Hong Kong

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 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

Hong Kong equities 2022 (US$)

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.”

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Japan

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.

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