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4 Taking stock – a look at the main factors influencing securities finance activity in Asia Pacific during 2022
8 Short selling - Restrictions on short selling across APAC remain a contentious topic
10 Japan Securities Finance – Exploring new horizons
13 China focus - How much potential does China have as a securities lending market – and what needs to change in the medium to long term to truly open up China as a location for securities lending?
16 BNY Mellon – A shifting landscape: three trends affecting Asian investors
19 Environmental concerns – Analysis of the impact of GASLA’s update to the Global Framework for ESG and Securities Lending, how far Asian lenders have integrated ESG into their collateral guidelines, and progress towards data standardisation and availability
23 Equilend - Digital Transformation: Solutions with Substance for Securities Finance
27 Technology - A review of the most important developments across the securities lending market from a technology perspective over the last 12 months
30 S&P Global Market Intelligence – “If you look up, there are no limits”
34 Currency settlement - Global Investor explores some of the implications of the move to T+1 settlement from a foreign exchange perspective and how this could impact trading costs in Asia Pacific
40 Interview (PASLA) - An update on the activities of the PanAsia Securities Lending Association over the last 12 months.
44 Interview (ASIFMA) - The Asia Securities Industry & Financial Markets Association outlines the key findings of its most recent market research and looks at the progress made in key areas from KYC/AML and sustainability to the potential implications of the EU Benchmarks Regulation’s third-country regime.
48 Country profiles – A round-up of major developments in securities finance in Australia, Hong Kong, Japan, and South Korea
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According to EquiLend’s data and analytics Q1 2023 review, the first three months of 2023 continued to see an increase in demand for APAC corporate debt, generating $24.9mn (£19.7mn). Fees across the region averaged at 88.33 bps while on-loan balances remained steady at $11.4bn.
The standout sector for Asian corporate debt was real estate. The top earning APAC issuance for Q1 2023 was Longfor Group Hldgs 4.5% 16/01/28, netting $539,000, with combined issuances earning over $840,000 for the quarter. Likewise, real estate issuer Country Garden Holdings corporate debt generated over $1.5mn overall in Q1 2023, far outperforming all other issuers in the region.
Goldman Sachs’ 2023 outlook noted that 2022 was a tumultuous year in Asian financial markets. Most of the region reopened from Covid, but China doubled down on containing the virus - suppressing economic activitywhile Russia’s invasion of Ukraine pushed global commodity prices higher.
Xi Jinping consolidated power at China’s 20th Party Congress, and US-China tensions escalated. Most of these events proved challenging for regional asset prices, with bonds, equities, and regional currencies all taking a beating.
Despite the headwinds, and a material slowdown in global growth, much of the region (ex-China/HK) still posted abovetrend growth, with particularly strong activity in India and southeast Asia.
S&P Global’s securities finance March 2023 snapshot reveals that APAC securities finance activity generated $211mn in revenues over the month - a 3% increase year-on-year and an increase of 50% from the $141mn generated in February. March was the highest revenue generating month for the region since September 2021 when revenues reached $219.4mn.
Q1 revenues ($513mn) for the region were down 4% year-on-year but were higher than any quarter since Q1 2022. March’s average fees of 93bps were higher both year-on-year and month-on-month and quarterly average fees stood at 90bps - 1% lower than in Q1 2022.
Utilisation continues to grow across the region, reaching 6.73% during the monththe highest since September 2022 (6.91%). Utilisation has been increasing over 2023
and the Q1 average of 5.44% is the highest quarterly figure since Q3 2022.
Across the region, Japan (+23%), Hong Kong (+23%) and Singapore (+64%) saw the largest increases in revenues with Japan recording its highest monthly revenues for several years. March is traditionally the highest revenue generating month for this market and the $91mn figure that was generated during March 2023 surpassed the March figure for the last few years.
Q1 revenues in Japan of $173mn were also 24% higher and represent an increase on the Q1 figure for the last few years. Revenues in this market were driven higher over the month by average fees of 60bps (+24%), the highest monthly average fee since January 2020.
In Hong Kong, average fees and revenues increased month-on-month despite a fall in utilisation and balances. Q1 revenues for the market of $109.8mn were up 25% on Q1 2022 and Q1 average fees of 134bps represented the highest quarterly average for several years.
Revenues in both Taiwan and South Korea increased when compared with February but continued to trend lower year-on-year.
Given the significant increase in Japanese revenues over the month it is unsurprising to see that Japanese stocks dominated the top revenue generating table for March. Sm Entertainment Co Ltd, a South Korean stock, was the second highest revenue generating equity over the month. News reporting that Kakao Corp cancelled an earlier plan to buy a 9.05% stake in the company triggered a fall in the company’s share price and increased borrowing interest from market participants.
Several Hong Kong listed stocks also appeared in the table over the month. Revenues in Smoore International holdings Ltd grew to an all-time monthly high as the company reported lower revenues than expected. In total, the top ten revenue
particularly during Q4 - leading to short covering and a fall in short conviction
Cowan,generating stocks produced 40% more than the previous month.
Asian equities had a very strong start to 2022, with every month up until May outperforming year-on-year explains Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence.
“However, from June onwards this trend inversed and the opposite was true until the end of the year,” he says. “Revenues finished just 1.3% higher ($2.05bn) than 2021. The decline in revenues during the second half of the year was driven by stronger equity markets across the region - particularly during Q4 - leading to short covering and a fall in short conviction.”
China, Hong Kong and Taiwan all achieved stronger growth over Q4 and China also signalled an end to Covid restrictions. All this positive sentiment led to a fall in loan balances, which fell by 1% year-on-year.
Taiwanese equities led the revenue table for the year (generating $548mn) followed by Japan ($521mn), Hong Kong ($413mn) and South Korea ($326mn).
“Australia performed well during the year with revenues increasing 63% year-on-year to $185mn,” observes Cowan. “The market
The decline in revenues during the second half of 2022 was driven by stronger equity markets across the region -Stewart executive director, head of APAC securities finance product at S&P Global Market Intelligence
benefited from the BHP delisting from the LSE and it also experienced strong demand for the large cap mining and mineral stocks that form part of the ASX.”
Taiwan also generated higher revenues yearon-year (+20%). Average fees increased by the same percentage and utilisation topped 10%, which helped push revenues higher.
“Ultra-loose monetary policy in Japan increased average fees for Japanese government bonds over the year as the central bank’s policy of yield control led to a lack of liquidity,” adds Cowan. “Volume weighted average fees topped 29bps as a result. Interest rates typically rose across the region during the year but at a slower pace when compared with Europe and the
US. The impact of these changes across the APAC region were therefore less significant than seen across other regions.”
South Korea, Taiwan, Japan, and Hong Kong are all showing good revenues for 2023 so far. A roll back of short selling restrictions across Taiwan and South Korea is expected to unlock pent-up demand.
Investors are increasingly looking towards Japan as an alternative to China following changes in the assessment of geopolitical risk and the poor performance of the CSI 300 year-to-date. Japan has seen very strong securities lending revenues over the first half of 2023 and is likely to continue to see further demand, especially if the central bank of Japan signals a change to monetary policy.
“The initiation of an offshore lending capability in Indonesia is very encouraging,” says Cowan. “Hopefully this will encourage other markets to follow in their footsteps and benefit from the advantages that a wellfunctioning securities lending market can bring, such as liquidity and price discovery.”
When asked to assess the main factors behind the growth of securities finance revenues in Asia in 2022, Adnan Hussain, head of agency lending & liquidity services, markets & securities services at HSBC refers to a number of key developments across fixed income, equities and macro:
• A loosening of the yield curve control at one point toward the end of last year created significant short interest in Japanese government bonds, whilst subsequent buying undertaken by the Bank of Japan saw dislocations in the market (taking liquidity of certain issuances out of the market)
• Directional interest in corporate bonds as interest rates increased
Rising interest rates caused investments to flow from equities into bonds, and interest rate differentials created dislocations across markets globally and across APACAdnan Hussain, head of agency lending & liquidity services, markets & securities services at HSBC
• Capital raisings, placements and rights issues as raising finance through debt became more expensive
• China/US tensions and trade restrictions caused strain in some sectors
• Risk appetite increased as mainland China and Hong Kong physically opened up after Covid restrictions were lifted
• Increase in participation/new lender entrants with growth of Asian ETFs participating in securities lending for additional yield
“Rising interest rates caused investments to flow from equities into bonds, and interest rate differentials created dislocations across markets globally and across APAC,” adds Hussain. “Strengthening USD in 2022 is evidence of this as US rates rose rapidly versus APAC where rates were slower to rise or, in some cases, did not rise at all. There was also a slight trend of sourcing Asian government bonds (HK/SG) as ‘alternative’ HQLAs as the traditional G7 ran lower in supply.”
He suggests recent equity rallies in Japan, Korea & Taiwan will increase directional opportunities and the need to hedge.
“If interest rate views remain dovish, we may see more flows into equities and higher equity values, resulting in more longs and shorts. Korea is still seeking developed market MSCI inclusion and may consider releasing the remaining short sell ban, and Taiwan is a significant hub of semiconductor production.”
According to Hussain we are likely to see a further increase in participation from nontraditional securities lending jurisdictions.
“In addition, for developed Asian markets we also see a growing adoption rate from Asia-based insurers and asset managers to participate in securities lending activities,” he
adds.
On the question of whether there is excitement about the potential of securities financing in emerging markets such as Indonesia and the Philippines, Hussain notes that Indonesia imposed a short selling ban on some securities during the pandemic (only removing the ban in April) and that its current securities based lending model is still primarily CCP and onshore (for example, local entities), rather than built around international infrastructure.
“The Philippines has been exploring securities based lending expansion for a few years now but its focus has been on a CCP model,” he adds. “A recent move to permit overseas securities as collateral use for onshore transaction is a sign of intent to move towards an international model alignment. Both markets are attractive and have strong demand from a lending perspective and we have been working closely with both regulators for facilitating a traditional lending programme.”
Of the two, the Philippines currently appears most likely to open up securities lending for offshore participants agrees Simon Lee, managing director, head of business development EMEA & APAC at eSecLending.
“The restriction on offshore collateral was recently announced as being lifted, and what now remains is for the Philippines stock exchange to recognise the eligibility of the industry standard GMSLA documentation, something PASLA is actively engaged in bringing to resolution,” he says.
“Indonesia, at the time of writing, remains a bilateral product, with collateral being held onshore, consequently excluding the majority of offshore participants. PASLA maintains regular dialogue with IDClear to promote collateral being held offshore and to open up participation among overseas investors and their agents.”
lending market, the association said it was encouraging to see the industry moving on from a restrictive environment. Elsewhere in this guide, PASLA chair Jason Wells refers to ongoing conversations with the Philippine Stock Exchange to support its planned short selling launch that have made “encouraging progress”.
He also observes that the introduction of an onshore bilateral securities lending and borrowing facility will facilitate investors to engage in transparent, well-regulated and covered short selling activities in Indonesia, increasing the liquidity and efficiency of the country’s capital markets.
PASLA believes this will enable better price discovery and greater market resilience, especially during periods of heightened volatility.
As markets continue to normalise post-Covid, it is inevitable that restrictions introduced during the height of the pandemic will continue to be removed. The key issue for market participants is the pace at which these limitations are removed - and the extent to which they return markets across Asia Pacific to the conditions that prevailed prior to 2020.
As early as 2021, trade associations and securities financiers were advocating a return to more normal market conditions. As we reported last year, some of the strongest criticism of these bans came from the PanAsia Securities Lending Association (PASLA). In its 2021 review of the regional securities
Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence explains that short selling restrictions exist in South Korea, Indonesia, and Thailand. “Taiwan previously had restrictions in place, but these were lifted in February 2023,” he adds. “South Korea is the most prominent securities lending market amongst these countries. During 2022, balances declined by $1.8bn (£1.4bn), a fall in demand that also affected average fees in the market which declined from 2.48% in January to 1.81% in December as demand for South Korean equities declined.”
Andy McCardle, head of EquiLend Asia observes that since the easing of the short sell ban, Korea has grown back to levels
Restrictions on short selling across APAC remain a contentious topic in terms of how policy makers have justified these bans and the evidence (or otherwise) to suggest that such bans have increased market stability.
similar to before the ban - even though the list of shortable names is around a tenth of what it used to be.
“With talk of Korea lifting the short selling ban on yet more names, there is a strong appetite and potential opportunity in that market, although it is likely to not happen at least until after the country’s elections in April 2024,” he says. “With a strong desire to be moved to ‘developed’ status, the short selling restrictions could be one potential barrier to that change.”
Korea is most affected by short selling bans, with only 350 names eligible for short selling. While this is impacting market volumes, McCardle suggests it is not as large an impact as might be expected as there is strong demand in the market.
He adds that Korea is a market that is so heavily owned by retail investors that in some ways there is a justification for the ban in the short term.
“In the longer term, however, most market participants see such bans as artificially inflating domestic markets at times and so can lead to a more significant drop and
South Korea is the most prominent securities lending market amongst these countries. During 2022, balances declined by $1.8bn, a fall in demand that also affected average fees in the market which declined from 2.48% in January to 1.81% in December as demand for South Korean equities declined.
impact to those retail investors when it happens,” says McCardle, adding that there is little evidence that short selling bans increase market stability.
“Indeed, many academics feel that bans have historically led to more volatility in markets compared to those that did not impose similar restrictions,” he says.
According to local reports, the Philippine Securities and Exchange Commission (SEC) has approved the PSE’s plan to introduce short-selling in the market. In a recent interview, SEC chairperson Emilio Aquino said the regulator agreed with the PSE that short selling would provide more liquidity in the market.
Final details of the plan have yet to be confirmed, although there are hopes that short selling will be in place before the end of the year. PSE president and CEO, Ramon Monzon was quoted as saying that this move would encourage major funds and foreign investors back into the market.
In June 2023, Bursa Malaysia announced the expansion of its list of securities approved for short selling, and the Ministry of Finance implemented a stamp duty rate reduction from 0.15% to 0.1% from July 2023.
Kazutaka shares vital information related to alternative short selling opportunities in the Japanese stock market and how Japan Securities Finance fits in the picture. Light is shed upon standardised margin transactions (SMT), the background system of the unique trading system with loans for margin transactions and how to take advantage of the SMT since the cost involved include premium charges.
If you need to short sell shares, a common way is to borrow these shares from a securities lending market. However, there is a unique method called “standardised margin transactions(“SMT”)” in Japan. SMT have a large presence on the stock market in Japan.
The big advantage of SMT, You can freely short the majority of all listed issues without the need for complicated prior contracts, negotiations or paperwork with lenders.
Let’s imagine you think that the price of a certain stock will fall in the future. Instead of borrowing those shares from a prime broker and selling them on the market, you can use a SMT to borrow and sell those shares from a Japanese securities company. You can then repurchase the shares when their price
drops within the repayment period (up to six months) and give them back to the securities company. You will then receive the difference in those prices. Moreover, you can also avoid losses through hedge selling using SMT for hedging purposes (in other words, when you think the price of the shares you hold will drop) in addition margin acquisition purposes like this.
Japan Securities Finance (“JSF”) administers loans for margin transactions(“LMT”) in SMT. That means JSF provide the ex-post loans for the funds and shares necessary for securities company. Prime brokers normally need to procure shares in advance before short selling them because of the short selling regulations. However, LMT are built into SMT. Therefore, you can immediately short sell shares without procuring them in advance as there is no conflict with naked-short selling regulations.
Any securities companies which have received a trading order for a SMT from an investor can procure the funds and shares necessary for settlement by providing a certain level of collateral to JSF.
How does JSF procure the funds and shares necessary for LMT? JSF can borrow the funds
necessary from financial markets due to our high credit rating (S&P A rating). Meanwhile, JSF procures the number of shares necessary from participants through an auction process. This JSF auction is held the day after the trading date. This cost determined in the auction process is called the “premium charge.” The premium charge is set in advance by the table corresponding to the amount of investment.
Margin sellers pay a uniform premium charge according to the SMT short balance. On the other hand, auction participants and margin buyers can receive these premium charges according to the number of shares they successfully bid for and the SMT long balance.
The premium charge rate is an indicator which expresses the supply and demand of the stock loan market in Japan. If the premium charge rises sharply, it has the effect of encouraging margin sellers to clear their accounts and margin buyers to newly enter the market. In general, the balance between margin buying and margin selling reaches an equilibrium through self-adjustment with such premium charges. Nevertheless, if the outlook for procurement through the auction process is unclear due to special factors such as sudden price fluctuations, corporate actions and listings which carry over into the next fiscal year from application, JSF will issue a warning or suspend applications (prohibit new sales) in the use of stock loans according on the situation, thereby controlling the increase in excessive selling through such measures.
The costs incurred in SMT consist of the premium charge and the lending fee set by the securities company.
Regarding the premium charge, there are many cases in which the costs involved in margin selling are lower the cost of borrowing on the securities lending market. In particular,
it is possible to find many issues which are comparatively less expensive if you use margin selling among those which are difficult to borrow with high market rates.
One of the reasons for that is that almost no professional investors have entered the SMT. Most users tend to be individual investors in Japan. The preferences of professional investors and individual investors are often divided. You can also now short Japanese shares at a reasonable price with SMT without paying high fees on the securities lending market.
If you would like to prove it, you can easily obtain the historical data of LMT from Quandl (a member of Nasdaq group).
SMT and LMT are very interesting system unique to Japan which enables you to short a wide range of issues. You can also start engaging in these transactions at any time by opening a margin trading account with a securities company in Japan.
Kazutaka Tajima has over 5 years’ experience in Loans for margin trading as relationship manager and JSF auction organiser. He held roles in repo and securities lending, collateral upgrade, and development of any financing tools in JSF.
How much potential does China have as a securities lending market – and what needs to change in the medium to long term to truly open up China as a location for securities lending?
In his top five securities lending demand predictions for 2023, Robert Lees, senior vice president securities lending investor services at BBH referred to China’s reopening as being likely to drive increased opportunities.
He suggested that the unwinding of ‘zeroCovid’ and domestic spending would likely be a significant catalyst this year and could drive increased opportunities. Although the removal of restrictions has been broadly welcomed, the ushering in of the new policy could generate potential risks, including rising infection rates, which may impact productivity.
Separately as China’s economy begins to reopen, Lees observed that global supply chains could be under further pressure,
particularly the automobiles and technology sectors. Furthermore, inflationary pressure may rise as China increases its demand for commodities and raw materials such as copper, gas, oil, and steel.
Andy McCardle, head of EquiLend Asia acknowledges that it is hard to estimate the potential of a Chinese lending market.
“However, I think we can all agree it is substantial,” he says. “China may well represent the largest opportunity of any market globally and it seems to be more a question of when it will reach that level rather than if. Having said that, it could be two years or two decades away.”
The obvious shortcoming of the current operating model is that it is really only a domestic model, which has limitations for both market entrants and vendors. “To truly open China to securities lending, the market needs to be more open and accessible to foreign banks,” adds McCardle.
Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence describes China as one of the sleeping giants of the APAC securities lending landscape. “The size of the investment community is vast, and the size of the economy is likely to at least equal that of the US over the coming years,” he says.
“As China moves towards a more technology focused, greener future, the stock market is likely to play a central role in financing new initiatives. To ensure liquidity and fair pricing, the existence of an active and open securities lending facility is essential.”
The risk to the securities finance community is the operational complexity that may be involved in operating in such a market. However, combined with Hong Kong - where 30% of securities currently on loan are China H shares (mainland China-incorporated securities listed in Hong Kong) the potential to become a significant market for global securities lending participants is enormous.
On the question of the significance of the decision to allow insurance funds to participate in securities lending markets, Cowan says any opening up of the securities lending infrastructure should be seen as a positive.
“This step shows that the authorities understand and have confidence in the market which is a good sign for future developments,” he adds.
The significance of the decision to allow insurance funds to participate in securities
lending markets is not the ability of insurance funds to lend per se, but to be able to lend via offshore lending agents - in traditional agency structures - under standard GMSLAs.
That is the view of Simon Lee, managing director, head of business development EMEA & APAC at eSecLending, who reckons the significance therefore is whether this signals the beginning of a wider trend of Chinese institutions to lending via the offshore markets, and possibly the easing of some of the more restrictive limitations impacting the lending of China ‘A’ shares.
“China is essentially a central counterparty market, which unfortunately limits the typical offshore investor from participation due to non-traditional approaches to aspects such as collateral management, counterparty exposure, indemnification, pricing, and corporate action collection, amongst others,” he adds.
“Until these change to the approaches employed in more traditional international lending programmes, we don’t expect to see much movement in the near term.”
Adnan Hussain, head of agency lending & liquidity services, markets & securities services at HSBC refers to a significant amount of potential in the Chinese market, inclusive of both Stock Connect and onshore lending.
“Generally, it is a positive that there is an ongoing review of the rules and that
China may well represent the largest opportunity of any market globally and it seems to be more a question of when it will reach that level rather than if
Andy McCardle, head of EquiLend Asia
insurance funds are now included along with banks, brokers and mutual funds,” he says. “However, offshore participation remains limited. Local knowledge on the international securities lending industry continues to increase although asset owners onshore have only recently started exploring alternative sources of yield and discovered lending as an option to do so, including offshore lending.”
Hussain says there are several limitations of the current operating model. From a Stock Connect perspective, participants are limited to exchange participants, with agent lenders not explicitly recognised. Additionally, while beneficial owners can lend they require a local licence (‘qualified institutions’) although the lending function is normally an outsourced activity.
“No offshore agent lenders are currently recognised – an asset owner can lend and generally all activity takes place onshore, through onshore borrowers and lenders,” he adds. “The CCP model is not viewed here as a qualifying CCP (QCCP), meaning there is a higher capital cost incurred. Collateral is also
counterparty exposure, indemnification,
held centrally by the CCP rather than passed onto the lender. Finally, a broker has to put up large collateral value before borrowing in a segregated account and short sell proceeds also sit within that same account.”
When asked what else needs to change in the medium to long term to truly open up China as a location for securities lending, Hussain makes a number of observations relating to Stock Connect including:
• Allowing more participants, such as agent lenders or affiliates of exchange participants, to join in the short term (longer term, PASLA has discussed a CCP model with HKEX that would align with that of mainland China)
• Ongoing collaboration of multiple stakeholders – HKEX, Shanghai and Shenzhen Exchanges, China Securities Regulatory Commission
• Relaxation of the uptick rule - currently, securities borrowed through securities based lending impact all accounts, including non-lending accounts, and are subject to the uptick rule; there is no segregation of accounts identified in the current rules.
China is essentially a central counterparty market, which unfortunately limits the typical offshore investor from participation due to nontraditional approaches to aspects such as collateral management,
pricing, and corporate action collection
Simon Lee, managing director, head of business development EMEA & APAC at eSecLending
Against a backdrop of changing regulations, policy divergence and the emergence of new markets, Alex MacMillan, BNY Mellon, explores what is needed to be a dependable partner for Asian investors.
The Asian market is undergoing a significant transformation, as several compelling trends reshape the investment landscape in the region. Whether on the sell-side or buy-side, investors are increasingly looking to engage with banks that not only have a strong presence in the markets and instruments that are popular in Asia today, but are also primed to react to the next wave of trends across trading, liquidity and collateral:
One important trend impacting Asian investors is the rise of synthetic financing capabilities. Large prime brokers have expanded their use of synthetics, which rely on outright purchases and sales rather than traditional stock borrows, to overcome the regulatory constraints of Basel III. And while the upcoming Basel IV rules may ease some of these constraints, they are unlikely to reverse the relevance of synthetics in Asian markets.
With the popularity of synthetics showing no sign of abating, a growing number of investors are keen to participate in this market. To meet this demand, BNY Mellon is scoping the feasibility of an agency total return swap solution that will further complement our physical lending.
The divergence of the Bank of Japan’s (BOJ) monetary policy from that of the G7 has brought renewed interest in the securities borrowing and lending (SBL) market for Japanese securities and cash, as well as domestic borrower demand:
• Yield curve control (YCC) – The BOJ’s yield curve control (YCC) policy has reduced the supply of 10-year bonds in the market. In response, brokers (offshore) are turning to agent lenders for their Japanese government bond (JGB) supply needs. As a result, fees are on the rise – making this
Large prime brokers have expanded their use of synthetics, which rely on outright purchases and sales rather than traditional stock borrows, to overcome the regulatory constraints of Basel III
This underpins the importance of Asian markets, and is why enhancing accessibility to the bank’s platform and people are key long-term priorities. The better connected BNY Mellon is, the better it can translate the needs of this dynamic region
class a more attractive option for clients.
• Increased rates – The possibility that Japan will increase interest rates has encouraged the market to review the economics of accepting Yen cash. As an experienced cash reinvestment manager, we are positioning ourselves to support future developments.
• Cost of hedging – The cost of hedging USD-denominated bond exposures (e.g., US Treasuries) has become too expensive for many Japanese asset owners. Consequently, borrowing demand has diversified to include more non-Japanese holders, as that supply is more stable. Banks such as BNY Mellon, which are able to provide ample supply of US treasuries, are supporting this diversification.
Key Southeast Asian markets are amending rules around SBL, which brings them closer to the international model that allows for offshore participation. For example, new rules aimed at opening the market to offshore investors were recently proposed in the Philippines and are currently going through the necessary approvals. The Indonesian Central Bank also recently issued new regulations regarding a bilateral securities borrowing and lending facility (onshore), which aims to match potential borrowers and lenders directly. This is a big step towards a working offshore model. Key industry participants are coming together to drive these developments alongside the Pan-Asia Securities Lending Association (PASLA).
In response to these trends, BNY Mellon continues to enhance its platform to support the Asian market’s current and future needs. Across Asia Pacific, significant volumes are transacted through BNY Mellon’s platform by a diverse range of institutions which rely on its stability and resilience. This underpins the importance of Asian markets, and is why enhancing accessibility to the bank’s platform and people are key long-term priorities. The better connected BNY Mellon is, the better it can translate the needs of this dynamic region.
In Singapore for instance, BNY Mellon recently introduced enhanced securities finance and liquidity expertise to better service growing ASEAN markets – including trading, client coverage and product. The commitment of our Securities Finance, Liquidity, Collateral Management and FX businesses to enhancing accessibility in the region and future proofing our capabilities doesn’t stop there:
• Sell-side traders from Tokyo to Sydney can borrow global fixed income and equities from our agency lending desk. This means getting pricing and execution in-region on trillions of dollars of securities.
• JGB financing through our global principal trading desk, where we lend cash and US Treasuries, supports the liquidity obligations (e.g., LCR) of Japanese Banks and the local entities of foreign banks.
• FICC Sponsored Repo participation in Southeast Asia has been expanded to include collateral providers and receivers.
Clients trade with the FICC via our shortterm investment platform, LiquidityDirect, or directly with our principal or agency desks.
• We lend assets for traditional buy-side clients (i.e., sovereign wealth funds and insurance companies) and are expanding into new segments such as Chinese qualified domestic institutional investors (QDII) and Korean mutual funds. This connects previously restricted supply to global demand.
• Asian institutional clients can invest cash into over 100 MMFs. Purchases, redemptions and exposure management are accessible on the same day.
• Clients can mobilise regional assets as collateral for financing activity globally, as the triparty platform supports more markets in-region than any other platform. In the last few years, the platform has added China Connect, Malaysian and Indonesian assets as eligible collateral.
• Buy-side clients can access innovative FX solutions covering emerging Asia. Most recently, we launched a custody-agnostic KRW onshore solution, which allows global (non-resident) clients to trade KRW deliverable spot and forward FX (via BNY Mellon Seoul).
Regulation, policy divergence and the emergence of new markets continue to shape the decisions of Asian investors. BNY Mellon’s history of supporting connectivity and stability will help ensure its platform
continues evolving to address ongoing challenges and empower clients to capture opportunities – now and in the future – in this dynamic, ever-changing marketplace.
Alex is based in Singapore and is responsible for business development of BNY Mellon’s Securities Finance business in Asia Pacific. This involves managing strategic relationships in the region and advancing growth across the product suite, which includes Securities Lending, FICC Sponsored Repo and Secured Loan.
Prior to joining BNY Mellon in November 2022, Alex spent nearly a decade with Northern Trust in client management and product coverage roles in London and Singapore. Alex holds a Bachelor of Arts (Honours) in Business from the University of Kent.
BNY Mellon’s history of supporting connectivity and stability will help ensure its platform continues evolving to address ongoing challenges and empower clients to capture opportunities – now and in the future –in this dynamic, ever-changing marketplace
Analysis of the impact of GASLA’s update to the Global Framework for ESG and Securities Lending, how far Asian lenders have integrated ESG into their collateral guidelines, and progress towards data standardisation and availability.
In March 2023 the Global Alliance of Securities Lending Associations (GASLA) released an update to the global framework for ESG and securities lending. The new framework updates the first version, which was released by the Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) in May 2021 with the support of the International Securities Lending Association (ISLA) and provided the first practical guidance on how securities lending market participants could approach ESG issues in their businesses. It provides insight into key considerations across the five main touchpoints between securities finance and ESG:
• Voting rights: Assess or develop a policy for recalling loaned securities based on ESG considerations in a proxy voting framework; identify the types of material shareholder resolutions on which they
want to vote by company and by issue, also taking into consideration other fiduciary duties, including revenue generation for underlying
• Non-cash collateral, cash reinvestment and reuse: While ESG-related risks should be considered in all aspects of an asset owner or managers’ investment portfolio, it should be recognised that collateral guidelines should also be adequately diversified with a key aim of properly mitigating credit risk, as well as ensuring collateral is liquid and can be realised in the event of default
• Lending over record date: Securities lending activity across multiple jurisdictions can result in different tax obligations for the various participants in the lending - lenders should ensure
compliance with the spirit as well as the letter of the law for tax-related regulations and initiatives across global jurisdictions
• Facilitating participation in short side of the market: Where securities are borrowed to cover short selling, which is recognised globally for its contribution to price discovery as well as healthy and liquid markets, borrowers should pay close attention to regulatory requirements in different jurisdictions with regards to the disclosure requirements for short positions
• Transparency in the lending chain: GASLA’s objective is to ensure that regulators and issuers have access to the transparency about securities lending that they require - lenders, via their agents, can consider implementing effective minimum standards, reflecting their corporate level sustainability framework, with respect to selecting their direct counterparties, thereby embedding their ESG policies into their ‘approved’ borrower lists
The framework also offers commentary on the legal and regulatory context for each touchpoint as well as practical guidance for lenders.
“We are excited to be launching this update to the framework at the time of our conference in Tokyo,” said Paul Solway, director and communications officer at PASLA. “This is the product of extensive research and dialogue by GASLA’s member associations, distilling the latest thinking on how the securities finance market can approach ESG considerations, which are critical to all financial institutions. We are proud that we have been able to converge on a single framework for the industry
globally and look forward to learning more about its value to our members.”
According to Yuka Hasumi, head of EquiLend Japan, there is increased understanding of the compatibility between securities lending and ESG – in other words, how ESG can be harmonised to co-exist in the investment strategies of firms.
“We have seen some global custodians establishing an ESG-aware commingled cash collateral reinvestment strategy in their agency lending programmes, for example,” she says, adding that PASLA’s work in this area has been important in terms of providing best practice guidelines.
“Aligning the universal drive toward ESG solutions by conducting panels and discussions on a regular basis has driven the agenda forward and guidance will continue to evolve to reflect requirements across local and international markets.”
ESG remains a challenge for many beneficial owners. There is a growing distinction in approaches at a regional level and given its importance to a company’s strategy and competitive advantage, a lack of standardisation can sometimes cause challenges.
Any market guidance is helpful in this space as it provides guard rails and confidence that these ideals can be fully integrated in an efficient and cost-effective manner. Regulators will also like the fact that the market is looking to essentially self-regulate in this space and make positive changes.
That is the view of Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence, who says while standardisation can be achieved, it is important to also acknowledge that each beneficial owner will view ESG through a slightly different lens.
“As the conversation evolves, so do the number of tools and data points available to market participants to help them to achieve their ESG objectives,” he says. “There is a raft of data points now available to all market participants. The question for the securities lending community focuses on how lending agents are evolving their offerings to be able to support a client’s ESG objectives, and how their range of product offerings fit with client’s needs.”
A fully segregated lending model allows clients to manage collateral effectively as per their own ESG criteria observes Adnan Hussain, head of agency lending & liquidity services, markets & securities services at HSBC.
“Recalls for proxy voting are common in some APAC markets, such as Australia –where funds (for example, pension funds) are expected to be more actively involved in voting - particularly on ESG concerns,” he says.
On the question of whether there are sufficient resources available to clients to enable them to determine whether their agency securities lending programmes are complying with their sustainability goals, Hussain suggests how they lend their securities for additional yield and comply with their sustainability goals comes down ultimately to governance and resources.
“Supporting clients to reduce their greenhouse gas emissions is a top priority for us and we have committed to aligning the financed emissions from our portfolio of customers to net zero by 2050 or sooner, in line with the Paris Agreement goals,” he adds.
Simon Lee, managing director, head of business development EMEA & APAC at eSecLending reckons that for the majority
of market participants, the updates to the GASLA framework are for the most part a reiteration of many key tenets of their existing activities.
“For those institutions we don’t see material change to their participation or programme structure,” he says. “For those institutions that have not yet incorporated ESG considerations into their securities lending activities, the framework can provide valuable direction as they work through this with their service providers.”
When asked whether there are there
Aligning the universal drive toward ESG solutions by conducting panels and discussions on a regular basis has driven the agenda forward and guidance will continue to evolve to reflect requirements across local and international markets
Yuka Hasumi, head of EquiLend Japan
sufficient resources available to clients to enable them to determine whether their agency securities lending programmes are complying with their sustainability goals, Cowan acknowledges that each client’s ESG goals are likely to be different.
“From a securities lending perspective, any new restrictions or programme requirements will need to be hard coded into the operating processes of the lending agent,” he says. “This is something that lending agents have been doing for many years and should already be part of best practice.”
Cowan also refers to the importance of PASLA’s work in this area in terms of providing best practice guidelines.
“Industry-led guidance and thought leadership in this space is essential to ensure that the market pulls in the same direction,” he says. “Coordination on a global level is also invaluable as most clients have lending programmes that span more than one geographical zone.”
In December 2022 ASIFMA released the results of its green taxonomy survey, the first ever report of its kind which aimed to make observations of common themes and issues identified with taxonomy adoption and implementation in sustainable finance in Asia Pacific and beyond.
The survey was aimed at banks, and respondents were predominantly multinational banks headquartered in Europe or America operating in Asia Pacific, with a smaller number headquartered in China and Japan.
At the time of conducting this survey, several regional Asia Pacific taxonomies were under discussion or consultation, such as the ASEAN, Australian, Thailand and Singapore GFIT taxonomies.
“Taxonomy adoption and implementation
are gathering pace in the Asia Pacific region,” said Diana Parusheva-Lowery, executive director and head of policy and sustainable finance at ASIFMA. “It is becoming an industry - and perhaps soon to be a regulatory - imperative to have common externally mandated definitions of green economic activities for corporate reporting standards, product labelling and possibly other purposes.”
Some of the key findings of the survey were:
• The majority (75%) of survey participants had started using a taxonomy - the EU taxonomy of sustainable activities was the dominant taxonomy, with three quarters of respondents indicating they had adopted it
• Two thirds of respondents indicated they had adopted a taxonomy for the purposes of disclosure and reporting alignment
• The availability, quality and reliability of data was identified by survey participants as the key difficulty in taxonomy implementation, followed by lack of clarity in taxonomy definitions with participants indicating difficulties with interpretative questions about the scope of the taxonomy
• Almost all survey participants anticipated implementing a blended scenario taxonomy operating model to create an internal standard
Beyond regulatory obligations, most participants indicated that issuer, borrower or investors’ expectations would be the key consideration in determining which taxonomy they would use.
“The survey results indicated participants are making concerted efforts to ensure readiness and to support this endeavour,” added Parusheva-Lowery. “However, there remain opportunities for bodies such as ASIFMA to facilitate the adoption and implementation of taxonomies and to further the sustainability and climate agenda.”
A recent PASLA podcast asked what is this “digital transformation” we hear so much about? Is it the wholesale adaptation to an entirely new way of working, or is it the integration of emerging and embedding technology to enhance the dayto-day operating model of firms, for the better and how to reconcile that with local versus global regulatory pressures? EquiLend’s Head of Asia, Andrew McCardle, expands on his thoughts on the same in this article.
Increased transparency across all corners of finance, when it came, was overdue. Financial centres generating billions of dollars a day, running on legacy technology and a 24-hour work culture--some might argue the sector felt resistant to change. That change was heralded by the birth of Silicon Valley, adding a freshness to IT and infrastructure which had sorely been lacking. Challenging the idea of IT as a means to an end and reframing it as exciting, instant, powerful--the gateway to the future—was enticing. Timing is everything.
We now see change from all quarters: regulatory change, technological change, global and economic change. The world of finance has been buffered by strong winds in the past 4 years, yet no core infrastructure malfunctions have occurred despite huge stock volatility and runs on banks, to name a few. This is testament to the technological change
which our sector has embraced. Regulatory change has played a role in this adoption, with regulators rightly demanding greater transparency, better processes, fewer breaks, fewer fails and ever decreasing settlement cycles.
Regulators in APAC have the same priorities as their US and EU counterparts, but where change comes slowly in those more established markets – with some 10 years lead time since the first proposal of SFTR for the EU - we see more immediate, decisive action from regulators in parts of the APAC market. This speaks to the desire of local regulators to inspect markets even in their relative infancy and put in place the safeguards that larger financial centres have learned expensive lessons from.
A mention of EquiLend is overdue here given our role in early digital transformation in
securities finance 22 years ago with automated trading and post-trade services, along with our role as a data, reg-tech and platform provider in the APAC financial community. Our more than two decades of heritage in bringing efficiency to trade execution and lifecycle management has powered our ambitions as we have grown to encompass an end-to-end suite of lifecycle management solutions, realtime data and reporting tools.
A key element of our role in APAC is in supporting firms in being on the right side of any regulation, regionally or globally. EquiLend’s positioning as a trading platform contributes an additional layer of confidence for regulators in the data, as it gives timestamped confirmations with trade details to make it easy for verification. Transformative, real-time data is available for firms on NGT, making trading and reporting all the more accurate for firms and regulators.
There are global challenges to be solved with tech which western regulators have smartly addressed with SFTR in EU markets and the looming 10c-1 in the US. Whether Japan, Australia and other regional markets will look to adopt this style of regular reporting cadence remains to be seen. T+1 promises to be interesting for our sector as without diligent preparation and adoption of automated tech solutions, we expect to see increased bottlenecks across the lifecycle of the trade. With the global market cut-off running to US end of day, ensuring process flow for APAC trades continues in line with the US is an opportunity to engage eager firms to address future challenges now with forward-looking,
Andrew McCardle is the Director and Head of EquiLend Asia. He has been based in Asia since EquiLend opened an office in Hong Kong in 2011. Previously, he was on the firm’s Client Services team in London. As Head of EquiLend Asia, McCardle is responsible for the firm’s securities finance trading, post-trade, market data and clearing services offered throughout the Asia Pacific region, as well as managing EquiLend’s Hong Kong-based sales, client relationship management and client services staff. McCardle has a bachelor’s degree in chemistry and master’s degree in chemoinformatics from The University of Sheffield in the U.K.
EquiLend’s positioning as a trading platform contributes an additional layer of confidence for regulators in the data, as it gives timestamped confirmations with trade details to make it easy for verification
global solutions, something which has often been a budgetary challenge.
Incrementally, transformative digital tech has and continues to address data inaccuracy and latency, collateral overexposure and settlement failure, to name a few. The contribution to global market liquidity risk inherent in each of these, especially in a T+1 or even T+0 environment, can be removed by the adoption of automation to smooth every part of the trade lifecycle, such as EquiLend has been offering for a number of years already.
Each of our step changes in line with the industry were disruptive and either brought to market or supported any variety of incoming change mentioned so far. Truly transformational technology, however, operates in new bounds, and our latest innovation 1Source, a DLT-based single source of truth for securities finance, is already making waves.
APAC is a region whose regulators are already adapting to change with vigour; as with the rest of the world, settlement cycles are changing, and with some of the most stringent punitive damages, transformational technology could deliver some of the greatest benefits here. For the times, transformational attitudes are important. Change makers are pushing new ideas, solutions and adaptations daily. AI is now a part of our present, not in a faroff sci-fi future. Returning to our search for a definition of digital transformation, it would be inaccurate for us to define digital transformation within the narrow confines of only moving to entirely new ways of working or to position it simply as an enhancement of the old. The real definition is broader. It lies in a challenge to markets to do more and do better and face the future head on.
For the times, transformational attitudes are important. Change makers are pushing new ideas, solutions and adaptations daily. AI is now a part of our present, not in a far-off sci-fi future
Citi’s 2022 report on the state of market infrastructures and securities services found that when it comes to engagement of digital assets, blockchain or DLT, just over half of the Asia Pacific securities service firms surveyed were active this year.
The benefits of tokenisation were also clear according to Asian market participants, with 41% describing the potential benefit
of tokenisation in terms of market liquidity and variety of tradable assets as ‘extremely valuable’ and 55% referring to it as moderately valuable.
The report referenced the announcement by Asia Development Bank of a project to trial blockchain for settling cross border securities transactions, the findings of which were published in June.
According to Asia Development Bank, project Tridecagon proved that the deployment of DLT/blockchain solutions for the settlement of cross-border securities transactions is possible, particularly in a well-governed and functionally well-defined environment.
Even under strict assumptions, connectivity between different blockchains can be ensured, natively or with the aid of existing tools and emerging applications. The functionality of the blockchains involved proved to be workable and fit for purpose and all the vendors participating in the proof of concept were able to adapt their solutions to the bank’s requirements and successfully demonstrate the results.
The connectivity achieved between blockchains in project Tridecagon suggests that such functionality can be deployed in a heterogenic system environment, as typically observed in ASEAN+3.
If properly designed, it may be easier in DLT/blockchain solutions to deploy additional functionality at a later stage than in the existing legacy systems. Solutions may be more resilient and tamper-resistant compared with linkages of the existing payment and settlement systems.
However, Asia Development Bank accepts
that the limited scope of project may not be sufficient to prove the general usability of DLT/blockchains in all aspects of post-trade processing and financial transactions.
In the process of the proof of concept it was recognised that some of the functionality goes beyond what legacy functionality needs at this point and that some legal and regulatory changes are necessary to fully utilise the functionality.
The project set various reality checks, including no legal and regulatory changes. This highlighted the importance of synchronising DLT/blockchain and legacy systems and the fact that the former alone may not be a full-fledged solution, but with synchronisation could improve the existing financial systems.
It was therefore recommended that a thorough analysis of existing transaction procedures and DLT/blockchain functionality be conducted in any project implementation.
The project team also observed that while in actual implementation technology will not
We believe a more efficient onboarding process could unlock substantial assets currently unavailable in securities lending simply due to the fact that those beneficial owners are not onboarded to lending programmes
Yuka Hasumi, head of EquiLend Japan
If properly designed, it may be easier in DLT/blockchain solutions to deploy additional functionality at a later stage than in the existing legacy systems.
be a problem, the governance of a possible consortium would be the key to success –which is why the question of cost, or costeffectiveness, may not be easy to answer until the determination of governance principles is complete.
Technological developments in securities finance have advanced swiftly over the last 12 months, accelerated further by the approaching T+1 shortened settlement cycle coming in North America - which will have a global impact downstream suggests Yuka Hasumi, head of EquiLend Japan.
“1Source, our distributed ledger technologybased solution, will alleviate concerns by keeping counterparties immediately and always aligned for lifecycle events,” she continues. “This is one such advancement which is only possible because of new technology and a willingness of the market to invest in future-proofing their businesses.”
Hasumi says the desire to automate is strong throughout the region, including in markets such as Korea where the regulator is working hard to track what is going on. Market participants also have a strong desire for increased transparency and efficiency.
“The beneficial owner onboarding process is one area in need of more efficient processes, which is something we have addressed with our new Onboard+ solution,” she adds. “We believe a more efficient onboarding process could unlock substantial assets currently unavailable in securities lending simply due to the fact that those beneficial owners are not onboarded to lending programmes.”
EquiLend’s focus has been on supporting the full front, middle and back office in the ability to connect with counterparties, execute transactions centrally, maintain their books and records, and handle operational processes efficiently.
Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence
“We have enhanced our automation capabilities over the past year with support for hard-to-borrow transactions with competitive bid on NGT (centralising client special activity while utilising street-level insights such as real time and depth-of-market data to allow clients to make informed trading decisions); upgraded many of our post-trade solutions around returns, recalls and monitoring of settlements; brought new real time data and analytics offerings to the global market; and set our sights on supporting easier beneficial owner onboarding as well as helping our clients meet new regulatory obligations,” says Hasumi.
Onboarding has always been a particular challenge for market participants according to Stewart Cowan, executive director, head of APAC securities finance product at S&P Global Market Intelligence.
“The manual, email driven process has been broken for a while and it has made onboarding new funds inefficient and time consuming,” he says. “Over the last year, S&P Global Market Intelligence has developed a new tool to streamline this process. This tool transforms onboarding by acting as a central hub for fund information and communication, making the process more efficient and controlled. We believe that it will unlock additional liquidity more quickly to the benefit of all market participants.”
The manual, email driven process has been broken for a while and it has made onboarding new funds inefficient and time consuming
This year has already seen significant progress in Taiwan, South Korea, Indonesia Philippines, and Malaysia, suggesting that the region may be ready to finally realise its full capacity. Not that APAC has been on a bad run, activity has remained comparatively strong and surpassed European markets in terms of revenues. However, the advancement of new markets towards an open offshore securities lending facility offers a significant upside for future returns.
Between January and May 2023, $859mn (£676mn) in securities finance revenues were generated for market participants. Despite this being 2% lower than 2022 values, it does remain significantly higher than during the same period in 2021 ($695mn) and 2020 ($672mn). Utilisation remains solid across the region reflecting a robust level of demand. Across Asian equities, the Jan – May average stood at 5.17% which compares favorably to the 5.08% that was seen during the same period during 2022. Average fees remain aligned with those seen during 2022 and currently stand at 93bps (Jan-May average).
Two of the best performing markets over the year have been Japan and Taiwan. Japan experienced one if its highest revenue generating months for many years during March, as a strong dividend season saw revenues top $90mn. Average fees across all months of 2023 (Jan – May) have exceeded those during 2022 and balances have been on average 6% higher. Japanese government bonds have been very popular amongst borrowers over the last few months as low inflation allows monitory policy to remain stimulatory.
Taiwan is often referred to as a barometer for the global economy given its strength in both semiconductor and microchip production. Global trade tensions have led to sanctions and subsidies, which have added volatility, creating numerous borrowing opportunities for investors. Revenues have increased as restrictions have been lifted and both on loan balances ($22bn) and lendable assets ($151.7bn) hit a year high in May, to the benefit of lenders.
Hong Kong remains one of the most important markets within the region. The reopening effect of China has benefited Hong
Kong and revenues generated in the market beat those of 2022 during all months of 2023 except for May. Over 30% of securities on loan are China H shares, (Mainland China incorporated securities listed in Hong Kong) which combined with a vibrant special market results in continued strong returns.
During 2022, Australia benefited from the BHP delisting from the London Stock Exchange. The market also experienced a continued demand for mining stocks linked to the manufacturing of batteries (e.g. Lithium). These factors made 2022 one of the best performing years for the market after generating $185mn in securities finance revenues. Average fees in this market surpassed 100bps during both Q2 and Q3. So far, during 2023, this market is off to a slower
start. Revenues remain, on average, 21% lower than those seen during the same period of 2022 (Jan-May). Despite this, Australia remains a hub for sophisticated investors and a home to some of the largest energy and mining companies in the world. As the electric vehicle sector remains popular amongst short sellers and demand for minerals to enable the production of electric vehicle batteries remains critical, Australia remains a market very much in focus.
Strong tailwinds are present within the Asia region from a securities lending perspective. South Korean government bonds have started to become more popular amongst borrowers. The country has a strong credit rating, and its bonds are increasingly considered as high-quality liquid assets. In addition, the
As we head towards the second half of 2023, we believe the region is on a precipice – it’s relatively unscathed by the global inflationary concerns, markets are still recovering from extended COVID lockdowns and regulators are seeking to resolve the bottlenecks and restrictions which will allow for greater liquidity
South Korean regulator has signaled a review of short selling restrictions and a reform of the investor identification processes which will drive improved market efficiency and higher revenues. Progress in new markets such as Indonesia will encourage other regional markets to capitalise on the benefits that securities lending can bring to financial markets, such as additional liquidity and fairer pricing. China and India will hold the key for the region’s long-term success if the regulators were to ever agree to offshore participation.
At S&P Global Market Intelligence Securities Finance, our aim is to enhance both transparency and understanding of the securities finance markets. Changes in the market landscape are closely monitored as the group continues to help clients navigate an ever-changing market. Local expertise and knowledge are paired with market leading solutions-based capabilities to provide clients with actionable content and insight through the combination of both data and analytics. S&P Global Market Intelligence Securities Finance offers tools for performance benchmarking, collateral management, client onboarding and risk management. Several tools have also been developed that are specific to the beneficial owner community to assist them in improving program oversight and risk management processes as well. These tools are currently proving very popular as volatility and geopolitical risk remain key features across all financial markets. Within the Asia Pacific region, S&P Global Market Intelligence provides coverage across all markets and have local representation in Australia, Hong Kong, Japan, and Singapore. As we head towards the second half of 2023, we believe the region is on a precipice – it’s relatively unscathed by the global inflationary concerns, markets are still recovering from extended COVID lockdowns and regulators
are seeking to resolve the bottlenecks and restrictions which will allow for greater liquidity. We expect securities finance revenues to remain robust, if Japan’s interest rate policy continues, Japanese government bonds are expected to remain in demand. Hong Kong is likely to continue to lead the way in the region’s specials activity, as the reopening effect of the Chinese economy starts to fade, and Taiwan is expected to drive revenues higher given its liquidity profile and its strong links to the electric vehicle and artificial intelligence sectors.
Stewart Cowan, Executive Director, Head of APAC Securities Finance Product, S&P Global Market Intelligence
Stewart is based in Sydney and is responsible for Securities Finance product across Asia Pacific.
Securities Finance customers leverage the most extensive global securities lending and finance data to optimise trading efficiency, enhance investment decision making and manage securities lending programs.
Stewart’s role covers regional business strategy, including new markets, data and solutions as well as driving new consulting services and regulatory reporting solutions.
Stewart has 30 years of experience in the financial services industry with 15 years in securities finance. Stewart recently served at Digital Asset Holdings as Senior Product Manager for Enterprise Solutions presenting distributed ledger technology and smart contract product solutions and concepts. Prior to this, Stewart served at JPMorgan for 17 years. Stewart carried out a number of roles his final being Asia Pacific Head of Product and Portfolio Advisory for Agency Lending, responsible for the business growth and client management for Agent Lending across the Asia Pacific franchise.
Stewart has also worked at State Street and Perpetual Trustees.
Leverage our experience to optimize your program performance, enhance investment decisions, and confirm good governance through powerful tools and analytics.
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Global Investor explores some of the implications of the move to T+1 settlement from a foreign exchange perspective and how this could impact trading costs in Asia Pacific.
In an article published late last year, BoonHiong Chan, head of fund services and head of securities market & technology advocacy at Deutsche Bank and Britta Woernle, head of market advocacy Europe securities services, Deutsche Bank discussed how the global trend towards accelerated settlement cycles was playing out in Asia Pacific.
China Interbank Market’s government bonds operate on settlement cycles of T+0, T+1 and T+2. T+3 and a special service where settlement on the trade date plus four or more days, where four days is the minimum ((T+n (n >=4)), were subsequently rolled out to allow sufficient funding time for global investors, especially those unable to settle due to local holidays.
In 2021, India made a determined push for a T+1 settlement cycle for listed equities, which has been live since February 2022. The initiative has been heralded as a positive development from a domestic and regulatory perspective. Accelerated settlement cycles have also being discussed in the Philippines (to move from T+3 to T+2).
In June 2022, the ASEAN+3 Bond Market Forum and the Cross-Border Settlement Infrastructure Forum organised a webinar outlining accelerated securities settlement and emphasised the need for industry-wide engagement, collaboration and support.
BBH’s European custody product manager, Derek Coyle, has suggested that Asia is likely to be the most impacted by the move to T+1 in the US market due to time zone differences on the basis that all post-trade activity would
need to be completed in two hours.
While the Indian market adapts processes to T+1 on a specific fund/client basis, elements of optimisation might be possible to set up in terms of process design, he said, referring to the importance of reviewing which operational tasks can be done on T+0 - such as matching and confirmations - so that no further action is needed when Asian markets wake up on T+1.
In February, the SEC adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one (T+1). The compliance date for the final rules is 28 May 2024.
The global FX division of the Global Financial Markets Association (GFMA) subsequently suggested that accelerating securities settlement to T+1 raises the risk that transaction funding dependent on FX settlement may not occur in time, with trade matching, confirmation, and payment all having to be completed within local currency cut-off times.
Alex Dunegan, CEO Lumint Currency Management observes that T+1 FX settlement is challenging for multiple reasons with many regulatory and operational considerations governing the FX settlement process, much of which comes down to the brokers and banks involved.
“For example, I purchase Australian equities from New York for T+1 settlement,” he says. “The bank I traded with may have already
missed its Australian dollar cut-off time for payment since it is already T+1 in Australia when I am in New York - and that assumes I have done the FX trade alongside the equity purchase.”
Firms that do not execute their corresponding FX trades until T+1 (or later) would also be severely impacted. These firms may prefer to wait for confirmations or maximise FX netting opportunities if their equity purchases and sales occur in the same market and by definition, they would encounter settlement risk here.
Joe Hoffman, CEO of Mesirow Currency Management agrees that FX is a concern for investors that operate in an Australian or Asian base currency and trade frequently at the US close. By the time these investors receive their equity trade with confirmed FX requirements, the trade date for FX would have flipped - which happens at 5pm NY time. This means the FX trade will become a same day settled trade.
“Suppose an investor executes the equity trades early in the US trading day and subsequently instructs the FX trade,” he says. “In that case, the trade will be considered T+1, allowing the custodian time to process the trade.”
For most currency pairs the standard settlement period is T+2. Principle 35 (settlement risk) of the Global Code of FX Conduct states ‘market participants should reduce their settlement risk as much as practicable, including by settling FX transactions through services that provide PVP settlement where available’.
The mechanism for settling PVP or paymentversus-payment (a settlement mechanism that ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency
is to accept that the settlement FX will need to be executed on T+0, in the Asian morning
Christakes place) has been continuous linked settlement or CLS, which has set cut-off times where trades need to be matched in order to settle in this framework. Unfortunately, with the new T+1 equity settlement cycle, investors will have difficulty posting trades ahead of the CLS cut-off.
“As a result, they will need to be settled
Executing late in the US day also creates potential market liquidity implications that need to be understood. Another option
Gothard, partner and head of global markets at BBHVikas Srivastava, chief revenue officer at Integral
and establishing new teams in the US may not be efficient or feasible,” he says. “Executing late in the US day also creates potential market liquidity implications that need to be understood. Another option is to accept that the settlement FX will need to be executed on T+0, in the Asian morning.”
However, this opens other risks such as potentially not being able to rely on risk mitigation market infrastructure such as continuous linked settlement. Other notable risks include executing and settling ahead of settlement cut-off times, which occur early in the global trading day for Asian currencies.
When trading US assets, the standard process is often for asset managers to trade the representative FX trade T+1. Once transactions are matched, trade calculation takes place the next day.
“This would therefore imply that after the T+1 change, we would either require execution in illiquid periods of the day - likely late in the day after London market period ends - or move to T+0 execution, which results in a much smaller window of potential execution, matching, and settlement, not to mention the lack of infrastructure to assist with this” says Nathan Vurgest, director, head of trading at Record Financial Group.
outside of CLS, which increases the risk surrounding settlement,” says Hoffman. “This is an unintended consequence of this change in the equity settlement cycle that regulators either missed or ignored.”
Since the US equity market closes at 4pm ET (9pm UK/10pm CET), this will leave very little time on T+1 to match the equity trades and to then generate and execute the FX required to settle the equity trades agrees Chris Gothard, partner and head of global markets at BBH.
“For Asian managers without US trading and settlement capabilities this poses a challenge,
This could potentially lead to inefficiencies in terms of cash balances being held in different currencies and more transactions to true these balances up, if these are required.
Under T+2, firms had more time to figure out exactly how much would be needed in the local currency for the equity trade, plus commissions and other fees. Achieving this under T+1 is much more challenging as in APAC firms will have a matter of hours and not days to ensure they have the correct amount of dollars available from settlement of associated FX trade.
Manual processes will not be able to handle this and will lead to higher trade fails. The spectre of T+1 should be a wakeup call for market participants to work with their technology providers to install highly automated trading technology
To make this a reality, automation of the trading process is needed with very tight integration between the equity order management system, equity execution management system, back office, and the FX execution management system.
That is the view of Vikas Srivastava, chief revenue officer at Integral, who notes that all this needs to happen very quickly and with no mistakes.
“Manual processes will not be able to handle this and will lead to higher trade fails,” he says. “The spectre of T+1 should be a wakeup call for market participants to work with their technology providers to install highly automated trading technology. Given the time pressure to deliver the infrastructure there are significant benefits of going with a cloud-based system which has a much faster time to market than in-house tech builds.”
According to Gerard Walsh, global head of capital markets client solutions at Northern Trust, Asia-Pacific markets will need particular attention. In 2022, the US Treasury recorded approximately 25% of all US foreign owned equities were held by APAC investors (data as of 30 June 2022 published by the US Treasury in April 2023 from the report on foreign holdings on US securities).
However, he also observes that T+1 isn’t the shortest settlement cycle in place around the world. “For example, Taiwan is a T+0 market and there are models already at work to satisfy that ultra-short cycle,” says Walsh. “T+0 markets are pre- funded and elements of that T+0 process may need to be adopted by managers who invest in US assets and are based in a time zone that has low levels of overlap with US trading hours.”
Walsh also suggests that FX risk can be mitigated through thorough preparation.
“Leaving aside human error in the US T+1 future state, more use of straight through processing, as low a level of human intervention as possible, and a full rework of existing processes will help mitigate such risk,” he adds.
Whilst the GFMA report identifies that advances in distributed ledger technology (DLT) are developing and could eventually provide alternative solutions to the challenges of T+1 US securities settlements outlined in the report, this is significantly underplaying its current role suggests Alex Knight, head of sales and EMEA at Baton Systems.
T+0 markets are pre- funded and elements of that T+0 process may need to be adopted by managers who invest in US assets and are based in a time zone that has low levels of overlap with US trading hoursGerard Walsh, global head of capital markets client solutions at Northern Trust
“Automated, safe, and scalable settlements utilising DLT are already in use by some tier 1 banks, helping them to address the roadblocks to efficient trading that will be thrown up by this monumental shift in market structure,” he says. “DLT is already proven as the means to accomplish risk-proof FX settlements for cross-border transactions.”
These observations beg the question ‘how challenging is simultaneous execution of equity and currency trades?’. Historically, currency trades on the back of equity trades were an afterthought and left to the operations team or the custodian (un-negotiated FX trades typically realise much higher costs). As a result, the investor would wait until the equity trades were confirmed and matched before the currency trades were instructed.
Challenges of mixing stocks and currencies include differences in market dynamics, liquidity, execution speed, technology requirements, and risk management explains Dardan Abazi, senior institutional sales at Cornerstone FS.
“Coordinating the timing of equity and currency trades can be complex due to these factors,” he says. “Successful cross-asset trading requires careful planning, reliable data and technology, and expertise in both markets.”
There are currency management and brokerage desks which can provide this service, but that does not necessarily make it easy to implement. Service providers that can execute simultaneous FX deals are best poised to help - assuming they can provide systematic solutions – but even a systematic and automated approach will face the same issues of time zones and bank settlement cutoff times.
The fastest FX execution system in the world is only as fast as the input data it receives
and if that data arrives on T+1 or later, the settlement risk remains.
Vurgest says traders need to ask who would be managing this joint transaction - an equity specialist or a custodian – adding that it is notoriously costly to have custodians or nonFX specialists execute FX.
“Related to the above, if the FX transaction is merely ‘tagged’ on to equity transactions, the costs of execution would likely increase due to the lack of attention paid to this aspect,” he says. “This is because operational process is likely to be prioritised over cost reduction.”
This could lead greater inefficiency as there would be more ‘out of hours’ FX transactions. For example, when equities are transacted at New York close it is likely to be more expensive to execute FX outside of London hours.
“Lastly, it would be possible to align equity and FX requirements efficiently if there were less focus on matching equity benchmarks,” he adds. “Thus, more consideration could be given to trading during the day when there is better FX liquidity.”
While simultaneous execution of equity and currency trades can be done, the concern there is that the FX execution is based on unmatched and unconfirmed equity trade information – the FX trade on this basis is essentially an estimate.
“Given the new deadlines it is plausible that this could be an approach some managers without the right infrastructure or solutions have to put in place, but it creates additional risk of large errors, potential for cash management breaks, and at the very least will increase the work around settlement FX flows from a trading and operational perspective,” says Gothard.
Executing FX trades against unconfirmed or unmatched equity trades can lead to settlement mishaps, counterparty risk,
pricing confusion, regulatory concerns, and operational risks.
“For example, if I purchased FX on an equity target purchase amount and the order was only partially filled the resulting exchange (which settles the next day) would leave me with a surplus in the equity’s FX and possibly a shortfall in my funding currency,” explains Dunegan. “I would likely need to reverse this, which would require further trading (more transaction costs) and take additional time to resolve - extending the cost of the settlement risk.”
According to Hoffman, an investor is better off trading the FX and having that transaction settle in a timely fashion instead of risking an overdraft waiting for the equity trade to match.
For example, if an investor buys 10,000 shares of equity ABC at $95.25 (£75.37) and the fees and commissions are one basis point, the net amount of USD that needs to be purchased is 9,525,952.50. If the broker changes the execution price to $95.23 before confirming and matching the trade the net amount on the revised trade would be $9,523,952.30.
“The difference between these two amounts is just over $2000, immaterial in the grand scheme of things,” says Hoffman. “If the investor waited for the equity trade to be confirmed and missed the cut-off for the FX trades, they could incur an overdraft on the $9.5mn. Assuming an overdraft rate of 7%, the investor would be assessed a charge by their custodian of approximately $1,850 for not executing the FX trade and in some jurisdictions there may also be a regulatory implication associated with an overdraft.”
Other risks of executing FX trades against unconfirmed or unmatched equity trades include over trading, which could lead to increased portfolio costs, incurring overdraft
charges on accounts or an opportunity cost of investment. This is likely to happen if balances are held in different accounts and different currencies are needed to resolve mismatches in equity and FX trades.
One way to mitigate this risk would be to create a full trade and trade-related FX execution lifecycle that completes both elements as close in time as possible says Walsh, adding that such processes exist now from providers of joined-up global trading and FX solutions that address US T+1 for firms outside US time zones.
If the FX transaction is merely ‘tagged’ on to equity transactions, the costs of execution would likely increase due to the lack of attention paid to this aspect. This is because operational process is likely to be prioritised over cost reduction
Nathan Vurgest, director, head of trading at Record Financial Group
The primary focus for the Pan-Asia Securities Lending Association (PASLA) is the development of open, transparent and efficient securities lending markets across the region. To that end it has actively engaged with numerous regulatory bodies and exchanges in Asia, explains association chair, Jason Wells.
“For example, there are ongoing conversations with the Philippine Stock Exchange to support its planned short-selling launch and refine current securities based lending rules, with encouraging progress made this year,” he says.
In June, Wells participated in a seminar organised by Indonesia Clearing and Guarantee Corporation (IDClear) for the soft launch of its bilateral securities lending and borrowing facility.
The new facility is designed to complement an existing facility, namely securities lending and borrowing with a negotiated transaction mechanism based on an agreement between the lender and the borrower.
IDClear describes the bilateral facility as more flexible in terms of amount of fee, amount of collateral value, loan period, type of loan and collateral securities including bonds, and amount of securities returned.
“The introduction of an onshore bilateral securities lending and borrowing facility will facilitate investors to engage in transparent, well-regulated and covered short selling activities in Indonesia, increasing the liquidity and efficiency of the country’s capital markets,” says Wells. “We believe it will
There are ongoing conversations with the Philippine Stock Exchange (PSE) to support its planned shortselling launch and refine current securities based lending rules, with encouraging progress made this yearJason Wells, chair Pan-Asia Securities Lending Association (PASLA)
and
enable better price discovery and greater market resilience, especially during periods of heightened volatility.”
This development comes at a time when Indonesia’s IPO market ranks as the world’s fourth largest year-to-date thanks to the country’s robust growth prospects and importance in supply chains for the global energy transition.
According to Wells, global investors are looking to increase their participation in the Indonesian market and this trend will be accelerated with regulatory changes like the introduction of bilateral securities lending and borrowing, which aligns with international best practices.
“We are really excited by the momentum and enthusiasm towards securities-based lending in Indonesia,” he adds. “PASLA will continue to work with the Indonesian authorities to help facilitate the development of securities lending and the broader equity market.”
PASLA has also held discussions with Bursa
Malaysia on options to help promote higher liquidity in that market.
The stamp duty cap has been maintained at RM1,000 for each contract and the capital market regulators have committed to exploring ways to reduce market friction and shorten time-to-market for initial public offerings.
According to Securities Commission chairman Awang Adek Hussin, these capital market initiatives will boost trading participation and access to financing in the market, fostering greater diversity and inclusivity in the industry and creating a more vibrant capital market to drive economic growth.
Bursa Malaysia chief executive officer, Datuk Muhamad Umar, said the measures would widen affordable investment choices and deepen investor interest in the Malaysian market, leading to Bursa Malaysia being a destination of choice for fundraising.
The Securities Commission and Bursa Malaysia said it would continue to work
Malaysia: The stamp duty cap has been maintained at RM1,000 for each contract and the capital market regulators have committed to exploring ways to reduce market friction and shorten time-to-market for initial public offerings
Wells: We are committed to the sustainable development of the Chinese markets and are looking forward to working closer with authorities to further enhance the current system in a manner that is agreeable to key stakeholders
closely with the Ministry of Finance, industry partners and other relevant bodies to explore further measures to ensure an inclusive and sustainable capital market.
PASLA has also recently concluded a series of face-to-face engagements with Chinese regulators and exchanges following the resumption of travel to China.
“It is critically important to spend time on the ground, hearing directly from key stakeholders in China about their ambitions for securities based lending and to understand the risks that give them most concern,” says Wells.
“Fostering these relationships is the only way to truly understand the needs of the various stakeholders in this complex market. From our engagements post-Covid, there appears to be an eagerness to engage on topics such as securities based lending - and an interest in improving investment opportunities into the country - and PASLA is providing suggestions on how to work through market bottlenecks and to address inefficiencies.”
In April 2023, onshore central counterparty China Securities Finance Company (CSFC)
extended variable fee pricing for lenders across all stocks, which was previously limited in scope to the STAR board. This change increases the value proposition for lenders keen to monetise their longs.
Furthermore, on the borrow side, the CSFC expanded the products which a participant can invest their short-sell proceeds into. In addition to money market funds, bond ETFs are now permissible investments.
These adjustments were made in response to market advocacy and Wells says it is immensely positive to see these actions originating onshore and the CSFC driving change.
“PASLA is measured in its expectations for change,” he explains. “We are committed to the sustainable development of the Chinese markets and are looking forward to working closer with authorities to further enhance the current system in a manner that is agreeable to key stakeholders. Rome was not built in a day - we are there for the long haul.”
PASLA is also at the forefront of advocacy efforts around collateral in the region, seeking to facilitate the use of a broader range of collateral across its different markets. The association’s subject matter experts are driving dialogue with exchanges and regulators, which includes providing educational sessions on how the collateral market operates globally.
These steps are important, PASLA believes, because the volume of collateral in Asia Pacific has grown from $19 trillion to $25.5 trillion over the last four years as the overall market has grown.
PASLA is leveraging its partnership with ASIFMA and other industry bodies to support the evolution of the collateral market in Asia Pacific. Its country-specific working groups have also been active participants in the development of securities finance in key regional markets.
The mainland China working group has focused on netting opinion and documentation clarity where domestic Chinese government bonds are used for margin purposes.
In Korea - where policymakers have proposed a number of reforms to the foreign investor regime - PASLA has worked on the implications of the shift from IRC to LEI registration and the discussion on omnibus versus segregated account structures.
In Taiwan, the working group has successfully worked to advocate change, with regulators now allowing equity collateral to be used on a non-title transfer basis for offshore financing transactions. There is concern that some foreign investors who receive this collateral may not get comfortable, which could limit participation. The working group is therefore now focused on outlining a title transfer model (in line with international best practice) which would allow collateral to move freely and give greater comfort to collateral receivers.
Taiwan: The working group has successfully worked to advocate change, with regulators now allowing equity collateral to be used on a non-title transfer basis for offshore financing transactions
Wells describes this as a very positive story, with real engagement across regulators, the stock exchange, depositary and central bank with more to come.
In India, PASLA has been helping members adapt to the use of Indian government bonds as collateral for margin purposes, while its Philippines group has been working to confirm the eligibility of overseas collateral.
Finally, the Asia Pacific securities lending industry has been able to get together again at last. After a four-year hiatus, securities lending participants from across Asia Pacific and beyond gathered in Tokyo in March for what PASLA described as a long overdue industry reunion. The PASLA/RMA conference on Asia securities lending attracted more than 380 international delegates.
“The three day conference featured essential insights on the latest developments in securities lending around Asia Pacific, deep dives into key themes shaping the industry, and authoritative views on what to expect for the remainder of the year,” says Wells.
Next year’s event will be held in Singapore.
The Asia Securities Industry & Financial Markets Association outlines the key findings of its most recent market research and looks at the progress made in key areas from KYC/AML and sustainability to the potential implications of the EU Benchmarks Regulation’s third-country regime.
The Asia Securities Industry & Financial Markets Association (ASIFMA) 2022-23 Asia-Pacific capital markets survey indicated a continued optimistic perception of APAC markets, reflected in the fact that a majority of participants intended to expand their business presence in the region.
The ease of operating in APAC capital markets has largely been stable. However, exceptions were noted, including Hong Kong - where participants viewed the regulatory environment as improving and easier to operate but viewed the operating environment as challenging - and mainland China, which was seen as having a more challenging operating and regulatory environment.
Singapore, Australia and Japan markets scored the highest across the three factors (market
We are now launching the 2023 repo survey that we are planning to leverage to promote the opening of the domestic repo markets by incorporating sets of onshore data from some of the key regional markets
Philippe Dirckx, managing director and head of fixed income, ASIFMA
development, regulatory and operating environments), with participants citing workforce skills as the key attraction under operating environment, trading and exchange infrastructure under market development, and predictable and transparent regulatory policy under regulatory environment.
Mainland China and Singapore were identified as the most prominent target markets for expansion, mainly due to the former’s growing customer and wealth base and the latter’s political environment and predictable and transparent regulatory policy.
Participants ranked international financial centres (Hong Kong, Singapore) and mature markets such as Australia and Japan as the leading markets to conduct sustainable finance business.
Also in December 2022, the latest survey of the Asia-Pacific repo market was published. In broad terms, across the APAC nonJapan region the survey reported $310.9bn (£246bn) in outstanding value and an average daily turnover of $3bn, compared with $242.4bn and almost $33bn per day in 2021.Average deal size was around $47mn, compared with $56mn in the last survey.
The survey revealed that the bulk of business in the non-Japan repo market share of reported repos was still executed directly between parties by telephone and electronic messaging. However, voice brokers and, to a lesser extent, automatic electronic trading systems, increased their share. There was also a recovery in the share of CCP-clearing.
There was a distinct change in the geographical nature of business, with a decline in cross-border business between APAC and Europe relative to cross-border business within APAC. This theme was also
The updates [to best practices for KYC/AML] reflect and take into account the changes made to the KYC/AML guidelines applicable to Hong Kong and Singapore since 2017 as well as recent market practices such as remote onboarding
Laurence Van der Loo, executive director and head of technology and operations, ASIFMAJohn Ball, managing director - global FX division Asia Pacific, GFMA
reflected in major shifts in shares away from transactions with counterparties in Europe, the US and major Asian markets in favour of ‘other APAC’ and Australian counterparties.
European securities and US Treasuries also lost ground in favour of Japanese securities and international bonds. Overall, government securities became the largest class of collateral.
Philippe Dirckx, managing director and head of fixed income says the association was encouraged by the findings of the repo market survey. “It provided the picture of a healthy market with a growing number of participants,” he adds. “We are now launching the 2023 survey that we are planning to leverage to promote the opening of the domestic repo markets by incorporating sets of onshore data from some of the key regional markets.”
ASIFMA decided to update its best practices for KYC/AML earlier this year. Laurence Van der Loo, executive director and head of technology and operations explains that this was done to make sure the best practices remained up to date and fit for purpose. “The updates reflect and take into account the changes made to the KYC/AML guidelines applicable to Hong Kong and Singapore since 2017 as well as recent market practices such as remote onboarding,” she says.
ASIFMA’s key objective in terms of improving the sustainability of securities lending in the region is to create interoperability between systems, definitions and reporting standards, including disclosure (TFCD and/or ISSB standards adoption by listed companies); taxonomies - common definitions on what is green, in transition or sustainability linked; and development of carbon markets
We advocated to limit the scope of the EU Benchmarks Regulation to only apply to third country benchmarks deemed ‘strategic’ and that ‘nonsignificant’ EU and equivalent third country benchmarks be excluded given that they are unlikely to have an impact on the market integrity or stability of the EU or individual member states
with similar and potentially interoperable characteristics.
“Ultimately this will help avoid market fragmentation, which would increase costs and obstruct financial flows across the region,” says Diana Parusheva-Lowery, executive director and head of public policy and sustainable finance.
In August 2022, ASIFMA responded to the European Commission’s consultation seeking feedback on further potential improvements to the functioning of the EU Benchmarks Regulation, specifically as regards the rules applicable to third country benchmarks and the impact on market participants of the full entry into application of the third country regime as of January 2024.
“We advocated to limit the scope of the regulation to only apply to third country benchmarks deemed ‘strategic’ and that ‘non-significant’ EU and equivalent third country benchmarks be excluded given that they are unlikely to have an impact on the market integrity or stability of the EU or individual member states,” explains John Ball, managing director - global FX division Asia Pacific, GFMA.
Five trade associations - ASIFMA, GFMA, ISDA, FIA and EMTA - published a briefing paper titled ‘The Importance of Reforming the EU Benchmarks Regulation’, updating an earlier version issued in June 2020.
“In March 2023, we responded to the call for evidence issued by the EC on ensuring continued access to benchmarks worldwide for EU businesses and investors and on the application of the supervisory rules applying to EU Paris-aligned benchmarks and EU climate transition benchmarks to ensure non-EU administrators using these labels are subject to EU supervision,” says Ball.
Ultimately [improving the sustainability of securities lending in the region] will help avoid market fragmentation, which would increase costs and obstruct financial flows across the region
Diana Parusheva-Lowery, executive director and head of public policy and sustainable finance
The Australian securities lending market had almost $459bn (£363bn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, up from $438bn in 2021.
In terms of value on loan, the 2022 total of over $20bn was almost unchanged from the previous 12 month period. Once again this figure remains below the $21.6bn recorded in 2019, indicating that the market has still not fully recovered from the 2019-20 trend for superannuation funds to put an end to their securities lending programmes.
There was more encouraging news on equity lending revenues, which rose sharply to $185bn –almost double the total for 2020 and an increase of more than $70bn on the 2021 total.
Australian Super’s latest annual report notes that the fund participates in securities lending programmes through agency arrangements with JP Morgan Chase Bank NA and directly with approved third party borrowers.
The financial assets transferred to other entities under securities lending arrangements include Australian and International equities and fixed interest securities. The fair value of financial assets on loan at reporting date was $21,215mn (2021: $14,303mn).
The Australian Stock Exchange’s latest half year results saw a resilient underlying performance across the group with operating revenue coming in at $499.5mn. While this was fractionally down when compared to the prior period, it was described as a pleasing underlying performance given that the comparative period was a near alltime record result and there had been significant changes in the external environment.
Operating revenue for listings and technology and data was up, as was net interest income. This was offset by declines in markets and securities and payments.
In August 2022, the Australian Securities and Investments Commission (ASIC) warned brokers to be careful about or reconsider offering high-risk products and services to retail investors - such as securities lending - where the true cost is masked.
Following changes in market conditions that dampened retail investor activity, some brokers in Australia looked to broaden their revenue base by offering retail investors what ASIC refers to as high risk products or services that may be unfair, inappropriate or result in poor outcomes.
In Australia, securities lending has generally been limited to institutional investors who have the size, scale and sophistication to understand and manage the risks. ASIC commissioner, Danielle Press, said the regulator would intervene or take action where it saw unfair or inappropriate offers of securities lending arrangements to retail clients.
In our 2021 and 2022 guides we referred to Hong Kong as one of the star performers in the Asian securities finance market, with equities lending revenues of $330mn (£261mn) and $491mn respectively, 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. However, this positivity was reversed somewhat last year as lending revenues dropped to $413mn. In terms of value on loan, Hong Kong also saw a significant decline from $43.3bn in 2021 to $33bn last year, lower than the $34bn recorded in 2020. It was a similar story when it came to lendable assets, where the 2022 total of $552bn was a fall of $126bn from the 2021 level.
In May, Hong Kong Exchanges and Clearing (HKEX) announced the launch of the Hong Kong dollar-renminbi dual counter model and the dual counter market making programme in its securities market to support the trading and settlement of RMB-denominated securities in Hong Kong.
HKEX chief executive officer, Nicolas Aguzin, said, “The new dual counter model is another key milestone in the development of Hong Kong’s capital markets. It will give issuers and investors more choice, it will enrich Hong Kong’s RMB products ecosystem, cementing its role as the world’s leading offshore RMB hub, and it will support the ongoing internationalisation of the RMB.”
HKEX has published relevant rule amendments for the introduction of the model and the dual counter
“The new dual counter model is another key milestone in the development of Hong Kong’s capital markets. It will give issuers and investors more choice, it will enrich Hong Kong’s RMB products ecosystem, cementing its role as the world’s leading offshore RMB hub, and it will support the ongoing internationalisation of the RMB.”
HKEX chief executive officer, Nicolas Aguzin
market making programme. Interested exchange participants may apply to become a dual counter market maker for eligible securities under the model in accordance with the relevant rules.
These market makers will offer buy and sell quotes for the RMB-denominated securities trading, providing liquidity in the RMB counter and minimising price discrepancies between the HKD and RMB counters.
Under the model, investors will be able to interchange securities listed in both HKD and RMB counters. Securities under the two counters are of the same class and holdings of securities in the two counters can be transferred without change of beneficial ownership.
As part of the preparation for the launch, HKEX arranged a series of testing and practice sessions
between May and June to support market participants on the trading and settlement of securities under the model.
In June, Citi Securities Services announced the launch of a new fully automated solution designed to improve its custodial capability in post-trade instruction and settlement processing.
The proprietary technology involves a module that connects directly to Hong Kong’s central clearing and settlement system (CCASS).
“In 2020, we were the first sub-custodian in Hong Kong to offer our clients real time notification of the trade matching status,” said Aditya Sharma, APAC head of custody at Citi Securities Services. “The latest solution is a continuation of our efforts to provide a complete suite of services that are as close to real time as possible.”
In 2022 we observed that movement in Japan’s securities finance market was out of step with most of the rest of the region as the region’s largest market saw a reduction in value on loan from $125bn to $114.4bn, 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.
This figure rebounded somewhat last year to $118bn, although lending revenue continued to fall to $520mn ($535.7mn in 2021) and lendable assets were almost unchanged.
In February, the Bank of Japan took steps to deter
market players from short-selling government bonds in a fresh sign of the mounting difficulties of sustaining its yield control policy.
The central bank said in a statement that it would increase the minimum fee charged to financial institutions for borrowing some 10-year Japanese government bond (JGB) notes to 1% from 0.25%. Under a scheme called the securities lending facility or SLF, the BOJ lends out holdings of JGBs that are in short supply in the market.
The move is part of the bank’s efforts to address market distortions caused by its heavy bond buying to defend its cap on the 10-year bond yield.
‘The SLF facility is intended to supply JGBs temporarily and as a supplementary measure,’ the BOJ said in a statement. ‘But we have seen massive short-selling in the market that is based on the premise of using the SLF facility on a sustained basis’.
The use of JGBs as collateral in Euroclear has doubled since 2021 and this across the different business lines of repo, securities lending and UMR. JGBs have thus become the largest sovereign collateral.
A report from Oxford Economics explained that the Bank of Japan enhanced its funds-supplying operations in January, after widening the tolerance band for 10-year JGB yields in December 2022. The January actions were aimed at bringing down yields while avoiding further direct JGB purchases, but long-term JGB yields stayed stubbornly high and market liquidity did not recover.
a significant role within Asia, but has within recent decades stepped up to become a major global player.
Since opening up the market to foreign direct portfolio investment in January 1992, KRX’s main board KOSPI has enjoyed sizable participation from global investors, ranging between 30% and 40% of market activity over the past two decades. However, foreign investors have contributed significant net outflow since March 2020 and foreign ownership is at the lowest rate since the global financial crisis.
The Korean securities lending market had more than $157bn (£124bn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, down significantly from last year’s total of $195bn.
In terms of value on loan, the 2022 total of just over $16bn was more encouraging. The value of equities on loan dropped by 30% in 2020 before recovering to reach $13.6bn in 2021 – albeit only a modest increase on the $13.4bn valuation of 2019.
Korean securities lending revenues for equities enjoyed a further modest revival in 2022 with total revenues of $326bn compared to $311mn last year. However, this figure is still well down from the $483mn recorded in 2018 and even the $436mn generated in 2019 as the market continues to recover slowly from reduced activity in securities lending and short selling markets.
A report published by ASIFMA in November 2022 (Korea Capital Markets 2022 and BeyondOpportunities and Challenges) noted that the Korea Exchange (KRX) is the 15th largest in the world in terms of market capitalisation.
As such, the Korean market does not only enjoy
ASIFMA says its members welcomed the partial lifting of the short sales ban, as well as measures to improve regulatory oversight of securities lending to win back the public’s trust. However, active fund managers who employ market-neutral long-short strategies continue to remain on the sidelines until a broader range of securities eligible for securities lending become available to support their trading strategies.
Further, uncertainty over what constitutes legitimate trading activity has led many global firms to suspend market-making businesses in Korea which have historically helped to provide liquidity to the market.
The industry welcomed the decision of Financial Services Commission to lift the proposed fine by the Financial Supervisory Service of KRW 48bn on nine local and foreign securities firms for allegedly ‘disturbing market order’.
But although the FSC decision represented a significant, positive step in the right direction, market participants remain confused about the basis for the initial issuance of the fine by FSS and the industry would appreciate more rigorously defined trading guidelines and specifications and seek to resolve future misunderstandings by appealing for more information upfront.
The industry has supported South Korea’s longstanding aspiration to become upgraded to
developed market status by MSCI, which could attract an increase in foreign capital inflows of up to $36bn and promote the long term growth and sustainability of the Korean market. The 2022 MSCI report identified several hurdles that Korea still needs to clear in relation to the FX
market, short sales, and information disclosure in English among other matters. ASIFMA members have highlighted four equities issues – information flow and regulatory guidelines; top broker leader board and investor protection; foreign exchange; and short sales.
