Malaysia
03 May 2018
Now is an exciting time for the Malaysia securities lending market. With a loosening of the reins on it鈥檚 securities lending market, and an allowance of corporate bond short selling, what does the future entail for the country?
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Leave your cares behind
During the last 30 years, Malaysia has become a major centre for Islamic banking, it鈥檚 also highly regarded as an environment for international investors. In addition, the country currently has 234 Malaysian assets on loan (as of 24 April) and has also provided significant returns for overseas funds. As with other countries in the region, it suffered during the Asian crisis, but managed a relatively quick recovery.
Recent times have been good times, on the whole. DataLend reported in April that average daily on loan balance for this year so far is just under $800 million per day, while equities currently make up $636 million of the total (79.5 percent). In addition, average daily lendable balance for 2018 currently stands at $20.23 billion.
According to the Malaysian 麻豆传媒 Commission (MSC), the Malaysian capital market grew 12.6 percent to RM 3.2 trillion ($820 billion) in 2017, while equity market capitalisation expanded 14.4 percent to RM 1.9 trillion ($490 billion), with positive performance across all key indices.
The capital markets saw the growth across all segments due to 鈥渂etter economic fundamentals, corporate earnings recovery, growth in private investments, strong foreign investment inflows and higher investor participation鈥�, according to the MSC.
In addition, total bonds and sukuk outstanding stood at RM 1.3 trillion ($330 billion), an increase of 10.1 percent. But all this positivity has taken a little while.
Our new state of mind
In 2007 the Bursa securities borrowing and lending (SBL) system was introduced. Bursa Malaysia 麻豆传媒 Clearing offered SBL specified shares which were, at that time, currently eligible for borrowing and lending.
The system stated that SBL activities in Malaysia must have either been made through an approved clearing house acting as a central lending agency, or entered directly over-the-counter between the eligible participants and facilitated by the approved clearing house under the SBL鈥攏egotiated transactions model. Skip forward to 2017, and the model is fully implemented.
In recent times, Malaysia has further loosened the reins of its securities lending market in a bid to boost price discovery and market liquidity.
From last year, investors in the Malaysian exchange鈥檚 securities lending market were allowed to borrow securities for the settlement of potential failed trades rather than be subjected to the buying-in process.
The reforms came under the exchange鈥檚 regulated short selling (RSS) and the SBL-NT, aforementioned.
At that time (February 2017), the exchange valued the total size of its securities lending market at MYR 4.9 billion ($1.1 billion).
Suffice to say then, that the securities lending market is showing growth. Speaking at the 15th Annual Pan Asian 麻豆传媒 Lending Association (PASLA) conference, Dane Fannin, head of capital markets for Asia Pacific at Northern Trust, said Asia鈥檚 significant growth profile is unlikely to change anytime soon.
Fannin claimed that conversations in this region are now markedly 鈥渕ore optimistic and focused more towards growth and opportunity, which is exciting, and it鈥檚 not hard to
understand why鈥�.
Fannin further noted not to forget about Asia鈥檚 fixed income and repo markets as they continue to develop. He suggested that this space is becoming a lot more relevant as firms pursue strategies of optimisation.
However, more recently, in April this year, a report published by Standard and Poor鈥檚 (S&P) Global Ratings suggested that the global Islamic finance industry will 鈥渆xpand slowly鈥� in 2018 and 2019.
In its report, the financial services company said that the Islamic finance industry would only grow by about 5 percent on average over the next two years. This slow growth is owed to tepid economic conditions in certain core markets.
However, S&P added that standardisation and financial technology (fintech) could help accelerate the industry鈥檚 growth in the short to medium term.
Though Mohamed Damak, S&P global head of Islamic finance, says: 鈥淲e foresee only a marginal influence of fintech on our Islamic bank ratings over that period. We consider that Islamic banks will be able to adapt to their changing operating environment through a combination of collaboration with fintech companies and cost-reduction measures.鈥�
Perhaps the introduction of a digitisation acceleration working group could help achieve that anticipated industry growth, the MSC and Bank Negara Malaysia (BNM) seem to be going in the right direction in that respect with the establishment of the Brokerage Industry Digitisation Group (BRIDGe).
BRIDGe aims to accelerate the digitisation of the brokerage industry to enhance operational efficiencies and service standards.
The working group will encompass the MSC, BNM, and industry participants including brokers and banking institutions.
Away from the technological sphere, but a move that could still enhance securities lending growth further, is the introduction of corporate bond selling, which happened early last year. The MSC has authorised the short selling of corporate bonds in a bid to boost market liquidity.
鈥淭he further development of onshore hedging will complement the liquidity in the secondary market, particularly on the longer end of the yield curve,鈥� the Central Bank of Malaysia said at the time.
The MSC said this initiative was part of continuous efforts towards enhancing the liquidity of the secondary bond market, while ensuring a comprehensive and facilitative infrastructure and regulatory framework.
The time is right for makin鈥� friends
Malaysia has seen sufficient growth but what about its neighbours in Asia?
Taiwan, for one, is set to make further updates to its SBL model this year, according to a panellist at the 15th Annual Pan Asia 麻豆传媒 Lending Association Conference.
According to a panellist, the Taiwan SBL market has remained stable for the last six years showing growth year-on-year since 2012.
During the panel, delegates were asked which market requires the most work to develop to full lender participation via an interactive voting system.
Taiwan was joint top with Malaysia at 37 percent. Thailand was in third place with 27 percent of the votes.
There are currently nine active lending markets in Asia, which continue to yield better returns than Europe and the US on a normalised basis, according to Fannin.
In addition, there are a range of emerging markets such as the Philippines, India, Indonesia and China, which present 鈥渟ignificant opportunity鈥� for industry participants in the long term.
But are these really the good times?
DataLend reports that average utilisation for the Malaysia market has been pretty low thus far in 2018 at slightly under 4 percent. Utilisation has been trending lower in 2018, from 4.4 percent in early January down to 3.6 percent (as of 24 April).
In addition, PASLA has warned that Malaysia鈥檚 neighbour, the Philippines, short selling framework still needs work.
The Philippines short selling infrastructure is due to launch this year, however, a Pan Asia 麻豆传媒 Lending Association (PASLA) board member suggested in March that this year might not be a 鈥渞ealistic launch date鈥�.
After a consultation paper was released by the Philippines Stock Exchange in November last year on the launch of the Philippines short selling infrastructure, a PASLA executive committee member suggested that there is still work to be done in certain areas.
Malaysia鈥檚 top five hottest securities:
Sapura Energy
Serba Dinamik Holdings BHD
Yong Tai BHD
Pos Malaysia Berhad
YTL Power International BHD
(Source: DataLend as of 24 April 2018)
During the last 30 years, Malaysia has become a major centre for Islamic banking, it鈥檚 also highly regarded as an environment for international investors. In addition, the country currently has 234 Malaysian assets on loan (as of 24 April) and has also provided significant returns for overseas funds. As with other countries in the region, it suffered during the Asian crisis, but managed a relatively quick recovery.
Recent times have been good times, on the whole. DataLend reported in April that average daily on loan balance for this year so far is just under $800 million per day, while equities currently make up $636 million of the total (79.5 percent). In addition, average daily lendable balance for 2018 currently stands at $20.23 billion.
According to the Malaysian 麻豆传媒 Commission (MSC), the Malaysian capital market grew 12.6 percent to RM 3.2 trillion ($820 billion) in 2017, while equity market capitalisation expanded 14.4 percent to RM 1.9 trillion ($490 billion), with positive performance across all key indices.
The capital markets saw the growth across all segments due to 鈥渂etter economic fundamentals, corporate earnings recovery, growth in private investments, strong foreign investment inflows and higher investor participation鈥�, according to the MSC.
In addition, total bonds and sukuk outstanding stood at RM 1.3 trillion ($330 billion), an increase of 10.1 percent. But all this positivity has taken a little while.
Our new state of mind
In 2007 the Bursa securities borrowing and lending (SBL) system was introduced. Bursa Malaysia 麻豆传媒 Clearing offered SBL specified shares which were, at that time, currently eligible for borrowing and lending.
The system stated that SBL activities in Malaysia must have either been made through an approved clearing house acting as a central lending agency, or entered directly over-the-counter between the eligible participants and facilitated by the approved clearing house under the SBL鈥攏egotiated transactions model. Skip forward to 2017, and the model is fully implemented.
In recent times, Malaysia has further loosened the reins of its securities lending market in a bid to boost price discovery and market liquidity.
From last year, investors in the Malaysian exchange鈥檚 securities lending market were allowed to borrow securities for the settlement of potential failed trades rather than be subjected to the buying-in process.
The reforms came under the exchange鈥檚 regulated short selling (RSS) and the SBL-NT, aforementioned.
At that time (February 2017), the exchange valued the total size of its securities lending market at MYR 4.9 billion ($1.1 billion).
Suffice to say then, that the securities lending market is showing growth. Speaking at the 15th Annual Pan Asian 麻豆传媒 Lending Association (PASLA) conference, Dane Fannin, head of capital markets for Asia Pacific at Northern Trust, said Asia鈥檚 significant growth profile is unlikely to change anytime soon.
Fannin claimed that conversations in this region are now markedly 鈥渕ore optimistic and focused more towards growth and opportunity, which is exciting, and it鈥檚 not hard to
understand why鈥�.
Fannin further noted not to forget about Asia鈥檚 fixed income and repo markets as they continue to develop. He suggested that this space is becoming a lot more relevant as firms pursue strategies of optimisation.
However, more recently, in April this year, a report published by Standard and Poor鈥檚 (S&P) Global Ratings suggested that the global Islamic finance industry will 鈥渆xpand slowly鈥� in 2018 and 2019.
In its report, the financial services company said that the Islamic finance industry would only grow by about 5 percent on average over the next two years. This slow growth is owed to tepid economic conditions in certain core markets.
However, S&P added that standardisation and financial technology (fintech) could help accelerate the industry鈥檚 growth in the short to medium term.
Though Mohamed Damak, S&P global head of Islamic finance, says: 鈥淲e foresee only a marginal influence of fintech on our Islamic bank ratings over that period. We consider that Islamic banks will be able to adapt to their changing operating environment through a combination of collaboration with fintech companies and cost-reduction measures.鈥�
Perhaps the introduction of a digitisation acceleration working group could help achieve that anticipated industry growth, the MSC and Bank Negara Malaysia (BNM) seem to be going in the right direction in that respect with the establishment of the Brokerage Industry Digitisation Group (BRIDGe).
BRIDGe aims to accelerate the digitisation of the brokerage industry to enhance operational efficiencies and service standards.
The working group will encompass the MSC, BNM, and industry participants including brokers and banking institutions.
Away from the technological sphere, but a move that could still enhance securities lending growth further, is the introduction of corporate bond selling, which happened early last year. The MSC has authorised the short selling of corporate bonds in a bid to boost market liquidity.
鈥淭he further development of onshore hedging will complement the liquidity in the secondary market, particularly on the longer end of the yield curve,鈥� the Central Bank of Malaysia said at the time.
The MSC said this initiative was part of continuous efforts towards enhancing the liquidity of the secondary bond market, while ensuring a comprehensive and facilitative infrastructure and regulatory framework.
The time is right for makin鈥� friends
Malaysia has seen sufficient growth but what about its neighbours in Asia?
Taiwan, for one, is set to make further updates to its SBL model this year, according to a panellist at the 15th Annual Pan Asia 麻豆传媒 Lending Association Conference.
According to a panellist, the Taiwan SBL market has remained stable for the last six years showing growth year-on-year since 2012.
During the panel, delegates were asked which market requires the most work to develop to full lender participation via an interactive voting system.
Taiwan was joint top with Malaysia at 37 percent. Thailand was in third place with 27 percent of the votes.
There are currently nine active lending markets in Asia, which continue to yield better returns than Europe and the US on a normalised basis, according to Fannin.
In addition, there are a range of emerging markets such as the Philippines, India, Indonesia and China, which present 鈥渟ignificant opportunity鈥� for industry participants in the long term.
But are these really the good times?
DataLend reports that average utilisation for the Malaysia market has been pretty low thus far in 2018 at slightly under 4 percent. Utilisation has been trending lower in 2018, from 4.4 percent in early January down to 3.6 percent (as of 24 April).
In addition, PASLA has warned that Malaysia鈥檚 neighbour, the Philippines, short selling framework still needs work.
The Philippines short selling infrastructure is due to launch this year, however, a Pan Asia 麻豆传媒 Lending Association (PASLA) board member suggested in March that this year might not be a 鈥渞ealistic launch date鈥�.
After a consultation paper was released by the Philippines Stock Exchange in November last year on the launch of the Philippines short selling infrastructure, a PASLA executive committee member suggested that there is still work to be done in certain areas.
Malaysia鈥檚 top five hottest securities:
Sapura Energy
Serba Dinamik Holdings BHD
Yong Tai BHD
Pos Malaysia Berhad
YTL Power International BHD
(Source: DataLend as of 24 April 2018)
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