Another interesting year for securities finance in Asia

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.

Growing utilisation

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.

Equity strength

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 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.

Japanese focus

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

• 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.”

Non-traditional jurisdictions

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.”