Evaluating growth in the Asian securities lending market

and the effects of the regulations

Martin Chen, Vice President of ChinaTrust, examines the highly competitive securities borrowing and lending environment in Asia Pacific. Touching upon key regulatory changes, he observes that Basel III will encourage banks to consider CCPs for OTC derivatives as a viable way to enhance collateral management. Martin also identifies that, unlike Europe and the USA, securities lending in Asia Pacific has great growth potential

as trading volumes of OTC derivatives have been growing.

Bryan Camoens: The highly competitive nature of securities borrowing and lending makes it so that businesses in Asia have to constantly reassess their strategies in order to remain competitive, could you please tell us why this is so

and how do the best collateral management firms get this done? Martin Chen: There are many challenges existing in Asian securities lending and collateral markets, although Asia is considered the fastest growing region in these areas. Markets in Asia are quite fragmented, and different markets have different regulations and practices. For example, in Taiwan, there is a competitive auction scheme in which

Taiwan Stock Exchange (TWSE) acts as the Central Counterparty (CCP), while there a negotiated scheme (bilateral transactions) which is similar to the international practice. Before entering a new market, borrowers and lenders need to do a due diligence can have a good understanding of the market. They also need to monitor a market very closely as regulations may be suddenly changed due to market volatility and have immediate impacts on both borrowers and lenders. Bryan Camoens: Could you please give us a round-up of key developments in the securities lending markets around Asia? Martin Chen: Some countries in Asia have been more cautious about short-selling activities. For example, TWSE announced in Nov. 2011 that the daily limit of total quantity sold per line of borrowed shares is amended from “3% of total outstanding

shares” to “20% of the average trading volume of the previous 30 business days”. That significantly reduces the number of shares which can be borrowed for short selling and thus has impact on market liquidity. Currently, borrowers of Taiwan equities can short sell borrowed shares one day before the shares are actually received. But TWSE may impose stricter controls and allow borrowers to short sell borrowed shares only upon receipt.

In Hong Kong, market participants are required to report short positions to the Securities and Futures Commission (SFC) under the Securities and Futures Rules effective June 18, 2012. The new rule allows SFC to monitor short selling activities more closely. I think it is a good thing for the regulators to improve market transparency. But the regulators should think twice before implementing a policy to restrict or prohibit short

sales as it often harms market liquidities and cannot really solve the problem. In addition, we are happy to see some markets like China, India and Malaysia developing their securities lending markets. Especially, we can pay more attention to the developmet of a securities lending market in China. China launched its pilot program for margin financing and securities lending on Mar. 31, 2010. Given the success of the pilot program, it has become a standard program since Oct. 28, 2011. The balance of

securities lending reached RMB1.28 billion at the end of May 2012. Besides, China Securities Finance Company (CSFC) was established in Oct. 2011. It is the sole institution in China which can supply securities to lending brokers. We also heard that the regulator in China is studying the possibility of allowing Qualified Foreign Institutional

Investors (QFIIs) to participate in the securities lending market.

Bryan Camoens: In your opinion what impact will the regulations have on the Asian market? Martin Chen: Regulations like Dodd-Frank Act, Volcker Rule and Basel III promulgated in the West will definitely impact the countries in the East. The use of CCPs for OTC derivatives, required by Dodd Frank Act, will result in more demand for higher quality securities (e.g., treasuries), more efficient collateral management as well as optimization of collateral use. Basel III may also encourage Asian banks to consider use of CCPs for trading OTC derivatives as there is just 2% capital charge for trades cleared through CCPs.

The other impact is that the regulators in Asia may also adopt foreign regulations. It is obvious that the Short Position Reporting Rules in HK was influenced by Dodd-Frank Act in the US. Bryan Camoens: What are the current and yet to be explored opportunities in Asia’s securities market? Martin Chen: I am very confident in the growth of securities lending opportunities in the Asia Pacific region given that there is a good mixture of markets with different development stages. For example, Japan, Australia, Hong Kong and Singapore are considered mature markets which have higher SBL trading volume but lower fees. There are some developing markets like Taiwan, South Korea and Thailand with good liquidities as well as better fees. China and India will gradually catch up and have great potential to grow. Given the increasing use of CCPs, many market participants will have no capabilities of doing collateral management in house, or the in-house collateral management will be too expensive for them. They have to seek the assistance of third party collateral

management service provider. Therefore, this provides business opportunities to those big custodian banks with enhanced collateral solutions. Bryan Camoens: Looking ahead how will Asia’s collateral management evolve over the next decade?

Martin Chen: Unlike US or Europe, the trading volume of OTC derivatives is still growing in Asia. That provides great opportunities for collateral managers. Besides, fragmented clearing markets in Asia will make collateral management more complicated and costly. How to integrate the clearing markets and make collateral management more friendly and efficient will be an important issue within the next decade.

Martin Chen will be evaluating the growth in the Asian securities lending market and the effects regulations at the 2nd Annual Collateral Management Asia 2012. Get the brochure or register for the conference via: Email: enquiry@iqpc.com.sg Web: www.collateralmanagementasia.com