Asia Pacific securities lending: Positioning for a strong 2022
01 February 2022
Asia-based securities lending specialists reflect on the performance of APAC markets during 2021, the lifting of short-selling bans in Malaysia and South Korea, and prime opportunities for growth of lending activity in 2022 and beyond
Image: stock.adobe.com/Anton Balazh
How do you assess the performance of APAC securities lending markets during 2021?
Jansen Chua: We saw a rebound in APAC market performance in 2021 versus 2020. This was driven primarily by strong short demand for Taiwanese (namely shipping and display panel issuers) and Hong Kong securities (HK-listed real estate issuers such as Evergrande Real Estate), capital restructuring (BHP in Australia) and a broad resumption of interest for South Korean securities where the short-sale ban, announced in 2020, was finally lifted.
Sunil Daswani: The Asian markets have been a real standout in 2021, with strong returns seen on both our discretionary and exclusive books. Borrower demand has grown over the period and continues to do so going into 2022, with most market participants bullish about prospects over the next 12 months. The big driver of much of this growth was the partial lifting of the short selling ban in South Korea, which not only drove activity in that market but also had the effect of buoying business across the region. We are optimistic that South Korea will continue its upward trajectory into 2022 and expect similar performance in Hong Kong, a market that very much returned to form in the latter part of 2021.
GC lending across many developed markets did soften through 2021, much of which was due to the meme-stock phenomenon that kicked off in the US in the early part of the year. Asia markets weren’t immune to this softening, which was particularly noticeable in Japan, although this was offset in part by increased lending volume over the record dates in that market throughout 2021.
Paul Solway: APAC securities lending for 2021 enjoyed stronger performance overall than 2020. Total securities lending revenue was up more than 30 per cent, with some markets in APAC clearly outperforming. Taiwan’s securities lending revenue was up almost 200 per cent owing to the valuation of the panel makers and shippers, with the TAIEX ending the year as one of the best performing stock indices, up 23.66 per cent. Hong Kong and Malaysia were the other two markets that performed very well in 2021 in the securities lending space.
2021 was a thematic year, with lots of events driven by and related to COVID-19. Supply chain disruptions, energy shortages and chip shortages were some of the headwinds that impacted pricing and demand in securities lending. We have seen the high earners surrounding certain sectors like the shipping companies (Cosco, HMM, Wan Hai Line), the panel makers (AU Optronics, LG Display), rubber glove manufacturers (Top Glove, Sri Trang), and even the coal names (Banpu) — this was very consistent across all APAC markets. Corporate action and deal-driven names also played a role this year, with WH Group and BHP being two important earners in Hong Kong and Australia respectively.
In terms of weak earners, the only two markets in APAC where lending revenues have gone down were Japan and Singapore, which experienced a lack of specials this year. Singapore revenues were also impacted by the reduced dividend and scrip events for the major Singaporean banks in 2021.
David Lai: Taiwanese SBL growth was one of the key stories across the street in 2021. The industry has seen record trading balances as the market continues to grow in both onshore and offshore trading.
From an offshore perspective, I think it is fair to say that most supply has been centred around a select number of beneficial owner clients. So, it has been encouraging to witness the recent changes in our book composition and the increased dialogue that is taking place with our client base.
Korea lending activity has started to pick up traction following the last few KOSPI/KOSDAQ rebalances, which introduced some new IPO names into the short sell universe.
In Hong Kong, which is the most competitive market among lenders, global logistics, China technology, China property, and COVID/pharmaceuticals sectors continue to be the areas of focus. In 2021, we saw key specials in Hong Kong contributing significantly to our APAC revenue growth.
Phil Garrett: There were two key factors driving performance in APAC in 2021, namely China’s regulatory clampdown on a number of domestic sectors and the eagerly anticipated return of short selling, albeit partially, in Korea.
At the start of the year, the focus was on US sanctions on investments in named Chinese companies deemed to have ties to the military. By mid-year, however, attention was turning towards the regulatory tightening across certain sectors in China, including technology, private education, gaming and most notably property. A potential liquidity issue emerged for China Evergrande Group and by year-end the credit situation was affecting most of the sector, causing fears of contagion and driving strong sector lending demand. China’s clampdown created conditions which enabled market-wide short conviction not seen since before COVID. The Hang Seng Index finished down 15 per cent for the year, justifying the downside conviction.
Elsewhere Korea saw the re-introduction of short selling in May limited to constituents of the KOSPI 200 and KOPSI 150 indices, which saw strong demand driven by the likes of LG Display, HMM and Doosan Heavy Industries.
The sheer size of the Japanese market once again meant it was one of the region’s top revenue generating markets despite being heavily GC with few notable specials through the year. Sector-wise, we saw strong demand in some e-commerce names while other demand came from convertible bonds and secondary offerings.
Taiwan and Australia also saw strong revenues, with both stock markets performing well through 2021. Taiwan was driven by technology, and primarily semiconductor names, as the PHLX Semiconductor Sector Index recorded an all-time high. Australia was a strong performer in the second half of the year as high vaccination rates saw lockdowns end and the economy start to improve. All eyes towards the end of the year were focused on the impending BHP unification event.
In summary, APAC lending performance was stronger year-on-year in terms of Return to Lendable for equity markets, outperforming other regions on that measure. The return to risk-on for short sellers, particularly in the second half of the year, was a major boost for revenue generation and a welcome trend going into 2022.
James Cooper: 2021 was both a challenging and exceptional year from an APAC perspective. The evolving COVID landscape globally impacted supply chains at all levels, with travel restrictions and the divergent global policies applied to tackle the virus creating a number of global, regional and country-specific opportunities. Structurally, short-sell bans were lifted in Malaysia and Korea, driving a resurgence in demand along with a number of broader market themes. Demand in both markets was strong, with Korea seeing balances rise to previous highs relatively quickly.
The initial round of US sanctions in Chinese companies created some uncertainty in the market, but also opportunities for non-US asset owners and non-US entities. We noted that fees spiked on otherwise very liquid securities such as Xiaomi (1810 HK) as a result of the decrease in supply. In terms of China policy and the economy, we saw the regulatory tightening of technology companies, the restructuring of educational companies into non-profit organisations, and a liquidity crunch in the property sector — all of which drove security or industry-specific interest on the demand side.
Natalie Floate: Performance has been excellent in key revenue markets, particularly Hong Kong. This is a market that continues to impress us in terms of corporate activity and consistency of returns from special trading opportunities. In APAC, we are also constantly looking at South Korea, Taiwan and more recently at optimisation via the China Connect schemes.
Global financial markets have been subject to major fluctuations in liquidity and market pricing over the past two years, heavily linked to the impact of COVID-19 pandemic. What adaptations to working practices have you made to sustain and grow your APAC securities lending activity in this environment?
Solway: Our Trading Apps purchase in 2018 was key for our future-state resiliency, evolution and enhanced automation capabilities. The acquisition balanced low-touch automation with high-touch human influence, and this remains a fundamental focus for us in 2022. Working from home has also worked really well for us across the board; trading, relationship management and operations were all seamlessly moved from office to home working and they continue to work well for us.
Optionality continues for all our teams in both the front and back office, with staff able to choose which environment suits them in consideration of both their business-as-usual obligations and personal circumstances. Lack of travel has been a challenge for us but, again, technology has assisted in bridging any consequential gaps — although screen fatigue remains an issue for everyone.
Having a forward-looking location strategy to deliver local, on the ground solutions is another way we are making an impact in local Asian markets with our recent addition of a dedicated relationship manager in Seoul to serve our Korean clients. We also have further plans to expand product development and client service in 2022.
Chua: Flexible (or hybrid) work arrangements were definitely important adjustments that we implemented (and continue to invest in) to help provide support for our staff. Safety and well-being were clear priorities while balancing the need to minimise disruption to our programme, clients, and counterparties. Virtual engagement with clients and prospects was a new activity that we had to adapt to, replacing the traditional travel-enabled face-to-face relationship meetings. This new mode of engagement required a shift in how we have traditionally managed relationships and was supported by instructor-led training classes for our teams and the use of external vendors to support client engagement events.
Maintaining engagement with our employees was also a key management consideration. Traditional methods of bringing people together (e.g. coffee meetings, 1x1 in-person meetings) had to be replaced with virtual engagements instead. This required more deliberate planning and coordination and a heightened focus on leveraging collaboration tools available across the enterprise.
Lai: First of all, the whole industry should be proud of how it has navigated through the last two years. When describing the industry to outsiders, the words ‘relationships’ and ‘communication’ have always been prominent and we have certainly seen these traits keep morale high and work processes efficient.
From a J.P. Morgan perspective, we were rather fortunate to have our Japan trading desk fully operational in January 2021. With three trading desks in the region, we were able to remain flexible as external factors constantly changed.
In Hong Kong, our Asia-Pacific headquarters, we brought all our staff together across two offices at the end of 2019. The cutting-edge technology of the new workplace allowed us to enhance our virtual connectivity and collaboration and it also enabled us to align our staffing parameters when this was deemed to be appropriate or necessary.
In which APAC markets do you identify new opportunities for growth of your lending business? What regulatory changes, and changes to market practice, are required to enable and sustain this market development?
Lai: At the start of a new year, we once again find ourselves excited about the prospects for the China market. The opportunities, challenges, and relevant developments have been discussed extensively in previous articles in this publication, so I will not repeat them here.
As mentioned earlier, the industry has demonstrated its resilience during the pandemic — working with each other, clients, counterparties, and authorities to address any requirements or concerns. As such, we are well-placed to participate in the China market under any framework that is agreed upon.
Daswani: There continues to be potential opportunities in APAC markets that will provide for growth in coming years. Timing is always a challenge, as generally the stakeholders in the local market will need to work with regulators to adjust or add regulatory language to allow foreign investors to participate. For example, in the Philippines there is a pending regulatory change to allow offshore collateral to be accepted and to recognise the industry standard Global Master Â鶹´«Ã½ Lending Agreement (GMSLA). Whilst many hoped this would happen in 2021, it has yet to occur.
There has been increased dialogue with stakeholders in Indonesia in 2021. The focus has not just been on opening the equity market to foreign investors, but also potentially the fixed income market. The latter may initially focus on opportunities for domestic investors, but hopefully may extend to foreign investors over time.
No conversation on opportunities in Asia would be complete without discussing China. There is some work to do here to open the market for foreign investor participation, but there may be an opportunity for an investor that is comfortable with the central counterparty risk — which is the only option under current rules. This model, similar to what we see in Brazil, does restrict many lenders from participating owing to their own regulations on collateral, but this may present opportunities for some specific investor types, including onshore investors.
From a new investor perspective, we are already seeing interest from China insurance companies following the recent regulatory change which allows these investors to participate in securities lending. As always, the Pan Asian Â鶹´«Ã½ Lending Association (PASLA) is leading the charge in advocating for change in Asia and both Standard Chartered and our JV partner eSecLending are supportive of these efforts.
Solway: We think both tactically and strategically in terms of counterparties, collateral markets and trade ideas or solutions. The art is to nimbly navigate the different permutations that exist between these evolving parameters. The region remains diverse, fluid, and opportunistic, so having tactical options within existing open markets is key. Collateral is also a significant factor, with major considerations being cash versus non-cash, pledge versus title transfer, and RWA-friendly assets versus less capital-efficient securities.
Last year we spoke about new market aspirations such as China, Philippines and Indonesia. Not much has changed for these markets in the past 12 months, but we continue to work with PASLA and others to advocate and influence moves for regulatory change, market openness and harmonisation across Asia. With our successful delivery of China Stock Connect as collateral within agency lending, our sights now turn to China Bond Connect in 2022 in the expectation that this additional collateral flexibility will provide further financing solutions to the street and will underpin spreads and grow utilisation rates.
In the meantime, we remain strategically focused on adapting our models, where necessary, to make it easier for counterparties to trade through and with us. Linking products and services will allow us to leverage our franchise, which will not only add real value for our clients but also foster market efficiencies and drive meaningful price discovery in local markets.
Garrett: The securities finance industry has had China in its sights for over a decade. Promising developments in the China Qualified Foreign Institutional Investor (QFII) scheme to allow securities lending led to much optimism in 2020. However idiosyncrasies around the operating model have meant that any meaningful participation for offshore lenders is extremely limited. Ongoing regulatory engagement through industry bodies such as PASLA and Asia Â鶹´«Ã½ Industry & Financial Markets Association (ASIFMA) will hopefully enable modifications that will allow for full access to China through a more compatible model in the future. Whether this will happen in 2022 is, admittedly, doubtful.
Other markets to watch out for are Indonesia and the Philippines. Both markets have been stop-start on progress towards a viable SBL model for offshore lenders. For Indonesia, there were signs of regulatory re-engagement towards the end of the year, while in Q1 the Philippines announced the intended launch of rules and regulations for short selling. However we are still waiting for this to happen and both markets remain on hold at the time of writing.
The potential lifting of the remaining short-sell ban in Korea will also provide additional opportunity and we await further news from the regulators on this.
Cooper: Collateral mobility and optimisation remains a key focus in APAC. We continue to see demand for a widening of acceptable title transfer assets such as corporate bonds and ETFs, along with the acceptance of non-standard or ID market [where foreign investors are required to have an investor ID registration to trade and invest] securities such as Korea, Taiwan and Stock Connect — and then, more generally, the pledge structure is generating strong interest. As spreads narrow on historically higher fee lending markets, collateral costs are becoming increasingly important.
Local regulations for some of the ID markets present very specific regional opportunities, along with wider use of non-cash collateral globally and particularly in APAC. We have noted collateral convergence on the borrower side, with optimisation viewed more holistically across the whole business, and this has created new opportunities across business lines and also across regions. As an agent lender, we need to work closely with our clients to maximise these opportunities within their accepted mandates and risk profiles.
What impact is technology development, and parallel standardisation and digitisation of securities lending practices, having in the APAC region?
Solway: The region remains a collection of unique markets that have their own rhyme and reasons for rules, regulations, and activity. However, systematic solutions and controls are now in place for all nine active markets across APAC. Trading Apps remains our differentiator, enabling our traders to focus on the high-value and high-touch trades across both equities and fixed income. Despite spreads remaining under pressure, our balances at BNY Mellon grew in 2021, with records being broken in Japan during seasonal periods in the past year and technology being an enabler of this activity. Using technology in operations is also very much our priority, not only lowering the potential for human error but providing volume and scale that matches off against quant-driven, high-volume trading strategies that are now the new norm.
Lai: J.P. Morgan continues to focus on innovation and meeting the future demands of our clients. Our effort in digital evolution combines artificial intelligence, blockchain technology, and thought leadership to deliver innovative solutions for our clients across our securities financing products. The real-world application of blockchain technology has begun to pick up the pace. It is incumbent for J.P. Morgan to remain integral to this ecosystem and provide liquidity to the market. From a practical perspective, the APAC region still has an overseas nexus, whether from a high-quality liquid asset (HQLA) or a USD cash aspect or a support framework owing to the necessary ‘round trip’ or ‘follow the sun’ processes inherent in our business.
As such, any standardisation or technology development that reduces (or in some cases completely removes) the need for tracked and confirmed movements and post-trade reconciliations will be welcome.
What are the key issues for the APAC securities lending community in promoting high ESG standards across the SBL transaction value chain?
Daswani: More words were written in 2021 on securities lending and ESG than ever before and it continues to be a hot topic in 2022. We continue to believe that ESG and securities lending can be appropriate companions and the industry associations are working hard to give investors the knowledge and information to ensure comfort in managing these two activities in tandem. In fact, the Global Framework for ESG and Â鶹´«Ã½ Lending (GFESL), published by PASLA in May 2021, led the charge in providing a structure for investors to follow. More recently, a number of industry associations have formed the Global Alliance of Â鶹´«Ã½ Lending Associations (GASLA) to continue the work and focus on ESG solutions for the industry, among other important themes.
At Standard Chartered, we have been part of a regular dialogue with clients and prospects about ESG and securities lending. We believe that securities lending should not be an impact to success in meeting an investor’s ESG requirements. Many years ago, our partner eSecLending introduced Proxy Value that provided clients with data on voting materiality and securities lending revenue to better inform the decision about whether to recall a security from loan to vote. As you would expect, this has now evolved to include other elements of the environmental and sustainability agenda to add important additional colour to the information available to clients and fully support the ESG agenda.
Collateral screening has always been something that we have been able to do, primarily due to the segregated nature of our collateral accounts – the client is truly in control of what is taken as collateral and we can support changes as necessary. The main focus of client discussions here has been around managing this element of the programme in a way that is scalable. Thus, the introduction of ESG indices that can be supported by triparty collateral agents has been a particularly strong step to demonstrating adherence to ESG principles in collateral management.
Lai: ESG remains a focus topic for the global industry so, being mindful of the material in the public domain, I reiterate that our approach with all our clients is to understand any specific requirements they may have regarding their lending programme.
This might seem rather a basic statement, but it is the first step in initiating the multitude of programme parameters within the J.P. Morgan Agency Â鶹´«Ã½ Finance platform that allow our clients to customise their agency lending programme. This will impact the range of assets and possibly the rate of return of a lending programme — which our analytical tools will help to highlight. Understanding a client’s requirements and discussing the potential impact is the basic fundamental backbone of our business.
If there are client requirements related to the associated collateral, this will also impact the lending programme and processes involved. But, similar to above, these challenges can be worked through with active and clear communication from all parties.
Chua: We continue to see increasing interest in the application of ESG principles to securities lending activity. However, there are still a number of challenges that currently inhibit faster adoption into lending programmes, chief of which is the lack of a clearly defined and widely agreed set of standards among investors. For example, what is considered ‘eligible’ collateral for one investor may be considered ‘ineligible’ for another. This results in the need for customisation, which in turn prohibits the application of scalability to the processes of lending agents, borrowers and triparty collateral providers.
We also see growing interest in steps to promote transparency into lending activities. Investors are asking questions about their lending activity. For example, who are the ultimate borrowers of the securities? For what purpose are the securities being borrowed? And are these purposes (e.g. short-selling) aligned with their own ESG principles? We view peer-to-peer models as potentially a means to achieving this transparency objective between the principal lender and principal borrower. Traditionally, intermediaries such as the prime brokers and broker-dealers have stood between these principal parties. To address client demand, State Street introduced Direct Access, our managed peer-to-peer programme, in late 2019, enabling direct transactions between our lending and borrowing clients.
Investors have also expressed growing interest in exercising their voting rights for their securities lending portfolios. The desire to maximise lending returns can, at times, appear to be at odds with the need to exercise oversight and governance obligations over issuer companies. There are a range of tools available – such as recalling securities, restricting specific securities, setting limits on lendable amounts – whereby agent lenders can help beneficial owners bridge these two requirements.
Solway: As articulated in many webinars, the focus is currently on proxy voting, collateral and, as always, transparency. I have argued that most, if not all, current ESG concerns have been considered and adapted for in most modern agency lending programmes. At BNY Mellon, we have frameworks in place that give optionality across proxy recalls, collateral/lending restrictions, big data reporting, real-time benchmarking and active parameter screenings. The key challenge is finding sweet spot ESG requirements and standards across a multitude of clients who are all still navigating through their own corporate ESG mandates —and that may not have yet considered the niche impacts to securities lending programmes.
If all clients suddenly restricted lending for proxy votes, there would be a serious impact on supply in certain names and markets — that is obvious, especially in markets like Japan where proxy/AGM events are very prevalent. It is important to advocate for pragmatic approaches. Not all electable events are significant enough for all shareholders and so stewardship obligations may differ. At BNY Mellon, we are currently working to standardise some ESG collateral profiles for clients to leverage. As a leader in the triparty space, we have an obligation to be a first mover in providing our clients with pragmatic screening options for both lending and collateral.
Floate: ESG is not a new topic in APAC. It has been a key focus for beneficial owners that are long-standing participants of the securities lending market. This has positioned us well, enabling us to adapt, adopt and implement our lending clients’ ESG objectives, which are already mature and well established in their core portfolios, before being stretched into ancillary activities such as securities lending.
In this regard, we see the role of the agent as critical. Speaking for BNP Paribas Â鶹´«Ã½ Services, our clients look to us as their agent to see what it is possible to implement and to guide them on the implications — particularly in working through the value chain with borrowers and collateral managers. Proxy voting was the first element discussed from Australia and now we are seeing collateral screening as the next natural phase for ESG across APAC. Â鶹´«Ã½ lending is not always considered by beneficial owners when they think of ESG. As such, our role as agent is critical to highlight that a fund’s core ESG objectives can be stretched into their securities lending mandates in a complementary way.
How do you assess the outlook for APAC securities lending markets for 2022?
Garrett: The macroeconomic themes that have played out in 2021 will continue to have a heavy impact on borrower demand in APAC for the coming year. China’s common prosperity goal will heavily influence stock market conditions not just in China and Hong Kong, but also in regional markets tied to the fortunes of the world’s number two economy. Therefore we expect volatility and strong short-side interest to continue for the foreseeable future across the region. That said, we may see some easing in policy to avoid any systemically-impactful defaults. More recently, there has been much talk about an easing of the three red lines policy in the property sector as the government seeks to avoid a wider shock to the Chinese economy.
The reality of rising interest rates will undoubtedly increase volatility across global equity markets and we have already started to see this play out. Even those stock markets which fared well through 2021 are likely to see upward momentum checked in the face of this new environment. This will provide additional motive for more short-side positioning.
There is hope that at some point in 2022, Korea will lift the remaining short-selling ban to allow inclusion of all indices. As we saw with last year’s actions, this should provide an opportunity for lenders and borrowers to increase returns from this market.
Solway: Against the backdrop of ongoing and remaining risks from COVID-19, there will be big challenges alongside some surprising and significant opportunities. I fear for some conservative approaches in terms of regulatory or exchange actions against any extreme market movements that may play out. At the very least, certain hopes for market infrastructure progress in emerging markets may see continued procrastination, delays and postponement. The deep, liquid markets will continue to see the best activity; Hong Kong and Japan will continue to dominate. The question will be whether Korea and Taiwan will continue their positive trajectories without impediments or restrictions that cause a drag on revenue opportunities.
Specials will continue to be key to APAC revenues. Stress in the China property market will carry on, while the tech-heavy markets of Korea and Taiwan will continue to see volatility as both investor sentiment and macro influencers push and pull money in and out of this sector. Cash reinvestment is going to be one of the larger focus areas in 2022 for clients. Despite APAC naturally having a lighter cash collateral usage, yield curves are heading north and so nimbler clients will see opportunities and benefits from surprise changes to US and European monetary policy that may play out this year.
Questions remain over whether it will be a global soft or hard landing. Will the US economy be able to handle 1 per cent interest rates? These, and other factors, will decide how 2022 goes for most of our financing community.
Lai: As we begin 2022, we see challenges and opportunities in the securities lending market. In Hong Kong, we expect to see more Chinese companies listing on the Hong Kong exchange. It remains to be seen if SBL activity on these names will remain a key revenue driver.
Korea continues to work its way back to pre-short sell ban levels. While short selling is constrained to a universe of eligible names, Korea represents one of the higher fee-generating markets in APAC, so we are optimistic that this will be a key market for us going forward.
As outlined in our response to an earlier question, the securities lending market will continue to evolve with a focus on automation and product diversification.
Cooper: The APAC markets continue to look very positive from a securities lending perspective. We continue to see inventory levels increasing, driven both by new investment mandates in the region and also new asset owners starting to enter securities lending.
We are also seeing a number of local Asian markets continuing to develop their infrastructure to introduce securities lending. Following the rule change in late 2020 which allows qualified foreign investors (QFIs) to transact in onshore SBL, China continues to be a key focus, especially for agent lenders, in terms of providing solutions for both onshore and Stock Connect securities. The increased investment in APAC has also created a need to finance new assets, which might be harder to mobilise than those in some other developed markets. The growth in both the pledge structure and tokenisation offers potential solutions for those historically locked in assets.
Chua: We believe APAC markets are generally positioned well for another good year in 2022. We are expecting more corporate activity in the region as long as conditions remain accommodating. For example, Hong Kong should continue to benefit from new equity listings and IPO demand. There are some uncertainties that may create disruptions, namely the Federal Reserve Board’s (as well as several regional central banks’) stated intention to raise interest rates as well as broader implications of geopolitical events.
Daswani: We are optimistic about the region in 2022, evidenced by the strong bidding we have already for exclusive supply for the coming 12 months, seen by auctions eSecLending ran themselves, and on our behalf, in late in 2021. Returns in South Korea and Hong Kong should continue to strengthen and, similar to what was witnessed last year when the South Korean short selling ban was lifted, we expect that trend to spill over into the other key markets in the region. We remain hopeful that progress will be made in opening up both Indonesia and the Philippines for offshore lending later in the year.
What is top of your development priorities as an APAC securities lending division for the 12 months ahead?
Lai: Last year’s Â鶹´«Ã½ Finance Times Asia Handbook announced that J.P. Morgan was the first agent lender to accept China A-shares as collateral for a securities finance transaction conducted through the Hong Kong and China Stock Connect. The logical expansion is to include Bond Connect securities in our acceptable universe of collateral. Not only would this expand to seven the number of APAC domiciles in our acceptable fixed income collateral universe, it naturally builds on the official 2017 launch of Bond Connect.
Over the next 12 months, our team will focus on the further build out of the J.P. Morgan Agency Financing product set, giving APAC clients the ability to solve for all liquidity objectives across a single platform. The platform already offers significant efficiencies in terms of the legal framework, liquidity access, and operational support model, but the development of order management and optimisation functionality will serve to strengthen the economic proposition for outsourcing financing activity.
As a direct result of the next phase of the uncleared margin regulations due in September 2022, the scope of the J.P. Morgan collateral mobilisation and management tool, Collateral Transport, introduced in last year’s Â鶹´«Ã½ Finance Times Asia Handbook, will be widened further to be fully custodian agnostic. This will enable the client to consolidate its view on inventory across multiple custodian venues and optimise collateral flows as necessary.
Cooper: As an agent lender, optionality is key to monetise opportunities as and when they exist. This includes having the infrastructure in place to lend in new markets and the ability to accept wider collateral types. This also involves maintaining close and constructive relationships with beneficial owners to discuss time-sensitive trade opportunities. In a market of uncertainty, it is important to focus on those elements that are controllable and product enhancements that enable us to optimise performance for our clients’ portfolios that we are entrusted with.
Solway: People, systems, products and clients remain our focus in 2022. Without talented people, smart systems and evolving products, we cannot solve for the needs of our regional and global clients. We will continue to invest in and care about our people to execute a strategy that ensures resiliency both locally and regionally.
Targeting and optimising high-impact securities remains at the forefront of our strategy, from institutional high net-worth or retail clients. Additionally, untapped and new sources of supply are the jewels in the crown these days. Scalable same-day trading is also an area where we want to invest and provide solutions in 2022 as regulations and settlement cycles tighten, with associated penalties only going one way — up.
Jansen Chua: We saw a rebound in APAC market performance in 2021 versus 2020. This was driven primarily by strong short demand for Taiwanese (namely shipping and display panel issuers) and Hong Kong securities (HK-listed real estate issuers such as Evergrande Real Estate), capital restructuring (BHP in Australia) and a broad resumption of interest for South Korean securities where the short-sale ban, announced in 2020, was finally lifted.
Sunil Daswani: The Asian markets have been a real standout in 2021, with strong returns seen on both our discretionary and exclusive books. Borrower demand has grown over the period and continues to do so going into 2022, with most market participants bullish about prospects over the next 12 months. The big driver of much of this growth was the partial lifting of the short selling ban in South Korea, which not only drove activity in that market but also had the effect of buoying business across the region. We are optimistic that South Korea will continue its upward trajectory into 2022 and expect similar performance in Hong Kong, a market that very much returned to form in the latter part of 2021.
GC lending across many developed markets did soften through 2021, much of which was due to the meme-stock phenomenon that kicked off in the US in the early part of the year. Asia markets weren’t immune to this softening, which was particularly noticeable in Japan, although this was offset in part by increased lending volume over the record dates in that market throughout 2021.
Paul Solway: APAC securities lending for 2021 enjoyed stronger performance overall than 2020. Total securities lending revenue was up more than 30 per cent, with some markets in APAC clearly outperforming. Taiwan’s securities lending revenue was up almost 200 per cent owing to the valuation of the panel makers and shippers, with the TAIEX ending the year as one of the best performing stock indices, up 23.66 per cent. Hong Kong and Malaysia were the other two markets that performed very well in 2021 in the securities lending space.
2021 was a thematic year, with lots of events driven by and related to COVID-19. Supply chain disruptions, energy shortages and chip shortages were some of the headwinds that impacted pricing and demand in securities lending. We have seen the high earners surrounding certain sectors like the shipping companies (Cosco, HMM, Wan Hai Line), the panel makers (AU Optronics, LG Display), rubber glove manufacturers (Top Glove, Sri Trang), and even the coal names (Banpu) — this was very consistent across all APAC markets. Corporate action and deal-driven names also played a role this year, with WH Group and BHP being two important earners in Hong Kong and Australia respectively.
In terms of weak earners, the only two markets in APAC where lending revenues have gone down were Japan and Singapore, which experienced a lack of specials this year. Singapore revenues were also impacted by the reduced dividend and scrip events for the major Singaporean banks in 2021.
David Lai: Taiwanese SBL growth was one of the key stories across the street in 2021. The industry has seen record trading balances as the market continues to grow in both onshore and offshore trading.
From an offshore perspective, I think it is fair to say that most supply has been centred around a select number of beneficial owner clients. So, it has been encouraging to witness the recent changes in our book composition and the increased dialogue that is taking place with our client base.
Korea lending activity has started to pick up traction following the last few KOSPI/KOSDAQ rebalances, which introduced some new IPO names into the short sell universe.
In Hong Kong, which is the most competitive market among lenders, global logistics, China technology, China property, and COVID/pharmaceuticals sectors continue to be the areas of focus. In 2021, we saw key specials in Hong Kong contributing significantly to our APAC revenue growth.
Phil Garrett: There were two key factors driving performance in APAC in 2021, namely China’s regulatory clampdown on a number of domestic sectors and the eagerly anticipated return of short selling, albeit partially, in Korea.
At the start of the year, the focus was on US sanctions on investments in named Chinese companies deemed to have ties to the military. By mid-year, however, attention was turning towards the regulatory tightening across certain sectors in China, including technology, private education, gaming and most notably property. A potential liquidity issue emerged for China Evergrande Group and by year-end the credit situation was affecting most of the sector, causing fears of contagion and driving strong sector lending demand. China’s clampdown created conditions which enabled market-wide short conviction not seen since before COVID. The Hang Seng Index finished down 15 per cent for the year, justifying the downside conviction.
Elsewhere Korea saw the re-introduction of short selling in May limited to constituents of the KOSPI 200 and KOPSI 150 indices, which saw strong demand driven by the likes of LG Display, HMM and Doosan Heavy Industries.
The sheer size of the Japanese market once again meant it was one of the region’s top revenue generating markets despite being heavily GC with few notable specials through the year. Sector-wise, we saw strong demand in some e-commerce names while other demand came from convertible bonds and secondary offerings.
Taiwan and Australia also saw strong revenues, with both stock markets performing well through 2021. Taiwan was driven by technology, and primarily semiconductor names, as the PHLX Semiconductor Sector Index recorded an all-time high. Australia was a strong performer in the second half of the year as high vaccination rates saw lockdowns end and the economy start to improve. All eyes towards the end of the year were focused on the impending BHP unification event.
In summary, APAC lending performance was stronger year-on-year in terms of Return to Lendable for equity markets, outperforming other regions on that measure. The return to risk-on for short sellers, particularly in the second half of the year, was a major boost for revenue generation and a welcome trend going into 2022.
James Cooper: 2021 was both a challenging and exceptional year from an APAC perspective. The evolving COVID landscape globally impacted supply chains at all levels, with travel restrictions and the divergent global policies applied to tackle the virus creating a number of global, regional and country-specific opportunities. Structurally, short-sell bans were lifted in Malaysia and Korea, driving a resurgence in demand along with a number of broader market themes. Demand in both markets was strong, with Korea seeing balances rise to previous highs relatively quickly.
The initial round of US sanctions in Chinese companies created some uncertainty in the market, but also opportunities for non-US asset owners and non-US entities. We noted that fees spiked on otherwise very liquid securities such as Xiaomi (1810 HK) as a result of the decrease in supply. In terms of China policy and the economy, we saw the regulatory tightening of technology companies, the restructuring of educational companies into non-profit organisations, and a liquidity crunch in the property sector — all of which drove security or industry-specific interest on the demand side.
Natalie Floate: Performance has been excellent in key revenue markets, particularly Hong Kong. This is a market that continues to impress us in terms of corporate activity and consistency of returns from special trading opportunities. In APAC, we are also constantly looking at South Korea, Taiwan and more recently at optimisation via the China Connect schemes.
Global financial markets have been subject to major fluctuations in liquidity and market pricing over the past two years, heavily linked to the impact of COVID-19 pandemic. What adaptations to working practices have you made to sustain and grow your APAC securities lending activity in this environment?
Solway: Our Trading Apps purchase in 2018 was key for our future-state resiliency, evolution and enhanced automation capabilities. The acquisition balanced low-touch automation with high-touch human influence, and this remains a fundamental focus for us in 2022. Working from home has also worked really well for us across the board; trading, relationship management and operations were all seamlessly moved from office to home working and they continue to work well for us.
Optionality continues for all our teams in both the front and back office, with staff able to choose which environment suits them in consideration of both their business-as-usual obligations and personal circumstances. Lack of travel has been a challenge for us but, again, technology has assisted in bridging any consequential gaps — although screen fatigue remains an issue for everyone.
Having a forward-looking location strategy to deliver local, on the ground solutions is another way we are making an impact in local Asian markets with our recent addition of a dedicated relationship manager in Seoul to serve our Korean clients. We also have further plans to expand product development and client service in 2022.
Chua: Flexible (or hybrid) work arrangements were definitely important adjustments that we implemented (and continue to invest in) to help provide support for our staff. Safety and well-being were clear priorities while balancing the need to minimise disruption to our programme, clients, and counterparties. Virtual engagement with clients and prospects was a new activity that we had to adapt to, replacing the traditional travel-enabled face-to-face relationship meetings. This new mode of engagement required a shift in how we have traditionally managed relationships and was supported by instructor-led training classes for our teams and the use of external vendors to support client engagement events.
Maintaining engagement with our employees was also a key management consideration. Traditional methods of bringing people together (e.g. coffee meetings, 1x1 in-person meetings) had to be replaced with virtual engagements instead. This required more deliberate planning and coordination and a heightened focus on leveraging collaboration tools available across the enterprise.
Lai: First of all, the whole industry should be proud of how it has navigated through the last two years. When describing the industry to outsiders, the words ‘relationships’ and ‘communication’ have always been prominent and we have certainly seen these traits keep morale high and work processes efficient.
From a J.P. Morgan perspective, we were rather fortunate to have our Japan trading desk fully operational in January 2021. With three trading desks in the region, we were able to remain flexible as external factors constantly changed.
In Hong Kong, our Asia-Pacific headquarters, we brought all our staff together across two offices at the end of 2019. The cutting-edge technology of the new workplace allowed us to enhance our virtual connectivity and collaboration and it also enabled us to align our staffing parameters when this was deemed to be appropriate or necessary.
In which APAC markets do you identify new opportunities for growth of your lending business? What regulatory changes, and changes to market practice, are required to enable and sustain this market development?
Lai: At the start of a new year, we once again find ourselves excited about the prospects for the China market. The opportunities, challenges, and relevant developments have been discussed extensively in previous articles in this publication, so I will not repeat them here.
As mentioned earlier, the industry has demonstrated its resilience during the pandemic — working with each other, clients, counterparties, and authorities to address any requirements or concerns. As such, we are well-placed to participate in the China market under any framework that is agreed upon.
Daswani: There continues to be potential opportunities in APAC markets that will provide for growth in coming years. Timing is always a challenge, as generally the stakeholders in the local market will need to work with regulators to adjust or add regulatory language to allow foreign investors to participate. For example, in the Philippines there is a pending regulatory change to allow offshore collateral to be accepted and to recognise the industry standard Global Master Â鶹´«Ã½ Lending Agreement (GMSLA). Whilst many hoped this would happen in 2021, it has yet to occur.
There has been increased dialogue with stakeholders in Indonesia in 2021. The focus has not just been on opening the equity market to foreign investors, but also potentially the fixed income market. The latter may initially focus on opportunities for domestic investors, but hopefully may extend to foreign investors over time.
No conversation on opportunities in Asia would be complete without discussing China. There is some work to do here to open the market for foreign investor participation, but there may be an opportunity for an investor that is comfortable with the central counterparty risk — which is the only option under current rules. This model, similar to what we see in Brazil, does restrict many lenders from participating owing to their own regulations on collateral, but this may present opportunities for some specific investor types, including onshore investors.
From a new investor perspective, we are already seeing interest from China insurance companies following the recent regulatory change which allows these investors to participate in securities lending. As always, the Pan Asian Â鶹´«Ã½ Lending Association (PASLA) is leading the charge in advocating for change in Asia and both Standard Chartered and our JV partner eSecLending are supportive of these efforts.
Solway: We think both tactically and strategically in terms of counterparties, collateral markets and trade ideas or solutions. The art is to nimbly navigate the different permutations that exist between these evolving parameters. The region remains diverse, fluid, and opportunistic, so having tactical options within existing open markets is key. Collateral is also a significant factor, with major considerations being cash versus non-cash, pledge versus title transfer, and RWA-friendly assets versus less capital-efficient securities.
Last year we spoke about new market aspirations such as China, Philippines and Indonesia. Not much has changed for these markets in the past 12 months, but we continue to work with PASLA and others to advocate and influence moves for regulatory change, market openness and harmonisation across Asia. With our successful delivery of China Stock Connect as collateral within agency lending, our sights now turn to China Bond Connect in 2022 in the expectation that this additional collateral flexibility will provide further financing solutions to the street and will underpin spreads and grow utilisation rates.
In the meantime, we remain strategically focused on adapting our models, where necessary, to make it easier for counterparties to trade through and with us. Linking products and services will allow us to leverage our franchise, which will not only add real value for our clients but also foster market efficiencies and drive meaningful price discovery in local markets.
Garrett: The securities finance industry has had China in its sights for over a decade. Promising developments in the China Qualified Foreign Institutional Investor (QFII) scheme to allow securities lending led to much optimism in 2020. However idiosyncrasies around the operating model have meant that any meaningful participation for offshore lenders is extremely limited. Ongoing regulatory engagement through industry bodies such as PASLA and Asia Â鶹´«Ã½ Industry & Financial Markets Association (ASIFMA) will hopefully enable modifications that will allow for full access to China through a more compatible model in the future. Whether this will happen in 2022 is, admittedly, doubtful.
Other markets to watch out for are Indonesia and the Philippines. Both markets have been stop-start on progress towards a viable SBL model for offshore lenders. For Indonesia, there were signs of regulatory re-engagement towards the end of the year, while in Q1 the Philippines announced the intended launch of rules and regulations for short selling. However we are still waiting for this to happen and both markets remain on hold at the time of writing.
The potential lifting of the remaining short-sell ban in Korea will also provide additional opportunity and we await further news from the regulators on this.
Cooper: Collateral mobility and optimisation remains a key focus in APAC. We continue to see demand for a widening of acceptable title transfer assets such as corporate bonds and ETFs, along with the acceptance of non-standard or ID market [where foreign investors are required to have an investor ID registration to trade and invest] securities such as Korea, Taiwan and Stock Connect — and then, more generally, the pledge structure is generating strong interest. As spreads narrow on historically higher fee lending markets, collateral costs are becoming increasingly important.
Local regulations for some of the ID markets present very specific regional opportunities, along with wider use of non-cash collateral globally and particularly in APAC. We have noted collateral convergence on the borrower side, with optimisation viewed more holistically across the whole business, and this has created new opportunities across business lines and also across regions. As an agent lender, we need to work closely with our clients to maximise these opportunities within their accepted mandates and risk profiles.
What impact is technology development, and parallel standardisation and digitisation of securities lending practices, having in the APAC region?
Solway: The region remains a collection of unique markets that have their own rhyme and reasons for rules, regulations, and activity. However, systematic solutions and controls are now in place for all nine active markets across APAC. Trading Apps remains our differentiator, enabling our traders to focus on the high-value and high-touch trades across both equities and fixed income. Despite spreads remaining under pressure, our balances at BNY Mellon grew in 2021, with records being broken in Japan during seasonal periods in the past year and technology being an enabler of this activity. Using technology in operations is also very much our priority, not only lowering the potential for human error but providing volume and scale that matches off against quant-driven, high-volume trading strategies that are now the new norm.
Lai: J.P. Morgan continues to focus on innovation and meeting the future demands of our clients. Our effort in digital evolution combines artificial intelligence, blockchain technology, and thought leadership to deliver innovative solutions for our clients across our securities financing products. The real-world application of blockchain technology has begun to pick up the pace. It is incumbent for J.P. Morgan to remain integral to this ecosystem and provide liquidity to the market. From a practical perspective, the APAC region still has an overseas nexus, whether from a high-quality liquid asset (HQLA) or a USD cash aspect or a support framework owing to the necessary ‘round trip’ or ‘follow the sun’ processes inherent in our business.
As such, any standardisation or technology development that reduces (or in some cases completely removes) the need for tracked and confirmed movements and post-trade reconciliations will be welcome.
What are the key issues for the APAC securities lending community in promoting high ESG standards across the SBL transaction value chain?
Daswani: More words were written in 2021 on securities lending and ESG than ever before and it continues to be a hot topic in 2022. We continue to believe that ESG and securities lending can be appropriate companions and the industry associations are working hard to give investors the knowledge and information to ensure comfort in managing these two activities in tandem. In fact, the Global Framework for ESG and Â鶹´«Ã½ Lending (GFESL), published by PASLA in May 2021, led the charge in providing a structure for investors to follow. More recently, a number of industry associations have formed the Global Alliance of Â鶹´«Ã½ Lending Associations (GASLA) to continue the work and focus on ESG solutions for the industry, among other important themes.
At Standard Chartered, we have been part of a regular dialogue with clients and prospects about ESG and securities lending. We believe that securities lending should not be an impact to success in meeting an investor’s ESG requirements. Many years ago, our partner eSecLending introduced Proxy Value that provided clients with data on voting materiality and securities lending revenue to better inform the decision about whether to recall a security from loan to vote. As you would expect, this has now evolved to include other elements of the environmental and sustainability agenda to add important additional colour to the information available to clients and fully support the ESG agenda.
Collateral screening has always been something that we have been able to do, primarily due to the segregated nature of our collateral accounts – the client is truly in control of what is taken as collateral and we can support changes as necessary. The main focus of client discussions here has been around managing this element of the programme in a way that is scalable. Thus, the introduction of ESG indices that can be supported by triparty collateral agents has been a particularly strong step to demonstrating adherence to ESG principles in collateral management.
Lai: ESG remains a focus topic for the global industry so, being mindful of the material in the public domain, I reiterate that our approach with all our clients is to understand any specific requirements they may have regarding their lending programme.
This might seem rather a basic statement, but it is the first step in initiating the multitude of programme parameters within the J.P. Morgan Agency Â鶹´«Ã½ Finance platform that allow our clients to customise their agency lending programme. This will impact the range of assets and possibly the rate of return of a lending programme — which our analytical tools will help to highlight. Understanding a client’s requirements and discussing the potential impact is the basic fundamental backbone of our business.
If there are client requirements related to the associated collateral, this will also impact the lending programme and processes involved. But, similar to above, these challenges can be worked through with active and clear communication from all parties.
Chua: We continue to see increasing interest in the application of ESG principles to securities lending activity. However, there are still a number of challenges that currently inhibit faster adoption into lending programmes, chief of which is the lack of a clearly defined and widely agreed set of standards among investors. For example, what is considered ‘eligible’ collateral for one investor may be considered ‘ineligible’ for another. This results in the need for customisation, which in turn prohibits the application of scalability to the processes of lending agents, borrowers and triparty collateral providers.
We also see growing interest in steps to promote transparency into lending activities. Investors are asking questions about their lending activity. For example, who are the ultimate borrowers of the securities? For what purpose are the securities being borrowed? And are these purposes (e.g. short-selling) aligned with their own ESG principles? We view peer-to-peer models as potentially a means to achieving this transparency objective between the principal lender and principal borrower. Traditionally, intermediaries such as the prime brokers and broker-dealers have stood between these principal parties. To address client demand, State Street introduced Direct Access, our managed peer-to-peer programme, in late 2019, enabling direct transactions between our lending and borrowing clients.
Investors have also expressed growing interest in exercising their voting rights for their securities lending portfolios. The desire to maximise lending returns can, at times, appear to be at odds with the need to exercise oversight and governance obligations over issuer companies. There are a range of tools available – such as recalling securities, restricting specific securities, setting limits on lendable amounts – whereby agent lenders can help beneficial owners bridge these two requirements.
Solway: As articulated in many webinars, the focus is currently on proxy voting, collateral and, as always, transparency. I have argued that most, if not all, current ESG concerns have been considered and adapted for in most modern agency lending programmes. At BNY Mellon, we have frameworks in place that give optionality across proxy recalls, collateral/lending restrictions, big data reporting, real-time benchmarking and active parameter screenings. The key challenge is finding sweet spot ESG requirements and standards across a multitude of clients who are all still navigating through their own corporate ESG mandates —and that may not have yet considered the niche impacts to securities lending programmes.
If all clients suddenly restricted lending for proxy votes, there would be a serious impact on supply in certain names and markets — that is obvious, especially in markets like Japan where proxy/AGM events are very prevalent. It is important to advocate for pragmatic approaches. Not all electable events are significant enough for all shareholders and so stewardship obligations may differ. At BNY Mellon, we are currently working to standardise some ESG collateral profiles for clients to leverage. As a leader in the triparty space, we have an obligation to be a first mover in providing our clients with pragmatic screening options for both lending and collateral.
Floate: ESG is not a new topic in APAC. It has been a key focus for beneficial owners that are long-standing participants of the securities lending market. This has positioned us well, enabling us to adapt, adopt and implement our lending clients’ ESG objectives, which are already mature and well established in their core portfolios, before being stretched into ancillary activities such as securities lending.
In this regard, we see the role of the agent as critical. Speaking for BNP Paribas Â鶹´«Ã½ Services, our clients look to us as their agent to see what it is possible to implement and to guide them on the implications — particularly in working through the value chain with borrowers and collateral managers. Proxy voting was the first element discussed from Australia and now we are seeing collateral screening as the next natural phase for ESG across APAC. Â鶹´«Ã½ lending is not always considered by beneficial owners when they think of ESG. As such, our role as agent is critical to highlight that a fund’s core ESG objectives can be stretched into their securities lending mandates in a complementary way.
How do you assess the outlook for APAC securities lending markets for 2022?
Garrett: The macroeconomic themes that have played out in 2021 will continue to have a heavy impact on borrower demand in APAC for the coming year. China’s common prosperity goal will heavily influence stock market conditions not just in China and Hong Kong, but also in regional markets tied to the fortunes of the world’s number two economy. Therefore we expect volatility and strong short-side interest to continue for the foreseeable future across the region. That said, we may see some easing in policy to avoid any systemically-impactful defaults. More recently, there has been much talk about an easing of the three red lines policy in the property sector as the government seeks to avoid a wider shock to the Chinese economy.
The reality of rising interest rates will undoubtedly increase volatility across global equity markets and we have already started to see this play out. Even those stock markets which fared well through 2021 are likely to see upward momentum checked in the face of this new environment. This will provide additional motive for more short-side positioning.
There is hope that at some point in 2022, Korea will lift the remaining short-selling ban to allow inclusion of all indices. As we saw with last year’s actions, this should provide an opportunity for lenders and borrowers to increase returns from this market.
Solway: Against the backdrop of ongoing and remaining risks from COVID-19, there will be big challenges alongside some surprising and significant opportunities. I fear for some conservative approaches in terms of regulatory or exchange actions against any extreme market movements that may play out. At the very least, certain hopes for market infrastructure progress in emerging markets may see continued procrastination, delays and postponement. The deep, liquid markets will continue to see the best activity; Hong Kong and Japan will continue to dominate. The question will be whether Korea and Taiwan will continue their positive trajectories without impediments or restrictions that cause a drag on revenue opportunities.
Specials will continue to be key to APAC revenues. Stress in the China property market will carry on, while the tech-heavy markets of Korea and Taiwan will continue to see volatility as both investor sentiment and macro influencers push and pull money in and out of this sector. Cash reinvestment is going to be one of the larger focus areas in 2022 for clients. Despite APAC naturally having a lighter cash collateral usage, yield curves are heading north and so nimbler clients will see opportunities and benefits from surprise changes to US and European monetary policy that may play out this year.
Questions remain over whether it will be a global soft or hard landing. Will the US economy be able to handle 1 per cent interest rates? These, and other factors, will decide how 2022 goes for most of our financing community.
Lai: As we begin 2022, we see challenges and opportunities in the securities lending market. In Hong Kong, we expect to see more Chinese companies listing on the Hong Kong exchange. It remains to be seen if SBL activity on these names will remain a key revenue driver.
Korea continues to work its way back to pre-short sell ban levels. While short selling is constrained to a universe of eligible names, Korea represents one of the higher fee-generating markets in APAC, so we are optimistic that this will be a key market for us going forward.
As outlined in our response to an earlier question, the securities lending market will continue to evolve with a focus on automation and product diversification.
Cooper: The APAC markets continue to look very positive from a securities lending perspective. We continue to see inventory levels increasing, driven both by new investment mandates in the region and also new asset owners starting to enter securities lending.
We are also seeing a number of local Asian markets continuing to develop their infrastructure to introduce securities lending. Following the rule change in late 2020 which allows qualified foreign investors (QFIs) to transact in onshore SBL, China continues to be a key focus, especially for agent lenders, in terms of providing solutions for both onshore and Stock Connect securities. The increased investment in APAC has also created a need to finance new assets, which might be harder to mobilise than those in some other developed markets. The growth in both the pledge structure and tokenisation offers potential solutions for those historically locked in assets.
Chua: We believe APAC markets are generally positioned well for another good year in 2022. We are expecting more corporate activity in the region as long as conditions remain accommodating. For example, Hong Kong should continue to benefit from new equity listings and IPO demand. There are some uncertainties that may create disruptions, namely the Federal Reserve Board’s (as well as several regional central banks’) stated intention to raise interest rates as well as broader implications of geopolitical events.
Daswani: We are optimistic about the region in 2022, evidenced by the strong bidding we have already for exclusive supply for the coming 12 months, seen by auctions eSecLending ran themselves, and on our behalf, in late in 2021. Returns in South Korea and Hong Kong should continue to strengthen and, similar to what was witnessed last year when the South Korean short selling ban was lifted, we expect that trend to spill over into the other key markets in the region. We remain hopeful that progress will be made in opening up both Indonesia and the Philippines for offshore lending later in the year.
What is top of your development priorities as an APAC securities lending division for the 12 months ahead?
Lai: Last year’s Â鶹´«Ã½ Finance Times Asia Handbook announced that J.P. Morgan was the first agent lender to accept China A-shares as collateral for a securities finance transaction conducted through the Hong Kong and China Stock Connect. The logical expansion is to include Bond Connect securities in our acceptable universe of collateral. Not only would this expand to seven the number of APAC domiciles in our acceptable fixed income collateral universe, it naturally builds on the official 2017 launch of Bond Connect.
Over the next 12 months, our team will focus on the further build out of the J.P. Morgan Agency Financing product set, giving APAC clients the ability to solve for all liquidity objectives across a single platform. The platform already offers significant efficiencies in terms of the legal framework, liquidity access, and operational support model, but the development of order management and optimisation functionality will serve to strengthen the economic proposition for outsourcing financing activity.
As a direct result of the next phase of the uncleared margin regulations due in September 2022, the scope of the J.P. Morgan collateral mobilisation and management tool, Collateral Transport, introduced in last year’s Â鶹´«Ã½ Finance Times Asia Handbook, will be widened further to be fully custodian agnostic. This will enable the client to consolidate its view on inventory across multiple custodian venues and optimise collateral flows as necessary.
Cooper: As an agent lender, optionality is key to monetise opportunities as and when they exist. This includes having the infrastructure in place to lend in new markets and the ability to accept wider collateral types. This also involves maintaining close and constructive relationships with beneficial owners to discuss time-sensitive trade opportunities. In a market of uncertainty, it is important to focus on those elements that are controllable and product enhancements that enable us to optimise performance for our clients’ portfolios that we are entrusted with.
Solway: People, systems, products and clients remain our focus in 2022. Without talented people, smart systems and evolving products, we cannot solve for the needs of our regional and global clients. We will continue to invest in and care about our people to execute a strategy that ensures resiliency both locally and regionally.
Targeting and optimising high-impact securities remains at the forefront of our strategy, from institutional high net-worth or retail clients. Additionally, untapped and new sources of supply are the jewels in the crown these days. Scalable same-day trading is also an area where we want to invest and provide solutions in 2022 as regulations and settlement cycles tighten, with associated penalties only going one way — up.
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