Addressing regional challenges

An update on the activities of the Pan-Asia Securities Lending Association over the last 12 months.

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 and enable better price discovery and greater market resilience, especially during periods of heightened volatility.”

Indonesian growth

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.

Malaysian developments

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.

Chinese expansion

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.

Taiwan advocacy

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.