easing programs and tightening their monetary policies, Philippe Dirckx, managing director and head of fixed income at the Asia Securities Industry & Financial Markets Association (ASIFMA) observes that active intraday liquidity management will require operational efficiency to reduce cost effectively and structurally.

“The financial landscape is rapidly changing

Following the 2007-08 financial crisis, regulators mandated banks to report and monitor their liquidity positions crystallised under the Basel III pillar 2 and BCBS 248 principles. Regulatory development at the national level has focused on creating a framework that will require banks to effectively manage their liquidity and assess the associated risks, across asset classes, entities, and jurisdictions, as close as possible to real time.

Various regulatory agencies across jurisdictions in APAC have begun introducing guidelines relating to the use of artificial intelligence and that because of these individual approaches, there is a risk of regulatory fragmentation and duplication of well-established regulation and standards 19

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forcing financial institutions to upgrade their technologies and back-office applications.

“With the above evolution and challenges in mind, the development of cost-efficient cloud computing allows financial institutions to consolidate data historically siloed in various systems and locations,” says Dirckx.

“Banks will have to leverage new technologies such as artificial intelligence or machine learning to move from historical databased modelling to forecasting/predictive modelling and develop stress testing tools to enhance their risk management framework and capability to identify the credit crunch points.”

The managing director and head of fixed income at ASIFMA acknowledges that banks are facing a challenging environment, but describes this as a unique opportunity to explore new technologies and operating models that can help address these challenges and develop tools to manage and monetise their liquidity risk proactively and efficiently.

One of the priority areas for ASIFMA is enabling an efficient regulatory environment for artificial intelligence.

The association notes that various regulatory agencies across jurisdictions in APAC have begun introducing guidelines relating to the use of artificial intelligence and that because of these individual approaches, there is a risk of regulatory fragmentation and duplication of well-established regulation and standards that the financial industry is already subject to, which might stifle innovation and increase regulatory compliance risks.

Philippe Dirckx, managing director and head of fixed income at ASIFMA and developing with instant payments and distributed ledger technology becoming ubiquitous,” he says.

“Correspondent banking is going through its most significant transformation with cross-border transfers done in a matter of minutes instead of days.

Central banks are migrating towards 24/7 and securities markets are shortening their settlement cycles from T+2 to T+1.”

Prescriptive rules The concern is that individual approaches among regulators and overly prescriptive rules could cause any rules or guidance to fall out of step with rapid technological developments undermining their

Liquidity fragmentation This could exacerbate the existing fragmentation of the liquidity pools, technology stacks and operational processes,

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ASIFMA

Regulatory principles To that end, the association has proposed a set of regulatory principles which it believes will form the basis for an efficient regulatory environment whilst at the same time supporting customer and investor protection, market integrity and financial and systemic stability.

effectiveness - while also unnecessarily raising compliance costs and potentially hampering innovation.

Financial services is a highly regulated sector and ASIFMA found in its research that existing regulations largely address and mitigate the key risks which might be caused or increased by the use of artificial intelligence.

These include rules in respect of outsourcing, technology risk management, conduct, cybersecurity, duty to clients, internal governance, and model risk management, in addition to sector-agnostic requirements around data privacy and data protection and established internal risk management and governance frameworks.

The research studied how existing regulations and guidelines govern risks relevant to the use of artificial intelligence and concluded that existing rules and guidelines largely address artificial intelligence-related risks.

ASIFMA has recommended that regulators take a principles and risk-based approach, giving financial institutions flexibility in how best to operationalise the principles in relation to their artificial intelligence adoption, depending on the financial institution’s setup, framework, and the materiality of the use case.

It has encouraged regulators to support the global development of artificial intelligence within capital markets and avoid fragmentation and overregulation, which could slow down its adoption and development.

Specifically, it recommends that regulators should: • Principle 1 - support public-private collaboration • Principle 2 - allow financial institutions to take a risk-based approach to artificial intelligence, taking materiality of the use case and stakeholders into account • Principle 3 - take a technology-agnostic approach to regulation • Principle 4 - leverage existing regulatory frameworks • Principle 5 - strive for regional and international harmonisation • Principle 6 - promote and facilitate crossborder data flow • Principle 7 - engage with the industry on areas that need further discussion

Another issue that ASIFMA has been focusing on is promoting diversity within the industry. The board and diversity working group have been discussing ways to increase diversity in the industry and engaged

ASIFMA members have adopted a range of diversity and inclusion strategies and integrated them into their talent strategy, and sometimes even their broader business strategy. Inclusion is now part of the corporate value system and that diversity empowers inclusion 21

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numerous positive developments in the tokenised securities space since the last report, with market participants coming a long way in understanding the advantages of tokenised securities.

leadership advisory firm Egon Zehnder to deliver a diversity and inclusion baseline diagnostic for its members across the region.

The report showed a range of diversity and inclusion strategies adopted by ASIFMA members who have all integrated it in their talent strategy, and sometimes even in their broader business strategy. It found that inclusion is now part of the corporate value system and that diversity empowers inclusion.

Tokenisation benefits There have been successful proof of concepts within firms as well as on a multiparty basis and regulators have started to acknowledge the benefits of tokenisation with several jurisdictions accommodating sandboxes to support practical experimentation, and reviewing their frameworks and issuing new licenses.

Due to the trend towards digitisation of financial assets and the opportunities of tokenisation on the global financial markets, traditional financial institutions have entered the digital assets space.

But despite all these positive developments, there are still challenges that need to be addressed. Many of these are in the regulatory space, ranging from a lack of interjurisdictional harmonisation and taxonomy to historical paper-based requirements and processes, to the exclusion of retail investors.

ASIFMA recommends that regulators continue to work together and with the industry to provide harmonised guidance on the classification and recognition of tokenised securities, continue to explore regulatory sandboxes for full value chain experimentation, and continue to remove archaic paper-based requirements that undermine the full adoption of tokenised securities across the entire lifecycle.

From an ecosystem perspective, further education, collaboration and experimentation are needed to address the talent and liquidity gaps and reduce friction in a fragmented ecosystem. The association’s view is that this might enable large marquee transactions which could encourage faster adoption.

Diversity planning Having a good diversity and inclusion strategy is perceived to be critical to win the ‘war for the best talent’ and its importance is further enhanced by the benefits it brings to meeting customer expectations, enhancing external reputation and supporting client service.

While such activities were previously limited to markets where the topic gained higher place in the social agenda (such as the US), organisations now appreciate that the same value systems should apply to all markets.

According to the report authors, even the most advanced members see significant additional potential in diversity and inclusion investments and that current reality is still far from self-imposed targets and pledges.

Half of the respondents are making only early steps or are yet to take the first step with plans to support an ethnically diverse, disabled or older workforce.

ASIFMA has also been exploring developments in the tokenised securities space and last year updated its 2019 paper on this topic, which was designed to be a roadmap for market participants and regulators.

The update focused on participants’ specific platforms and product offerings, challenges and future plans, and general questions with regards to the current market and the minimum viable ecosystem.

According to ASIFMA there have been

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ESG

An evolving environment As environmental, social and governance (ESG) continues to top the agenda for many firms, we look at how this has impacted the securities finance industry during 2022. the right balance between responsible ESG voting practices and maximising securities lending revenue.

“We are helping clients to create a more efficient share recall process around proxy voting, which enables firms to gain the intelligence they need to make informed decisions around shares on loan and to optimise the recalls process,” he says.

ESG has been a hot topic within the securities finance industry for some time, with various initiatives introduced to ensure firms are meeting their clients’ expectations for sustainable and transparent trading.

As Darren Crowther, general manager securities finance and collateral management at Broadridge puts it, right across the industry participants are striving to find

The ability to consider ESG impact on trading decisions has now reached a point of clarity and firms should plan to implement this as part of their roadmap. This will provide them with the ability to clearly identify ESG collateral availability Darren Crowther, Broadridge

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ESG

programmes can be tailored to a highly customised set of parameters,” says Lee. This functionality has become increasingly applicable in an ESG context, with each client being able to structure their programmes to meet their ESG criteria without hindrance. An example of this relates to non-cash collateral where each client maintains their own tailored collateral schedules, with individual screening for non-compliant securities which can be dynamically adjusted with minimal notice.

All of this is made possible thanks to holding each client’s collateral in fully segregated accounts, held in their name.

“Concerning proxy voting, as we noted previously the topic has long been a key component of how we support our clients’ ESG requirements,” says Lee. “A decade ago we launched ProxyValue in partnership with Institutional Shareholder Services (ISS).

This product applies securities lending performance information to proxy voting management to provide a customised report at a transaction level to help institutional investors, boards and auditors ensure proxy voting fiduciary duties are met despite participation in a lending programme.”

Collateral availability has become something tangible that firms are implementing into collateral calculations on trades. “The ability to consider ESG impact on trading decisions has now reached a point of clarity and firms should plan to implement this as part of their roadmap,” adds Crowther. “This will provide them with the ability to clearly identify ESG collateral availability.”

Simon Lee, managing director, head of business development for the EMEA and APAC regions at eSecLending explains that his company’s role as an agent lender is to support its client requirements in the ESG space, which increasingly looks to address criteria pertaining to the collateral it holds on their behalf and the counterparties it lends to, in addition to the more familiar topic of proxy voting.

Standardised offerings Given that every beneficial owner will view the subject through their own unique corporate lens, the challenge for the industry is to provide client-centric solutions that can be accommodated within the confines of agent lending programmes that by their nature have been designed to standardise their service offering as much as possible.

“As a third party agent, all our client lending programmes are managed on a fully segregated basis, which historically has provided clients with a significant degree of control over the extent to which their

Changing landscape As the ESG landscape continues to evolve in the securities lending space and proxy voting remains at the fore, eSecLending has further developed this product - which

As a third party agent, all our client lending programmes are managed on a fully segregated basis, which historically has provided clients with a significant degree of control over the extent to which their programmes can be tailored to a highly customised set of parameters Simon Lee, eSecLending

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ESG

now incorporates ESG metrics to each upcoming meeting, providing clients with additional data points to help them meet their requirements.

Lee notes that industry associations are also working hard to provide best practice direction to allow beneficial owners to manage their ESG requirements in harmony with their securities lending programmes.

“The Pan Asia Securities Lending Association led the way on this with the Global Framework for ESG and Securities Lending, which it partnered to produce with the Risk Management Association and was endorsed by the International Securities Lending Association,” he adds. “These associations have formed the Global Alliance of Securities Lending Associations, with ESG being one of the key areas in which they will seek to promote global best practice.”

Supporting clients managing risk, liquidity and ESG criteria in securities finance and collateral management is a key objective for Clearstream notes the firm’s vice president collateral management, Marc Poinsignon.

“Governance - the ‘G’ in ESG – has taken centre stage with a particular focus on investor stewardship and transparency,” he says. “This extends to securities finance and collateral management where leading industry standards and best practices have developed over time. These are at the heart of our services and continue to be monitored closely.”

Screening options Enabling ESG collateral screening is important, whether it is from a risk mitigation angle or for an investor to comply with their ESG policies. Clearstream already offers solutions to clients to manage collateral inclusion and exclusions to meet their ESG criteria and is working closely with ESG metrics experts to further enrich the criteria

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Governance has taken centre stage with a particular focus on investor stewardship and transparency. This extends to securities finance and collateral management where leading industry standards and best practices have developed over time Marc Poinsignon, Clearstream

available and facilitate the whole process for agent-lenders, investors, and borrowers.

“Additionally, we want to play our role in supporting liquidity in growing ESG bond segments with the successful launch last year of ESG bond identifiers that include green, social, sustainability and sustainability-linked bonds,” adds Poinsignon.

These identifiers leverage international standards, principles and guidelines that are available in the market and can be used alongside any liquidity and risk criteria

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ESG

“We are looking to support our clients in navigating this transition with robust methodologies whilst keeping a flexible approach,” he says.

State Street believes that a well-managed securities lending programme can be a valuable portfolio management tool and enable funds to receive an additional source of income that can add incremental riskadjusted returns to a fund’s overall investment return objective.

“Some of the key ESG elements that are relevant to beneficial owners include improved transparency in the lending chain, determining whether to recall securities to exercise ownership rights such as voting, and managing ESG risks associated with collateral reinvestments,” explains Jia Xinting, ESG investment strategist APAC at State Street.

Some of the key ESG elements that are relevant to beneficial owners include improved transparency in the lending chain, determining whether to recall securities to exercise ownership rights such as voting, and managing ESG risks associated with collateral reinvestments Jia Xinting, State Street

already available in the firm’s programme to support ESG bond securities finance trades.

Poinsignon observes that ultimately, the transition in capital markets to more sustainable finance may require a phased approach with achievable, scalable and standardised parameters as well as different shades of transitional efforts in different regions and economies.

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Recall decisions The decision on whether to recall a security for voting will usually depend on whether a particular vote would have a material impact on the fund, and whether the benefit of voting would outweigh the forgoing of lending income.

“To answer these questions, sometimes it requires the beneficiary owners or lenders to form judgements about events or outcomes that might be difficult to quantify,” accepts Xinting. “It requires expertise and extensive experience in order to make such a call.”

Another aspect to consider is managing ESG risks associated with collateral reinvestments.

To support beneficiary owners and to ensure ESG standards are met in their collateral reinvestments, in 2021 the agency lending team of State Street Global Markets partnered with State Street Global Advisors to provide securities lending clients with a commingled cash collateral reinvestment strategy that follows short term investment guidelines

ESG

while considering R-factor - a proprietary ESG scoring system as a component in making its investment decisions to the extent consistent with applicable law.

Having started out very broadly, the industry has now narrowed the focus of its ESG lens on a few key areas – namely voting, collateral and transparency suggests Dimitri Orlando, head of EquiLend data & analytics EMEA & APAC. “Arguably, the most obvious impact of ESG on securities lending is recalling shares for voting purposes,” he says. “ESG-friendly lending programmes make it easy for beneficial owners to recall shares to vote on key topics at AGMs.” Collateral questions On collateral, the discussion has centred on the ability of the collateral received for a loan (and for cash collateral, the underlying investments) to meet the beneficial owner’s ESG parameters.

In response to a clear industry need for greater transparency and higher quality ESG evaluation options - particularly in securities finance - EquiLend has launched an environmental, social and governance data analysis and validation service for securities finance market participants.

“This service enables firms to submit ESGrelated data to our specialist data analytics team, who will then perform an independent analysis and validation,” explains Orlando.

Knowing that determining the ideal mix of ESG options is essential for any successful securities lending programme, BNY Mellon offers clients an ESG-compatible securities lending programme across several key parameters.

“We know that ESG will continue to be an important topic for Asian clients, and we will continue to develop our ESG offering as the current fragmented and early evolutionary

Arguably, the most obvious impact of ESG on securities lending is recalling shares for voting purposes. ESG-friendly lending programmes make it easy for beneficial owners to recall shares to vote on key topics at AGMs Dimitri Orlando, EquiLend

ESG landscape evolves,” says John Moran, head of securities finance business development at BNY Mellon.

He explains that the bank has several ESG subject matter experts who sit on the boards of leading industry associations. In addition, it continues to review ways to optimise a securities lending program that meets clients’ requirements.

“Recognising that transparency is key, we give clients increased visibility through

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Securities Finance Asia Pacific Guide 2022

ESG

our ESG collateral dashboard with marketleading ESG data from MSCI ESG Research,” adds Moran. “In our roadmap, we will look to provide greater transparency and enhanced information to allow clients to generate revenue while strategically applying their ESG principles. Interestingly, we have seen an Asian sovereign wealth fund looking to revisit securities lending after previously suspending part of its programme due to ESG concerns.”

According to Simon Kellaway, Greater China and North Asia head of the financing & securities services team at Standard Chartered, ESG is not always front and centre of the securities financing conversation in Asia.

Growing focus However, he notes that on the investor front it has grown as a focus area and as an increasing priority in Asia over the last 12 months as the trend for ESG investing has swept from west to east. This will naturally impact the securities finance industry as investors build sustainability ambitions and ESG KPIs into their overall asset allocation and investment strategies.

“This focus on ESG can be seen in the changing regulatory landscape across the region,” says Kellaway. “For example, China has made some strong moves to drive its ESG agenda, particularly focusing on

the transparency of data and the ability to recognise ownership throughout the transaction chain.”

In June 2021, the China Security Regulatory Commission (CSRC) revised format standards for annual reports and semi-annual reports of listed companies, which separated relevant provisions reporting on environmental and social responsibility to make them more easily identifiable.

“We are seeing an expansion in the number of regulators that mandate or give guidance to ESG related reporting for financial institutions,” adds Kellaway. “For example, Singapore is expected to mandate disclosure based on the Task Force of Climate-Related Financial Disclosures recommendations from 2023 for some industries and all issuers will be required to provide climate reporting on a ‘comply or explain’ basis and set a board diversity policy from end of 2022.”

Elsewhere in the region the central bank of Malaysia has identified climate risk among its top five priorities for its work to 2026 with plans for mandatory climate related disclosures, a climate stress test and a pledge to consider to factor capital requirements into climate risks.

These markets are home to some of the largest and most complex lending clients, whose programmes can be expected to develop in line with the growing ESG trends.

With further projections of rate hikes for the year, we are seeing stronger demand in repo activities in Australia. Other regional markets such as Indonesia and Philippines have been attractive to hedge funds as they offer a relatively liquid market and enhanced yields, with resultant interest in issues from these markets from a refinancing perspective Jansen Chua, State Street

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ESG

Data dependence Kellaway notes that while the issues of transparency and consistent data are very relevant in the securities finance industry, greater focus will be dependent on how much data becomes available and how standardised it can become.

“Examples of efforts to knowledge share and help market participants navigate the complexity of the different standards can be seen throughout the industry,” he says. One such example is where the ASEAN exchanges environmental, social and governance working group published a comparable table of sustainability reporting regimes to help investors understand the different reporting requirements across the region.

On the topic of initiatives market participants have implemented to address client demands for transparency and access to data, Kellaway observes that ensuring beneficial owners who lend out their securities can meet their ESG obligations is often going to be a key driver of the relationship between that beneficial owner and the securities lending agent.

“The securities lending agent must have the ability to deal with this in a flexible and transparent way that also enables risk mitigation,” he says. “The balance that clients look for is the ability for a provider to offer a well-executed lending programme that can also incorporate a client’s - often bespoke ESG policies. Transparency and flexibility are key, as well as good communication between the beneficial owner and the agent lender.”

This is something that is much easier to set up in an individualised, tailored programme than a pooled arrangement with other beneficial owners. The tailored, auction driven programmes Standard Chartered sees in the market now naturally combine high returns with low risk, but also facilitate a growing client demand for transparency and customisation - where it is easier to track

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The focus on ESG can be seen in the changing regulatory landscape across the region. For example, China has made some strong moves to drive its ESG agenda, particularly focusing on the transparency of data and the ability to recognise ownership throughout the transaction chain Simon Kellaway, Standard Chartered

portfolio usage and give access to enriched data about loans, collateral, borrowers, and voting-related activity.

Information availability Access to data is a topic that is being addressed across the post-trade space, but when it comes to ESG data all players continue

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to struggle with a lack of standardisation and in emerging markets, limited availability of data.

“ESG data is primarily driven by company disclosures and as more regulations are introduced across Asia we expect to see a better level of data becoming available,” says Kellaway.

In Singapore, SGX intends to mandate that climate and board diversity disclosures be made based on Task Force of Climate-Related Financial Disclosures recommendations from 2023 for some industries, and all issuers will be required to provide climate reporting on a comply or explain basis and set a board diversity policy from the end of this year.

In December 2020, Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group announced plans for aligned climaterelated disclosures to become mandatory by 2025, while in Taiwan the FSX has mandated ESG related data disclosure from 2022 by size and industry of company.

Standard Chartered is an opening signatory to the Global Principles for Sustainable Securities Lending (PSSL) which seeks to embed ESG standards into securities lending activity and promote the transparency of relevant data.

The PSSL consists of nine principles that signatories must commit to and encourages the adoption of transparency and accountability in securities lending programmes by providing accurate

information about the sustainable securities lending approaches and activities conducted by agent lenders and borrowers.

“Finally, some lenders have taken the decision to uncouple their securities lending programmes from their custodians,” explains Kellaway. “This ensures they can take full advantage of best-in-breed lenders who will maximise returns and deliver flexible reporting in a low risk programme, while simultaneously enabling them to pursue bespoke ESG-led programmes.”

Increased returns He says these options can materially increase returns by lending lower amounts of targeted securities via an auction process, while simultaneously minimising operational risk through highly automated electronic links between the custodian and lender. They also benefit investors by providing rich data and flexible ESGoriented options for recall governance and collateral alignment.

So how are beneficial owners collaborating with agent lenders and borrowers to ensure that ESG standards are met? According to Kellaway, beneficial owners and borrowers in Asia are still defining their ESG standards and working to understand the regulatory requirements in reporting required of financial institutions, as well as the ESG data that is available.

“As such, the best option available will be

The focus on ESG can be seen in the changing regulatory landscape across the region. For example, China has made some strong moves to drive its ESG agenda, particularly focusing on the transparency of data and the ability to recognise ownership throughout the transaction chain Simon Kellaway, Standard Chartered

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ESG

In incorporating ESG policies into their lending programmes, beneficial owners tend to focus on two key areas initially – the collateral that is accepted from borrowers, and the ability to recall securities for proxy votes

a flexible/individualised programme which beneficial owners can adapt to their own ESG standards, or which can promote confidence in meeting their own ESG policies,” he says.

In integrating ESG policies, the steps do not differ significantly from a standard lending arrangement where the details would need to be agreed between the beneficial owners and agent lenders, except that the integration of ESG standards must be clearly understood and acknowledged by all parties in terms of: • What securities or assets are available for loan • What collateral the beneficial owner will accept in return for lending and how this collateral needs to comply with the beneficial owners ESG policies • Asset owners/asset managers must undertake a conscious decision-making process about how their investments, their ESG policies and their bespoke securities lending requirements will interoperate Programmes that are flexible and clientspecific (i.e. non-pooled) are ideal as they naturally allow for such specific and tailored requirements.

“In incorporating ESG policies into their lending programmes, beneficial owners tend to focus on two key areas initially – the collateral that is accepted from borrowers, and the ability to recall securities for proxy votes,” says Kellaway. “Further collaboration will be needed to establish the material ESG standards for each lending portfolio and agree the data to monitor these standards.”

Simon Kellaway, Standard Chartered

who it has been lent to and what collateral is being held against it will be an important first step to monitoring ESG standards.

ESG securities lending programmes will need to have the flexibility to allow beneficial owners to recall securities for proxy votes where this aligns with their ESG policies and to monitor where an upcoming vote may have impact, even when that security is on loan.

Transparency of data and a view of securities that are on loan is essential to ensure that the beneficial owner understands which securities need to be voted on consistent with their ESG policies; which types of votes are important; whether voting on a percentage of shares is acceptable, or whether all shares need to be voted on; whether all markets are of equal importance when it comes to voting; and what revenue the beneficial owner is prepared to give up by recalling loans to ensure voting.

“In turn, the lending agent will need to ensure the availability of timely data to allow the beneficial owner to make this assessment, along with enough flexibility within their programme to allow for recalls where necessary, either through an auto recall or manual recall process, whilst seeking to minimise the commercial impact to the lender,” concludes Kellaway.

Visibility vital The lack of standardisation or harmonisation of ESG data is a conundrum that is being experienced across the banking industry.

The ability for a beneficial owner to have clear visibility on where their portfolio is,

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Securities Finance Asia Pacific Guide 2022

BNP PARIBAS SECURITIES SERVICES

Securities lending and collateral management coming together

Market dynamics are reshaping the relationship between securities lending and collateral management in Asia Pacific, with both activities being integrated and managed more and more on a complementary basis say BNP Paribas Securities Services’ Natalie Floate and David James Brown.

Historically, collateral management and securities lending have been treated as two separate activities but recent market forces have brought them closer together.

One such dynamic is regulation mandating the use of collateral, which was introduced in response to the global financial crisis of 2008.

Several areas of this global reform focused on collateral: for example, mandatory variation margin requirements and implementing rules around initial margin for over-the-counter (OTC) derivatives transactions.

A growing number of firms and products have found themselves in scope of the rules since they went live in a phased approach over the last five years. The use of derivatives in Asia has grown over the same period, and so in turn has the demand for collateral management services.

“What we found, particularly in Asia Pacific (APAC), was that we did not have many

Securities Finance Asia Pacific Guide 2022

clients caught up in the first few phases of mandatory regulation – previously many of our clients trading OTC transactions didn’t have to collateralise them,” says Natalie Floate, head of market and financing services, APAC at BNP Paribas Securities Services.

“Then clients were in-scope for variation margin and went live quickly and efficiently using cash as collateral. Cash could be deployed, managed, settled and reused quite easily, the operational impact was low, and it meant they could tick the box and be compliant with the regulations. This was understandable as the regulations went beyond collateral into trade reporting and other areas – it was quite impactful for many clients from front to back office.”

However, for some clients using cash collateral can create a drag on portfolio performance, especially in those portfolios that are focused on capital growth via assets

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What we found, particularly in Asia Pacific (APAC), was that we did not have many clients caught up in the first few phases of mandatory regulation – previously many of our clients trading OTC transactions didn’t have to collateralise them Natalie Floate, head of market and financing services, APAC at BNP Paribas Securities Services

with little cash allocation. In addition, as inflation and interest rates are expected to increase in the coming years, demand for cash collateral will be impacted and no longer necessarily be the ‘easy’ default option.

Tight markets are making fund managers extract value from across all elements of their portfolios.

“There will be other opportunities to invest that cash into high yielding instruments or other investments,” notes David James Brown, APAC head of collateral services at BNP Paribas Securities Services. “And as such more desire to deploy non-cash collateral will ensue.”

Activity in APAC was, for a time, driven by European and American banks, but regional institutions have increasingly embraced the collateral process and developed it to become a core competency. The market has seen increasing levels of demand for issuers from South Korea and Taiwan, both in terms of equity and corporate bonds.

“In APAC, most of our trading desks spend the majority of their time focused on local assets from a borrowing and lending perspective,” says Floate. “We have a mixture of mature and evolving markets in APAC which presents the best of both opportunities.”

Rising levels of activity have also influenced the use of another type of high quality asset - government bonds. Internal asset liability management has been the primary driver of demand, with treasury teams looking at balance sheet management and funding needs, raising liquidity via repo trades to access cash.

Regulatory requirements around the minimum quality of collateral types have brought additional attention to some assets; in particular, Japanese government bonds or JGBs which dominate Asian fixed income collateral types. Interest in other Asian sovereigns is increasing such as Australian or Singapore government securities, which are also highly rated or considered as high quality.

“However, high quality liquid assets are comparatively expensive, hence why flexibility

Switching gear This is where securities lending can come into play – the diversification of collateral types that can be used in transactions has seen non-cash options come to the fore including equity, corporate and government fixed income solutions.

There will be other opportunities to invest cash into high yielding instruments or other investments and as such more desire to deploy non-cash collateral will ensue David James Brown, APAC head of collateral services at BNP Paribas Securities Services

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BNP PARIBAS SECURITIES SERVICES

around collateral is essential,” says Floate.

“This is where the role of an agent or principal lender and collateral manager is key. We have the distribution reach and flexibility to guide our clients. For example, they might not see demand from other firms for Singapore government bonds but we have counterparties on our side that are looking for them.”

Clients are looking for more than just execution of their trading strategies, she adds.

“They want us to help connect them with other counterparties or providers, and advise them about what is happening in the market and trades they could be doing.”

instances on an international scale – means that having the infrastructure of the global custodian bank is key to support clients ‘around the clock’.

“If you are based in Asia Pacific and you have counterparties that deliver US collateral assets, you may need support to manage the process effectively,” says Brown. “When the US bond market nears the close, it is early APAC morning on the following day. You increasingly need to have the international network to support collateral activity because a lot of counterparties will want to move global assets.”

Local knowledge, global infrastructure

Triparty support

“More clients are asking which non-cash options are available to them – and we have seen market requirements change,” confirms Brown. “Our Asian client base is growing in knowledge and sophistication alongside local markets developing more when it comes to collateral. Collateral management is a global process that also requires local knowledge.”

Historically more common in Europe and the US, the use of a triparty agent has recently been increasing in APAC. New eligible types of collateral, greater connectivity, automation, time zone coverage and demand for better visibility into portfolio management are all factors supporting the use of a triparty agent for collateral management.

Put simply, triparty agents support clients with selection, optimisation, allocation of the collateral, valuation and any other corporate action or event processing.

“It all comes down to one thing: clients want data on their asset’s performance, settlement information, and risk qualifiers quickly and efficiently,” says Floate. “They can then turn this data into knowledge in terms of their liquidity needs.”

Client demand for straight through processing and automation – in many

There are several key areas where having the support of a global triparty collateral management team can be valuable. The first consideration is sourcing – creating eligible collateral pools which can involve transformation in order to get access to the right type of assets. This is followed by selection, which is more about utilising collateral in the most cost effective and efficient way, analysing mobility factors.

“That is where the processes all start to interlink,” says Brown. “You will need a mechanism to source, select and then settle the assets. Increasingly this means your collateral operations will need to be global or have the support of a global service provider.”

High quality liquid assets are comparatively expensive, hence why flexibility around collateral is essential. This is where the role of an agent or principal lender and collateral manager is key David James Brown

35

Securities Finance Asia Pacific Guide 2022

BNP PARIBAS SECURITIES SERVICES

If you are based in Asia Pacific and you have counterparties that deliver US collateral assets, you may need support to manage the process effectively. When the US bond market nears the close, it is early APAC morning on the following day David James Brown

Next is the servicing element. “Common challenges include substitution, corporate actions and coupon events,” warns Brown.

“If you are going to move collateral internationally, you need to have robust processes to manage post-settlement considerations, and obviously collateral assets can change in rating or price, so you will need to have valuation and credit risk management processes in place.”

Recently, agent lenders have been expanding acceptable forms of collateral beyond equities and bonds into new non-cash alternatives such as ETFs although this has not yet stretched into newer assets such as crypto. In addition to these changes, new considerations such as ESG have emerged - a topic that is gaining traction in APAC driven by regulatory, social and economic mandates.

Proxy voting, for instance, has been a fundamental topic when clients talk about

ESG, especially in Australia.

“When it comes to securities lending, beneficial owners such as superannuation funds want to be active shareholders and to have comfort in the end-to-end management of loans, including any recall that may be required to facilitate their vote casting at general meetings,” says Floate.

ESG objectives tend to be set at the portfolio or investment mandate level by clients, and then filtered down to individual activities like collateral management and securities lending.

“This is an area where we expect to see further developments,” predicts Floate. “As a global custodian, we wear various hats for many of our clients. If we have that full view of their portfolios from custody to collateral manager, we have the ability to optimise their investments throughout the cycle end-toend.”

Natalie Floate has over 20 years’ experience encompassing securities borrowing and lending, collateral management, FX, cash, financing and passive hedging services. She has previously held roles with The Bank of New York and State Street in Sydney and London in roles including operations, product management, relationship management, trading and general management.

David James Brown has over 20 years’ experience in OTC derivatives, collateral, repo and securities lending working for BNY Mellon, JP Morgan & UBS in Hong Kong, London and New York. He held roles in ops, risk, relationship management, trading and sales before joining BNP Paribas Securities Services in March 2022.

Securities Finance Asia Pacific Guide 2022

36

J.P. MORGAN

The future is here with collateral optimisation and mobilisation in Australia

More than ever, J.P. Morgan is leading the way in supporting Australian clients to optimise their use of securities and collateral explains Ed Bond, head of trading services Asia Pacific. offerings to launching new products to solve for regulatory challenges such as UMR. The J.P. Morgan tri-party platform can support sell-side firms through unlocking ‘trapped’ assets by mobilising collateral to bring greater efficiency to secured finance activities. It also extends to the buy-side as collateral receivers.

Additionally, as UMR phase 6 affects a greater number of Australian buy-side firms that had not previously been required to post initial margin and manage variation margin in connection with their derivatives trading activity, J.P. Morgan can help to solve collateral mobilisation challenges.

J.P. Morgan has partnered with banks, broker-dealers and beneficial owners in Australia to optimise portfolios and securities financing needs while reducing operational risk within the local time zone.

As the Uncleared Margin Rules (UMR) near the final implementation phase, the need to deploy an integrated approach to financing and collateral management will be critical for funds looking to optimise the use of their balance sheets.

J.P. Morgan’s long-established onshore presence in the Australian market across trading services – its agency securities financing and collateral services businesses - makes it well positioned to meet and provide a complete solution for clients, from structuring and facilitating securities finance trades, accepting broader and new collateral

Partnering with sophisticated brokers The flexibility and scalability of J.P. Morgan’s trading services solutions are why large

Our ability to help facilitate direct securities financing trades between asset owners and broker-dealers takes away the operational strain related to securities financing and collateral management 37

Securities Finance Asia Pacific Guide 2022

J.P. MORGAN

We have developed a market leading collateral transport system that offers efficient use of assets across securities lending and collateral, which gives buy-side institutions the clarity they need to manage various securities financing requirements and collateral obligations

that their loans are fully collateralised with eligible securities collateral throughout the trade lifecycle.

“For beneficial owners, our local operation teams ensure that clients can transact on a timely basis and facilitate trade and reporting on their behalf,” explains Bond.

“In response to client demand, we have also developed a market leading collateral transport system that offers efficient use of assets across securities lending and collateral. This gives buy-side institutions the clarity they need to manage various securities financing requirements and collateral obligations, showcasing the power of the trading services business.”

institutional firms in the Australian securities finance market turn to the bank to support and facilitate securities finance trades with counterparties in Australia.

Working with J.P. Morgan allows brokers to extract maximum value on their collateral portfolios, enabling them to focus on their core competencies of trading and inventory management.

J.P. Morgan continues to explore new opportunities with banks and broker-dealers in Australia on asset mobilisation between their European affiliates. The single global tri-party platform reduces inter-entity settlement friction and improves access to counterparties. It also expands the number and type of transactions that participants can complete and accelerates speed to market.

A simple way to comply with local legislation There is growing adoption of pledge structures for securities financing internationally, but legal jurisdictions can vary significantly between countries creating another challenge.

“We created a tri-party account control agreement under New South Wales governing jurisdiction, aligned with underlying pledge documentation for the Australian market,” says Bond. “This means that from a trading and tri-party perspective we are able to offer clients the optionality to trade under pledge and remain compliant within the domestic legal framework.”

Ease of operation The tri-party relationship means that clients don’t have to carry the operational burden associated with collateralisation and this also complements their already sophisticated financing strategies.

Ed Bond, head of J.P. Morgan trading services Asia Pacific says its relationship makes the post-trade lifecycle simpler for market participants. “Our ability to help facilitate direct securities financing trades between asset owners and brokerdealers takes away the operational strain related to securities financing and collateral management.”

Liquidity providers and other funds that are being collateralised can take comfort

Securities Finance Asia Pacific Guide 2022

Beneficial owner benefits The Australian institutional market is highly sophisticated with superannuation funds alone holding almost $3.5 trillion in assets.

38

Empowering your collateral Optimization

Mobilization

Integration

J.P. Morgan’s global collateral platform is designed to meet your local needs and power your collateral universe. Our data-driven solutions efficiently manage regulatory and operational complexity. We maximize efficiency, minimize costs and mitigate risk, providing you with the platform to excel.

Contact your representative to learn how we can help or visit www.jpmorgan.com/securities-services © 2022 JPMorgan Chase & Co. and its subsidiaries. All rights reserved. This advert is for institutional and professional investors only and subject to the important disclosures and disclaimers at www.jpmorgan.com/pages/disclosures.

J.P. MORGAN

J.P. Morgan sees more beneficial owners setting up centralised funding and treasury teams focusing on their firm’s balance sheet and optimising the use of their assets to maximise returns to their members. These funds are becoming more directly involved in the financing markets across lending and collateral and are looking for a combination of discretionary and more client directed, flexible lending programmes.

“We are able to step in as a dynamic agent who can facilitate and manage these trades in the most efficient way possible,” says Bond. “We have all the agreements in place, the structures, connectivity between desks, and a strong local presence.”

In May 2022, the Reserve Bank of Australia raised official interest rates for the first time in more than 11 years, creating a new challenge for institutional investors to generate returns. Securities lending can provide another source of incremental returns.

In this environment, funds will increasingly explore new strategies to optimise assets.

We are able to step in as a dynamic agent who can facilitate and manage these trades in the most efficient way possible.

We have all the agreements in place, the structures, connectivity between desks, and a strong local presence

For example, the digital asset sector is one area that is rapidly evolving, opening new possibilities. As recently announced, J.P. Morgan has successfully tokenised money market funds and transferred them between a collateral provider and receiver via the two parties’ tokenised collateral network on the Onyx blockchain. This is an industry first and demonstrates J.P. Morgan’s ability to innovate on behalf of clients.

“These are areas that J.P. Morgan continues to explore given the changing needs of financial institutions,” concludes Bond.

This publication is provided for information only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. The opinions, estimates, strategies and views expressed in this publication constitute our views as of the date of this publication and are subject to change without notice. Any opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan, including research. The information contained herein is as of the date of this publication and J.P. Morgan does not undertake any obligation to update such information. Any market prices, data or other information contained herein are not warranted as to completeness or accuracy and are subject to change without notice. This document does not purport to contain all of the information that an interested party may desire and provides only a limited view of a particular market, product and/or service. This document does not constitute advice by or on behalf of J.P. Morgan, and nothing in this document should be construed as legal, regulatory, tax, accounting, investment or other advice. No reliance should be placed on the information herein. The recipient must make an independent assessment of any legal, credit, tax, regulatory and accounting issues and determine with its own professional advisors any suitability or appropriateness implications and consequences of any transaction in the context of its particular circumstances. J.P. Morgan assumes no responsibility or liability whatsoever to any person in respect of such matters. Transactions involving securities and financial instruments mentioned herein may not be suitable for all investors.

The products and services described in this publication are offered by J.P. Morgan Chase Bank, N.A. or its affiliates subject to applicable laws and regulations and service terms. Not all products and services are available in all locations. Eligibility for particular products and services will be determined by J.P. Morgan Chase Bank, N.A. and/or its affiliates.

J.P. Morgan is a marketing name for businesses of J.P. Morgan Chase & Co. and its subsidiaries and affiliates worldwide. The material is produced and distributed on behalf of the entities offering Corporate and Investment Banking activities including but not limited to J.P. Morgan Chase Bank N.A. (including through its authorized branches), J.P. Morgan SE (including through its authorised branches), J.P. Morgan (Suisse) SA, J.P. Morgan Europe Limited, J.P. Morgan Securities LLC and J.P. Morgan Securities plc. J.P. Morgan Chase Bank, N.A., organized under the laws of U.S.A. with limited liability, is authorized by the Office of the Comptroller of the Currency in the jurisdiction of the U.S.A. For additional regulatory disclosures regarding these entities, please consult: www.jpmorgan.com/disclosures

Securities Finance Asia Pacific Guide 2022

40

PASLA

Addressing regional challenges

Industry diversity and ESG continue to be among the key issues affecting the APAC securities finance industry from the perspective of the Pan-Asia Securities Lending Association.

While perhaps not as traumatic as the previous 12 month period, the last year has been challenging for PASLA. In its most recent annual market report the association notes that despite having to postpone its 2021 conference, it was still able to offer the market a forum for exchanging ideas and learning about the latest developments.

Objectives have included championing the development of a more open market for securities lending in China as well as the integration of securities lending with ESG principles and the harmonisation of regional market standards around international best practice, whilst recognising that different Asian markets are at varying stages of development.

The global framework for ESG and securities lending published by PASLA and the Risk Management Association (RMA) last year noted that integrating environmental, social and governance factors into securities lending is an important component of the contribution that finance needs to make to the realisation of the United Nations’ Sustainable Development Goals.

ESG considerations To ensure that securities lending is understood as aligned with ESG investment principles it is essential that lenders and other market participants have a shared decision making framework for managing ESG considerations in this market.

The framework is designed to clarify market

To ensure that securities lending is understood as aligned with ESG investment principles it is essential that lenders and other market participants have a shared decision making framework for managing ESG considerations in this market 41

Securities Finance Asia Pacific Guide 2022

PASLA

Investor recommendations Among the best practice recommendations, the framework suggests that institutional investors that lend securities should consider: • Voting rights - assessing or developing a policy for recalling loaned securities based on ESG considerations in their proxy voting framework; identifying the types of shareholder resolutions on which they want to vote by company and by issue • Transparency in the lending chain - Implementing effective minimum standards that reflect their corporate level sustainability framework, for example applying an ESG lens to selecting direct counterparties • Collateral and cash reinvestment - applying the same ESG standards to the non-cash collateral they are prepared to accept when they lend securities as those that they apply to their investment portfolio • Lending over record date - Establishing a clear policy on lending securities over dividend record dates and communicating this with agent lenders as well as monitoring counterparty exposure in order to identify unusual activity • The short side of the market - identifying the areas in which they see potential for a conflict between facilitating participation in the short side of the market and their corporate ESG commitments and developing a policy to govern the facilitation of participation in short selling that includes specific guidance on the circumstances under which they would limit lending or decline to lend “Integrating ESG factors into securities lending is increasingly important to all market participants, reflecting the broader shift towards sustainable financial markets,” said Paul Solway, director and communications officer at PASLA. “PASLA and our partners at RMA believe it is essential that the market has a shared understanding of how ESG and securities lending intersect, as well as a common decision making

Paul Solway, PASLA participants’ understanding of how ESG and securities lending intersect as well as begin to standardise the choices that lenders can make in managing those touchpoints in accordance with their organisational ESG objectives.

Previous PASLA research has found that a majority of market participants saw ESG and securities lending as compatible, but also highlighted the need for more clearly defined options and standards to guide market participants.

A 2020 RMA paper on whether securities lending and ESG principles could coexist included a survey of major global asset owners and managers, of whom 95% said they believed ESG investing and securities were compatible but only 18% said they always applied ESG principles to their securities lending programmes, reinforcing the need for a common approach to integration.

Securities Finance Asia Pacific Guide 2022

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PASLA

framework for managing these touchpoints.”

Promoting inclusivity A lot of work has also been done to promote a more inclusive industry in Asia through the PASLA inclusion network. In an interview for the PASLA newsletter, chairperson Valerie Rossi spoke about what had changed since the launch of network and the measures in place to tackle the problems currently facing inclusion in the securities lending industry.

When asked what has changed at PASLA and across the securities lending industry in terms of embracing inclusivity, she referred to increased awareness – boosted in part by events such as a virtual presentation by Esther Mollema, who has produced an enormous amount of research on the benefits of embracing diversity and inclusion and advises many world’s leading organisations and universities on the themes of high performance and diversity and inclusion.

According to Rossi, member firms can help achieve inclusivity by constantly asking themselves the following questions: • Am I actively including?

• Am I excluding others without consciously doing it?

• Am I aware of my own bias?

• How can I drive change?

“It is vital that people who are passionate about inclusion lead by example in order to influence their colleagues and organisations – that is how we will drive change in the industry,” said Rossi. “We conducted a poll during the network launch event and some of the results were very telling.”

For example, when participants were asked which categories of biases they recognise at work, four in five said experience bias - which means people trusting their own judgement because of their extensive experience.

Common biases The next most common form of bias identified by the respondents was similarity bias, where people tend to gravitate towards and have more trust in people who are similar to them because of their experience, values, or upbringing.

When asked about the key learning they would take to work from the event, three in five respondents said they would make themselves equally accessible to everyone in the team, followed by 40% who said they would correct those who shut out other team members or people who make others feel uncomfortable or inferior. Some participants said they would actively invite introverts to share their views.

“The role of the PASLA inclusion network is to facilitate the exchange of ideas so that we can all benefit from the diversity of our industry and region,” said Rossi. “This will enable us to embrace change, generate new ideas, attract talent and provide equal opportunities in the industry.”

The goal of building consensus about the importance of inclusivity for the industry - while respecting local differences - is very closely aligned with PASLA’s objective of working with partners to seek the gradual harmonisation of securities lending market standards across the region, while recognising that markets are at different stages of development.

The goal of building consensus about the importance of inclusivity for the industry - while respecting local differences - is very closely aligned with PASLA’s objective of working with partners to seek the gradual harmonisation of securities lending market standards across the region, while recognising that markets are at different stages of development 43

Securities Finance Asia Pacific Guide 2022

COUNTRY PROFILES

Australia

The Australian securities lending market has more than $438 billion of lendable equities according to data from IHS Markit, a considerable increase on the $309 billion recorded in 2020 and a welcome increase after a slight decline in 2019.

The value of equities on loan also recovered from $16.4 billion to just shy of $20 billion. However this figure remains below the $21.6 billion in 2019, indicating that the market has not fully recovered from the 2019-20 trend for superannuation funds to put an end to their securities lending programmes in the year.

It was a similar story for equity lending revenues, which rose from $94.6 million last year to just under $114 million – still shy of the almost $116 million generated in 2019.

Australian Super’s latest annual report indicates a return to securities lending, reporting that the fair value of financial assets on loan last year was $14.3 billion compared to $6.7 billion in 2020.

Aware Super (formerly the First State Superannuation Scheme) reported an increase in securities lending income in 2021 on the back of a modest rise in the market value of securities on loan, while NGS Super reported an increase in securities lending collateral although net earnings

Securities Finance Asia Pacific Guide 2022

were lower than in 2020.

There were also some significant regulatory developments. In November 2021 the Australian Securities and Investments Commission (ASIC) published submissions to its consultation paper on securities lending by agents and substantial holding disclosure and the proposed remake of the order on substantial holding disclosure: securities lending and prime broking.

In the submissions, the Australian Shareholders Association (ASA) agreed that the potential for securities to be on-lent was not important in the context of control. However, the ASA argued that it could be important in terms of informing beneficial holders about the potential for their securities to be on-lent.

The ASA considered this would give beneficial holders information about their exposure to counterparty risk through securities lending and would also flag to the market the potential greater volatility of the securities (when compared to other companies with major holders who do not participate in securities lending).

Industry stakeholders (who either represent those who participate in securities lending or act as agent lenders) supported deferral relief.

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COUNTRY PROFILES

However, these respondents argued that agent lenders should not have a relevant interest at all and should be granted a broad exemption from the relevant interest provision.

This is because agent lenders generally act on client instructions and rarely exercise unfettered discretion over the client’s securities. These respondents argued that substantial holding disclosure by agent lenders was not useful to the market.

Industry stakeholders also highlighted the differences between prime broking and agent lending arrangements. They said that relief granted for agent lenders should be different from that given to prime brokers, because agent lenders are not a party to the securities lending transaction and do not obtain full legal title to the loaned securities. Industry stakeholders supported broader relief from the relevant interest provision so that it applies to any securities that an agent lender has a relevant interest in due to their authorisation agreement with a client lender. It was submitted that if relief was only granted for lending pool securities, agent lenders would still have to incur significant costs for IT systems to monitor the relevant disclosure data and argued that these costs would significantly outweigh any regulatory benefit.

One respondent said that an agent lender should not have a relevant interest in collateral securities where a triparty collateral manager has been appointed. According to the respondent, the appointment of such a manager removes a lot

of the agent lender’s role regarding collateral or purchased securities.

The respondent provided the example that the triparty collateral manager ensures collateral posted by the borrower satisfies the lender’s criteria, ensures the collateral remains sufficient and will not allow the agent lender to deal in the collateral before an event of default.

In response, ASIC decided to introduce the deferral relief without a broad exemption and maintained the view that relief should only be granted for lending pool securities and not extend to collateral securities.

ASIC also sought feedback on the definition of ‘authorisation agreement’ in the proposed legislative instrument and whether the definition of ‘custodial business’ adequately described the business of agent lenders.

In the case of the former, some respondents suggested that the definition was too prescriptive and could result in agent lenders not being able to rely on the legislative relief if they do not satisfy the definition, which the regulator agreed with. It also tweaked the regulation to ensure that agent lenders providing genuine agent lending services could rely on relief.

In addition, ASIC modified the relevant interest provision so that the agent lender retains a relevant interest in loaned securities and concluded that it would be more appropriate to procure authorisation agreements using its compulsory powers if the need arises, rather than require agent lenders to provide the agreement on request.

Australia equities 2019-2021

Source

Value on loan (US$)

Lendable assets (US$)

Lending revenue (US$)

2021

19,945,031,363

438,794,077,957

113,773,918

2020

16,394,946,711

309,422,573,147

94,631,508

2019

21,572,734,982

322,492,111,198

115,767,089

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Securities Finance Asia Pacific Guide 2022

COUNTRY PROFILES

Hong Kong In our 2021 guide we referred to Hong Kong as the bright spot in the Asian securities finance market and it is once again one of the star performers in this year’s edition.

In 2020 Hong Kong’s equities lending revenue was the top performer in Asia, falling only 5% to $330 million, which was less than all of its peers.

Last year that figure rebounded strongly to $491 million, pushing it very close to Japan as the largest revenue generator in APAC and accounting for a sizeable percentage of the lending revenue growth across the entire region.

Overall regional equities lending revenue in 2021 reached just over $2 billion compared to $1.5 billion in 2020, which meant that Hong Kong accounted for almost 30% of the increased revenue generated across APAC from securities lending activity.

In terms of value on loan, Hong Kong registered $43.3 billion in 2021 – up from $34 billion in 2020 which was in itself a significant increase on the figure for 2019 when value on loan was $31.3 billion.

Once again, Hong Kong was the main driver of improved performance across the region in this category of the securities lending market. From just under $200 billion in 2020, total value on loan across APAC last year rose to $216 billion, which means that Hong Kong generated considerably more than half the total regional increase over that period.

In terms of lendable assets, Hong Kong’s value

again increased sharply to just over $678 billion in 2021 from $508 billion in 2020 – which in turn was a sizeable increase on the $416 billion recorded in 2019.

The IHS Markit data reveals that there was almost $2.7 trillion of lendable assets in APAC in 2021. This represents a very significant increase on the figure for 2020, which was only just in excess of $2 trillion and up from $1.8 trillion in 2019.

Taking a regional view, Hong Kong was only outshone in terms of lending revenue by Taiwan, which recorded an astonishing increase of more than 250% from $178 million to $458 million last year. Although Malaysia increased its lending revenue five-fold last year, that was from a much lower base.

Taiwan also almost doubled its value on loan in 2021 to $20.4 billion from $10.5 in 2020, with Thailand and Malaysia also registering significant increases in this segment of the market.

Hong Kong equities 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

Lending revenue (US$)

2021

43,271,046,817

678,057,618,717

490,824,046

2020

34,422,185,464

507,876,399,587

330,145,977

2019

31,297,633,580

416,477,862,269

349,006,802

Securities Finance Asia Pacific Guide 2022

46

COUNTRY PROFILES

Japan

Movement in Japan’s securities finance market last year was out of step with most of the rest of the region. For example, the region’s largest market saw a reduction in value on loan from $125 billion in 2020 to $114.4 billion – making it the only significant market in the region (apart from Singapore, which registered a much small decrease) to see value on loan fall in 2021.

Lending revenue also saw a notable fall last year to $535.7 million, having dropped by a quarter in 2020 from the $813 million recorded in 2019.

These figures were racked up despite an increase in lendable assets to $1.2 trillion from $925 billion in 2020, with the latter representing a 13% increase on the total for 2019.

In June 2021, Japan Securities Finance Co (JSF) and the School of Engineering at University of Tokyo jointly launched empirical research to verify whether tokenised securities and collateral can be smoothly traded in securities lending and borrowing transactions through the use of distributed ledger technology.

They referred to increased focus on the uses of distributed ledger technology and the fact that discussions on the applicability of the technology had progressed in the securities field, mainly in post-trade processing and issuance of tokenised

securities.

JSF and the university conducted hypothetical transactions of exchanging tokenised securities and collateral with a limited number of parties to examine the possibility of enabling the transfer of securities and collateral denominated in foreign currencies in a near real-time manner, the benefits of expanding system availability and increasing the efficiency of administrative processing, and the utilisation of various assets – including illiquid assets - as collateral against the backdrop of these advantages.

In January, JSF managing executive officer, Yutaka Okada, delivered a lecture to students of the School of Engineering on the topic of ‘Financial & Securities Markets and Industry-Academia Alliance – Blockchain’.

He noted that blockchain technology is resistant to manipulation/counterfeiting and damage and offers more efficient processing (automation) when used with smart contracts, elements that can help reduce settlement and business risk and should be applicable to the securities business.

Experimental token settlement programmes in APAC include project Stella (a joint ECB and Bank of Japan project offering token-versus-token delivery versus payment settlements) and project

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COUNTRY PROFILES

Ubin, a token-versus-token programme by the Monetary Authority of Singapore and Singapore Exchange.

Actual cases in the region include the World Bank and Commonwealth Bank of Australia issuing bonds on their Bond-i platform using blockchain technology.

According to Okada it would be unrealistic at this stage to view blockchain as an immediate replacement for existing systems, which are already efficient and realising low settlement risk.

However, he says blockchain technology may help streamline back-office processing and cut costs and time, such as simplifying the multiple verification procedures performed from contract to settlement.

Shareholder voting, dividend payments and other corporate actions may also be automated based on ledger records.

More recently, Japan’s Government Pension Investment Fund issued a request for information on quantitative analytical methods to help it understand the implications of its decision in 2019 to cease securities lending activity.

Following discussions at the board of governors’ meetings in December 2019, the Government Pension Investment Fund announced that it would suspend its stock lending activities on the condition that the board of governors would review and assess the effect of this suspension.

Given the period of time that had passed since the suspension and as a result of market data that has been accumulated over this time, the fund announced plans to conduct quantitative analyses

on the effect of its stock lending suspension on the market.

In March it issued a request for information on quantitative analytical methods with the aim of analysing the effect of its stock lending suspension.

The fund said it would consider whether or not it would conduct research/analysis relating to stock lending activities based on the information received through this request.

The request fell into two categories, the first of which was deemed a prerequisite: Information and ideas for quantitative analytical methods based on data with rough cost estimates for each analytical method/research study Information supportive of conducting this quantitative analysis, including information relating to recent stock lending market activity (trade volumes, borrowing costs/premiums, new developments, and main players), the purposes of stock lending activities for borrowers, academic research papers relating to stock lending activities, and other matters relating to stock lending activity that GPIF should be aware of.

When the GPIF suspended stock lending for short selling it referred to the practice being inconsistent with its responsibilities as a long term investor.

It stated that the current stock lending scheme lacked transparency in terms of who was the ultimate borrower and for what purpose they were borrowing and effectively created a gap in the period in which the stock was held by GPIF and could be considered to be inconsistent with the fulfilment of the stewardship responsibilities of a long term investor.

Japan equities 2019-2021

Source

Value on loan (US$)

Lendable assets (US$)

Lending revenue (US$)

2021

114,362,063,094

1,169,058,191,225

535,682,661

2020

124,950,967,167

925,617,482,857

609,564,728

2019

116,571,274,052

822,604,357,317

813,773,384

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COUNTRY PROFILES

South Korea

Korean securities lending revenues for equities enjoyed a modest revival in 2021 with total revenues of $311 billion compared to $237 million last year. However, this figure is still well down from the $483 million recorded in 2018 and even the $436 million generated in 2019 as the market continues to recover slowly from reduced activity in securities lending and short selling markets.

Data on the value of South Korean equities available to lend was more encouraging. Last year’s total of $195 billion was not just up considerably from last year’s $134 billion but was also a significant increase on the $121 billion recorded in 2019.

The value of equities on loan dropped by 30% in 2020, but recovered last year to reach $13.6 billion – a modest increase on the $13.4 billion valuation of 2019.

Last September, the Korean Financial Services Commission updated the trends in short selling activities as stock short selling became available for KOSPI 200 and KOSDAQ 150 from the beginning of May. It noted that between 3 May and 17 September 2021, the daily average short selling volume

dropped about 12% compared to the period from 2 January and 13 March in the previous year. Given a large increase in the overall volume of stock market transactions, the proportion of short selling in relation to the total trading amount remained at around half the previous level.

The short selling transaction volume by institutional investors declined. Daily average short selling volume by institutional investors fell from KRW286 billion to KRW126 billion as the revised rules on market makers began to take effect from April 2021.

The top 10 stock items that were mostly targeted by retail investors for short selling appeared to be similar to those targeted by overall short sellers - including foreigners and institutions – and the authorities found no meaningful correlation between the amount of short selling and individual share prices.

Nor was there any meaningful relationship between the proportion of short selling and the performance of stock prices in the market.

The Korean Financial Services Commission stated that securities lending services would be

49

Securities Finance Asia Pacific Guide 2022

COUNTRY PROFILES

offered by all securities companies that issue credit loans to customers by the end of 2021 and that the establishment of a real time integrated information system for stock lending transactions would improve efficiency.

The authorities expanded the previous stock loan period of 60 days (non-renewable) to 90 days (renewable) starting with stocks borrowed from 1 November 2021.

In January 2022, the Korea Securities Depository reported that the short-term financing market was experiencing unprecedented growth and that repo was at the forefront of this expansion.

Institutional repo trading volume in Korea increased by 5.3% year-on-year to $19.6 trillion in 2021 according to the depository’s data on opening settlement. The new record high represented a 1.7fold increase from the $11.2 trillion recorded in 2017.

The daily average trading volume was also up by 18.8% to $106 billion in 2021 – more than double the $51.1 billion traded daily in 2017.

By the end of 2021, total repos traded among institutions in Korea were about 12 times larger than call loans. Overnight repos made up the largest share (68% or $72.5 billion) of the entire trading volume with the rest comprised of longer term transactions.

According to the Korea Securities Depository, the robust growth of repo trading in 2021 was largely driven by the excess liquidity during the Covid pandemic and the sizable purchase and sale of government securities under open market operations.

The amount of cash processed in the Korean capital market also reached a record high ($46 trillion) last year, up from $42.8 trillion in 2020. The total processing amount was mostly comprised of transactional settlements, followed by the principal and interest of registered securities and the cash processing amount for collective investment schemes.

It is worth noting that OTC repo trading accounted for more than 86% of the transactional settlements. This surge in repo-related cash settlements was attributed to the fact that the call money market is exclusively used by banks while securities firms, asset management companies and other players in the secondary banking sector have largely shifted to the repo market for short term financing purposes.

At the end of last year the institutional repo trading balance of the Korea Securities Depository exceeded KRW 150 trillion ($126.4 billion), the highest level since the inception of tri-party repo in 1999.

The spike in balance was seen as year-end effects in the short term (BIS capital adequacy ratio, money market fund cash withdrawal) and in a broader sense, seemingly attributable to the rise in repo demands driven by quantitative easing and the additional issuance of sovereign bonds in the aftermath of the Covid pandemic.

The Korea Securities Depository has played a leading role in transitioning away from LIBOR by publishing the Korea overnight financing repo rate (KOFR) since November 2021.

South Korea 2019-2021

Source

Value on loan (US$)

Lendable assets (US$)

Lending revenue (US$)

2021

13,648,080,300

194,929,711,900

310,563,248

2020

9,433,587,361

133,632,037,313

237,013,324

2019

13,386,514,177

121,133,932,919

435,452,428

Securities Finance Asia Pacific Guide 2022

50

COUNTRY PROFILES

Taiwan 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

Lending revenue (US$)

2021

20,388,118,073

95,640,392,956

458,139,750

2020

10,525,424,706

63,515,115,979

178,216,806

2019

8,256,784,279

58,383,499,186

207,564,672

Singapore 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

Lending revenue (US$)

2021

1,925,293,690

56,146,618,795

27,776,853

2020

1,967,848,382

45,585,363,007

31,182,847

2019

2,071,984,217

50,511,486,771

28,088,169

Malaysia 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

Lending revenue (US$)

2021

769,501,070

12,543,976,044

62,976,591

2020

601,377,752

11,160,325,471

12,207,790

2019

534,967,529

13,944,807,322

14,873,370

Thailand 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

Lending revenue (US$)

2021

703,045,514

17,353,803,553

19,209,500

2020

486,125,232

14,598,005,577

9,367,069

2019

724,879,581

17,717,152,901

11,876,105

New Zealand 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

Lending revenue (US$)

2021

783,674,800

11,480,037,796

4,996,555

2020

711,969,687

10,240,692,007

3,265,898

2019

719,531,298

8,637,957,331

3,119,543

Indonesia 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

Lending revenue (US$)

2021

1,589,933,234

2020

46,462,145

774,181,409

197,381

2019

21,382,838

1,310,520,063

329,398

Phillippines 2019-2021 Value on loan (US$)

Source Lendable assets (US$)

2021

875,573,051

2020

1,560

755,850,328

2019

27,387,900

944,313,536

51

Lending revenue (US$)

240,010

Securities Finance Asia Pacific Guide 2022

COUNTRY PROFILES

Comparison of Asian and North American mutual fund aggregates

Charts and data supplied by Credit Benchmark

Securities Finance Asia Pacific Guide 2022

52

COUNTRY PROFILES

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