Japanese securities lending clients require operational excellence, according to Paul Wilson of J.P. Morgan. Mark Dugdale reports
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What is the attitude to securities lending in Japan?
We are seeing more interest from asset owners in Japan to engage in securities lending. A combination of factors have created this momentum, including a shift of asset allocations from predominantly domestic to international and a need to maximise all potential sources of return on investment portfolios.
What do you see in regards to client requirements in Japan?
Clients in Japan have the usual agent lending requirements. They want a clear picture of the returns generated, the drivers behind those returns, affirmation of the risk profile of the programme, and the ability to understand the impact that the risk profile has on those returns. We see a definite preference for non-cash collateral types from clients in Japan. One specific area of focus for Japanese clients is operational excellence.
Clients require agents to minimise failed trades and will often have a reporting requirement, or ethos to ‘match to the yen’. For those for whom this ethos is new, the need to reconcile to the penny can be challenging.
The challenge often reveals itself when looking to deploy a global process or system to serve the needs of a client in Japan. J.P. Morgan’s historic franchise in Japan, combined with our Tokyo-based lending team, is well versed in bridging the gap between local and global cultural nuances. Certainly, the ongoing investment into our online securities lending dashboard and data analytics reporting suite puts our reporting capabilities at the forefront.
Are you seeing any particular trends?
We are seeing asset owners increasing their allocation to global assets, meaning we see an increase in outbound investment and a corresponding reduction of the allocation to Japanese domestic assets.
From this we have strong demand for highly customised trading strategies to lend material balances of general collateral on a term basis while not compromising on specials activity. Strength of balance sheet and having a good handle on the capital cost of the agent lender are crucial to success in such a strategy.
We also notice a shift towards a greater allocation to emerging markets, for the portion invested in international assets ex-Japan. From this we have then seen interest in lending those assets in newer markets, such as Brazil, Taiwan and South Korea.
What do clients in Japan value about J.P. Morgan’s programme?
Our clients in Japan tell us they find our expertise in emerging markets lending to be a valued capability, helping them gain a clear understanding of the potential complexities in documentation and intricacies in operation, and then achieving a route to market in the shortest timeframe.
Furthermore, our clients in Japan look to deal with counterparts of the highest financial strength, and so the quality of the indemnification that J.P. Morgan provides to agent lending clients comes up time and again as a reason they choose to work with us.
Finally, clients in Japan value the risk framework and risk culture that J.P. Morgan brings to every aspect of its agent lending programme. The high quality of J.P. Morgan’s due diligence and risk framework greatly assists Japanese clients in meeting their stringent due diligence requirements.
What about the recent expansion of your agent lending team in the Asia Pacific region?
With the pickup in interest in agent lending and continued growth in our clients’ lendable assets in Japan, we have established a dedicated lending team based in our Tokyo office.
This has mirrored our approach throughout the region in expanding our presence on the ground to support our growing programme and local clients.
What is J.P. Morgan’s outlook for 2016 and beyond?
We expect to see a continuation of the shift in asset allocation to global ex-Japan investments as asset owners and institutional investors are set on a course to reduce their domestic asset allocations. To some extent, this has a flow-on effect to interest in lending and we expect to see continued growth in agent lending for Japan clients.
What else is going on in Japan?
There is a somewhat buoyant mood in Japan, boosted by the Abenomics programme and with preparation underway for the 2019 Rugby World Cup and 2020 Olympics. This renewed vigour has placed Japan in the global headlines again.
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