Malaysia
06 August 2024
Carmella Haswell explores a core securities lending market, Malaysia, and how market participants in the region are working to expand the country’s potential
Image: stock.adobe/nasruleffendy
“It is just not enough to keep up, we must step up and innovate.”
The words by CEO Datuk Muhamad Umar Swift form a firm belief at Bursa Malaysia, and stand true for the further development of the Malaysia securities lending market.
Situated in Southeast Asia, Malaysia is home to a vibrant multicultural population and is known for its cuisine, rainforests, coastal landscapes, and the Petronas Towers located at the capital, Kuala Lumpur. It is formed by 13 states including Kelantan, Johor and Terengganu, and three federal territories: Kuala Lumpur, Putrajaya and Labuan.
The Malaysia market has evolved over the last decade to include a broad and diverse group of both international and domestic lenders and borrowers. The fundamentals for securities lending in Malaysia under a Global Master Securities Lending Agreement (GMSLA) have existed for over 10 years, and have a history of revenue generation for participants.
The region is also at the forefront in the development of Islamic banking, Islamic capital market and takaful. It has a strong Islamic financial system with a business driven regulatory regime and legal framework. Malaysia is known as one of the leading global hubs for Islamic finance.
As part of an open, liquid, fully developed financial securities market, David Forsyth, head of prime brokerage, Asia, at Maybank Investment Banking Group, says the evolution of securities borrowing and lending here naturally grows alongside the broadening of eligible assets and participating investors.
Consistent advocacy from Bursa Malaysia in advancing the local ecosystem has encouraged greater participation by local brokers offering securities borrowing and lending (SBL) services, says Leong See Meng, director of origination and listing at Bursa Malaysia. The exchange indicates an “encouraging growth” in participating organisations which offer end-to-end securities financing services, since the introduction of the Securities Borrowing and Lending Negotiated Transaction (SBLNT) model in 2009.
The exchange currently has five brokers, three of which have been established over the last six years. Bursa Malaysia foresees an increase in broker agents, which looks to help spur organic growth in securities financing and grow the domestic ecosystem.
Deploying financial innovation
Since the post-Covid 2022 levels of just under US$300 million, the Malaysia market size has more than doubled to almost US$800 million, according to Maybank Investment Banking Group. Utilisation levels have been stable, although the firm observes periodic sector and name-specific spikes in fee rates.
Forsyth indicates that some “interesting trends” have emerged surrounding developments in government policies and macro factors which affect sectors like construction and data centres, property development and the semi-conductor space. He adds: “We are excited to see how the expansion of the eligible stocks list and price discovery around these emerging themes could drive loan supply and fee rates for Malaysia.”
In terms of market conditions shaping collateral preferences on part of the lender and borrower, Jason Wells, managing director, head of agency trading, APAC, at State Street, pinpoints that Malaysian government bonds are not widely used as collateral due to limitations on the transfer of title registrar onshore. Attention to resolve this blockage would support secondary market liquidity of this key asset type and bring wider adoption across trading strategies, he confirms.
In addition, there remain concerns surrounding barriers to market for domestic and international participation in Malaysia for participants. Forsyth says: “Malaysia is fully open to most international financial institutions, and Maybank is happy to assist any potential participants with any queries they may have.” He explains that, historically, some areas of concern have been around country risk, netting opinions, operational risk and individual credit lines. These are still relevant concerns but appear to be less of an issue as more international investors become involved and the market evolves overall.
What is common across all market participants, however, is the expectation for consistent market structures when buying and selling securities, says Stephen Howard, CEO of the Pan Asia Securities Lending Association (PASLA). He explains that participants believe these structures should be rational and provide for transparent price formation. In addition, there should be access for both high-quality passive investors, and more active investors that require a range of hedging solutions to support retail and institutional investors.
“Where these structures are inconsistent, or unaligned with investor and issuers needs, or switched off then back on, this creates serious challenges for long term investment flows and the growth of indexation product development and AUM deployment,” Howard adds.
Similar to all markets regionally and globally, PASLA is certain that continued investor education, whether with investment products or market structure, is key for the further development of Malaysia. The association says it can add significant value by bringing together a broad range of participants into a singular dialogue, a place for views to be shared, voices to be heard, and where constructive outcomes are its key concern.
Encouraging cash market liquidity, developing hedging solutions for all classes of investor, that are supported with a diverse range of appropriate investor products is also key for development, Howard adds. “This journey evolves as financial innovation is both encouraged and deployed.”
Coming up short
A key distinction between APAC markets can be found in short selling. In Malaysia, permitted short selling is primarily for market makers and derivatives specialists to assist with their market making activity.
According to the Asia Pacific Securities Lending User Guide 2024, regulated short selling (RSS) can only be undertaken if it is accompanied by an authorised SBL transaction. While intraday short selling (IDSS) allows eligible investors to engage in short selling of RSS-approved securities, all short positions must be closed off within the same trading day. Intraday short selling by proprietary day traders is also allowed.
Where the short selling controls can be simplified and harmonised across the three regimes — RSS, IDSS and intraday short selling — this would help provide market participants with greater agility in their trading strategies, says Wells.
Bursa Malaysia says: “We acknowledge short selling as an integral part for the efficient functioning of the market. The exchange continues to stay informed about global market practices and strives to ensure that short selling regulations remain aligned with market standards, while maintaining investors’ confidence.”
In March 2020, a series of proactive measures, including the temporary suspension on short selling activities, were introduced to mitigate potential risks arising from heightened volatility and global uncertainties arising from the broader impact of Covid-19. These measures were thereafter gradually uplifted.
Over the last year there has been a tangible increase in the number of names eligible for short selling — up from 215 stocks in November 2022, to 441 in June 2024. Following the removal of temporary restrictions on short selling during Covid-19, Bursa Malaysia took steps to add to the list of eligible stocks for this activity in an effort to create liquidity and encourage participation.
For Forsyth, this move has provided an impetus for some smaller fund management companies in the market with higher concentrations in specials to participate in securities lending as well. “We anticipate supply shifts as these pockets of inventory are mobilised.”
“This change doubles the opportunity-set for our clients to generate incremental returns on their investments,” adds Wells. Similarly, in respect of Shariah-compliant asset owners, stocks eligible for the Shariah-compliant SBL framework by Bursa Malaysia has expanded to 361 stocks.
Reviewing the evolution of the Malaysia market over the past decade, Forsyth indicates that, more broadly and recently in Asia, the geopolitically-driven focus for investment opportunities (both long and short) beyond China “is driving an increase of interest in all other Asian markets”. While Japan has been the largest initial beneficiary, he adds, ASEAN and Malaysian markets are also benefiting from this growing interest and “we anticipate this driving greater volumes and SBL activity” in the months and years ahead.
As Malaysia seeks to compete against other ASEAN economies for investment dollars, Wells believes a well thought out strategy such as the Malaysia Public Listed Companies (PLC) Transformation programme — a vehicle to channel long-term investment capital flow into the country — will combine well with the improved SBL and short selling frameworks. This programme is expected to lead to an increase in capital deployed to Malaysia, according to Wells, and over time it will lead to a more liquid securities lending market.
He understands that these frameworks will allow investors more reason to deploy capital and employ trusted hedging techniques to support it. Wells continues: “With this virtuous cycle in play, we expect additional Malaysian equity allocation to indices. Increased indexing will bring in further liquidity from high quality, long-term passive investors which will be a net positive for SBL.”
A stronger capital market
As one of nine countries in Asia Pacific to have an active international securities programme for international investors, asset lenders and borrowers, Malaysia is continuing to develop its market structure, with the help of PASLA and the country’s stock exchange, Bursa Malaysia.
“It is a market that is characterised as transparent, aligned with investor hedging needs, and offering material beta returns for passive investors,” says Howard. “The consistent core financing balances demonstrate that demand is driven by investor hedging solutions supporting the cash equity and derivative market.”
Both DataLend and S&P Global Market Intelligence data reflect high-quality income streams in excess of 400 basis points for securities finance market participants.
After 10 years of lending Malaysian equities, Wells says the recent direction of travel is the most encouraging he has seen in some time.
Bursa Malaysia is leading initiatives to improve market operations and has already deployed several strategies to deepen investor participation in Malaysia. For example, the exchange issued a guidance note to facilitate SBL lender substitution, aiming to mitigate the early termination of the borrowed shares during partial recall instances.
In addition, Bursa Malaysia advocates for the advancement of Shariah-compliant securities and services. The Islamic Securities Selling and Buying — Negotiated Transaction (ISSBNT) framework, “the world’s first” Shariah-compliant alternative to the SBL framework, was enhanced in January 2023 to create a more facilitative trading environment that would encourage greater liquidity and trading velocity of Shariah-compliant securities.
To further boost the attractiveness of the ISSBNT trading framework, the Malaysian government announced in its Budget 2024 that income from ISSBNT transactions will be tax-exempt beginning in 2024.
The exchange is also in the process of updating the “cumbersome” rules on Approved Reasons for Transfer (ART), which Wells explains will “do wonders” for beneficial owners in the event of a close-out, allowing them to accelerate the process to a swift conclusion.
The Malaysian equity and securities finance market is an important market for regional and ASEAN asset allocation strategies. Speaking to SFT, Howard emphasises the region’s work to develop its market structure to “the right size for its broader equity aspirations”.
This includes supporting more than 1000 issuers coming to the equity capital markets, consolidating its capabilities in the bilateral securities finance market, expanding the range of eligible securities, and encouraging high-quality passive investors internationally to participate, to drive lower risk returns. “It is a similiar story regionally, however, driven by local market needs,” he explains.
It has been an active 12 months for PASLA as the association continues to focus on the Malaysia market, review regulatory structure, work on global netting opinions to ensure set-off, and collaborates with Bursa Malaysia to develop the market infrastructure to, as Howard recalls, “drive constructive commercial and compliant structures that aim to deliver a broad range of investors and issuers with a depth of capabilities”.
Recently, the region’s stock exchange joined PASLA as an official member. In response to this, Howard comments: “Bursa Malaysia joining our association is yet another example of another regional exchange seeing the value that PASLA can bring to bear for their business development initiatives under our PASLA Solutions membership structure.
“Malaysia is one of the integral markets for our ASEAN footprint, has progressively liberalised its market to align with the broader aspirations of both issuers, investors and a range of market participants.”
The relationship with Bursa Malaysia is fully aligned with the common goal to increase liquidity and provide a stronger capital market in Malaysia,” according to PASLA ASEAN working group lead, Ed Oliver — managing director of product development at eSecLending.
Being a part of PASLA promotes sharing of information and best practices among its members, adds See Meng. “It is also a platform to encourage a better understanding of the Malaysian market to institutional investors, to facilitate greater cooperation on securities financing, ultimately contributing to greater market vibrancy in the Malaysian securities market,” he continues.
On the horizon
As market participants look ahead over the next five-year period, the outlook appears to be positive with some expecting the region to continue to evolve and mature.
In line with other regional markets, Forsyth believes overall growth will be driven by global investor participation in local markets, as well as an increase in local asset owners participating in SBL, as they become more familiar with the product, building out operational and counterparty relationships.
To aid Malaysia’s development, PASLA’s strategy remains consistent. The association will work to broaden access to the market, which it calls a “two-layered strategy”: one relating to the products and markets, and another on the variety and range of market participants.
Firms are monitoring a number of expected developments in the pipeline for Malaysia. Forsyth pinpoints the development of products with delta one characteristics, such as exchange traded single stock futures, as part of the market's evolution. The introduction of these and associated activities in the market should raise greater investor participation and inventory utilisation, says Forsyth.
In addition, developing Shariah-compliant SBL solutions and services continues to be a core focus for Maybank Investment Banking Group, as its clients display increasing demand, driven by internal mandates to enhance the performance of Shariah-compliant portfolios.
With anticipated investment into system upgrades, Wells expects to see a resolution to the perennial “stock turnaround” issue which has “dampened” beneficial owners’ enthusiasm to participate in lending for fear of incurring onward delivery settlement failures.
He adds: “The market currently depends on an ‘exemption from buy-in’ facility but this is seen as a stop-gap solution without scale. Efforts to address the timing mismatch in settlements, if executed well, will go a long way to improving liquidity in the lending pools of Malaysian equities.”
Industry participants are eager to contribute to the improved market structure of Malaysia, a region which has proved promising for those taking advantage of its securities finance offerings. As PASLA continues its advocacy in this region, and Bursa Malaysia continues to advance the local ecosystem, the future looks bright for this vibrant market.
The words by CEO Datuk Muhamad Umar Swift form a firm belief at Bursa Malaysia, and stand true for the further development of the Malaysia securities lending market.
Situated in Southeast Asia, Malaysia is home to a vibrant multicultural population and is known for its cuisine, rainforests, coastal landscapes, and the Petronas Towers located at the capital, Kuala Lumpur. It is formed by 13 states including Kelantan, Johor and Terengganu, and three federal territories: Kuala Lumpur, Putrajaya and Labuan.
The Malaysia market has evolved over the last decade to include a broad and diverse group of both international and domestic lenders and borrowers. The fundamentals for securities lending in Malaysia under a Global Master Securities Lending Agreement (GMSLA) have existed for over 10 years, and have a history of revenue generation for participants.
The region is also at the forefront in the development of Islamic banking, Islamic capital market and takaful. It has a strong Islamic financial system with a business driven regulatory regime and legal framework. Malaysia is known as one of the leading global hubs for Islamic finance.
As part of an open, liquid, fully developed financial securities market, David Forsyth, head of prime brokerage, Asia, at Maybank Investment Banking Group, says the evolution of securities borrowing and lending here naturally grows alongside the broadening of eligible assets and participating investors.
Consistent advocacy from Bursa Malaysia in advancing the local ecosystem has encouraged greater participation by local brokers offering securities borrowing and lending (SBL) services, says Leong See Meng, director of origination and listing at Bursa Malaysia. The exchange indicates an “encouraging growth” in participating organisations which offer end-to-end securities financing services, since the introduction of the Securities Borrowing and Lending Negotiated Transaction (SBLNT) model in 2009.
The exchange currently has five brokers, three of which have been established over the last six years. Bursa Malaysia foresees an increase in broker agents, which looks to help spur organic growth in securities financing and grow the domestic ecosystem.
Deploying financial innovation
Since the post-Covid 2022 levels of just under US$300 million, the Malaysia market size has more than doubled to almost US$800 million, according to Maybank Investment Banking Group. Utilisation levels have been stable, although the firm observes periodic sector and name-specific spikes in fee rates.
Forsyth indicates that some “interesting trends” have emerged surrounding developments in government policies and macro factors which affect sectors like construction and data centres, property development and the semi-conductor space. He adds: “We are excited to see how the expansion of the eligible stocks list and price discovery around these emerging themes could drive loan supply and fee rates for Malaysia.”
In terms of market conditions shaping collateral preferences on part of the lender and borrower, Jason Wells, managing director, head of agency trading, APAC, at State Street, pinpoints that Malaysian government bonds are not widely used as collateral due to limitations on the transfer of title registrar onshore. Attention to resolve this blockage would support secondary market liquidity of this key asset type and bring wider adoption across trading strategies, he confirms.
In addition, there remain concerns surrounding barriers to market for domestic and international participation in Malaysia for participants. Forsyth says: “Malaysia is fully open to most international financial institutions, and Maybank is happy to assist any potential participants with any queries they may have.” He explains that, historically, some areas of concern have been around country risk, netting opinions, operational risk and individual credit lines. These are still relevant concerns but appear to be less of an issue as more international investors become involved and the market evolves overall.
What is common across all market participants, however, is the expectation for consistent market structures when buying and selling securities, says Stephen Howard, CEO of the Pan Asia Securities Lending Association (PASLA). He explains that participants believe these structures should be rational and provide for transparent price formation. In addition, there should be access for both high-quality passive investors, and more active investors that require a range of hedging solutions to support retail and institutional investors.
“Where these structures are inconsistent, or unaligned with investor and issuers needs, or switched off then back on, this creates serious challenges for long term investment flows and the growth of indexation product development and AUM deployment,” Howard adds.
Similar to all markets regionally and globally, PASLA is certain that continued investor education, whether with investment products or market structure, is key for the further development of Malaysia. The association says it can add significant value by bringing together a broad range of participants into a singular dialogue, a place for views to be shared, voices to be heard, and where constructive outcomes are its key concern.
Encouraging cash market liquidity, developing hedging solutions for all classes of investor, that are supported with a diverse range of appropriate investor products is also key for development, Howard adds. “This journey evolves as financial innovation is both encouraged and deployed.”
Coming up short
A key distinction between APAC markets can be found in short selling. In Malaysia, permitted short selling is primarily for market makers and derivatives specialists to assist with their market making activity.
According to the Asia Pacific Securities Lending User Guide 2024, regulated short selling (RSS) can only be undertaken if it is accompanied by an authorised SBL transaction. While intraday short selling (IDSS) allows eligible investors to engage in short selling of RSS-approved securities, all short positions must be closed off within the same trading day. Intraday short selling by proprietary day traders is also allowed.
Where the short selling controls can be simplified and harmonised across the three regimes — RSS, IDSS and intraday short selling — this would help provide market participants with greater agility in their trading strategies, says Wells.
Bursa Malaysia says: “We acknowledge short selling as an integral part for the efficient functioning of the market. The exchange continues to stay informed about global market practices and strives to ensure that short selling regulations remain aligned with market standards, while maintaining investors’ confidence.”
In March 2020, a series of proactive measures, including the temporary suspension on short selling activities, were introduced to mitigate potential risks arising from heightened volatility and global uncertainties arising from the broader impact of Covid-19. These measures were thereafter gradually uplifted.
Over the last year there has been a tangible increase in the number of names eligible for short selling — up from 215 stocks in November 2022, to 441 in June 2024. Following the removal of temporary restrictions on short selling during Covid-19, Bursa Malaysia took steps to add to the list of eligible stocks for this activity in an effort to create liquidity and encourage participation.
For Forsyth, this move has provided an impetus for some smaller fund management companies in the market with higher concentrations in specials to participate in securities lending as well. “We anticipate supply shifts as these pockets of inventory are mobilised.”
“This change doubles the opportunity-set for our clients to generate incremental returns on their investments,” adds Wells. Similarly, in respect of Shariah-compliant asset owners, stocks eligible for the Shariah-compliant SBL framework by Bursa Malaysia has expanded to 361 stocks.
Reviewing the evolution of the Malaysia market over the past decade, Forsyth indicates that, more broadly and recently in Asia, the geopolitically-driven focus for investment opportunities (both long and short) beyond China “is driving an increase of interest in all other Asian markets”. While Japan has been the largest initial beneficiary, he adds, ASEAN and Malaysian markets are also benefiting from this growing interest and “we anticipate this driving greater volumes and SBL activity” in the months and years ahead.
As Malaysia seeks to compete against other ASEAN economies for investment dollars, Wells believes a well thought out strategy such as the Malaysia Public Listed Companies (PLC) Transformation programme — a vehicle to channel long-term investment capital flow into the country — will combine well with the improved SBL and short selling frameworks. This programme is expected to lead to an increase in capital deployed to Malaysia, according to Wells, and over time it will lead to a more liquid securities lending market.
He understands that these frameworks will allow investors more reason to deploy capital and employ trusted hedging techniques to support it. Wells continues: “With this virtuous cycle in play, we expect additional Malaysian equity allocation to indices. Increased indexing will bring in further liquidity from high quality, long-term passive investors which will be a net positive for SBL.”
A stronger capital market
As one of nine countries in Asia Pacific to have an active international securities programme for international investors, asset lenders and borrowers, Malaysia is continuing to develop its market structure, with the help of PASLA and the country’s stock exchange, Bursa Malaysia.
“It is a market that is characterised as transparent, aligned with investor hedging needs, and offering material beta returns for passive investors,” says Howard. “The consistent core financing balances demonstrate that demand is driven by investor hedging solutions supporting the cash equity and derivative market.”
Both DataLend and S&P Global Market Intelligence data reflect high-quality income streams in excess of 400 basis points for securities finance market participants.
After 10 years of lending Malaysian equities, Wells says the recent direction of travel is the most encouraging he has seen in some time.
Bursa Malaysia is leading initiatives to improve market operations and has already deployed several strategies to deepen investor participation in Malaysia. For example, the exchange issued a guidance note to facilitate SBL lender substitution, aiming to mitigate the early termination of the borrowed shares during partial recall instances.
In addition, Bursa Malaysia advocates for the advancement of Shariah-compliant securities and services. The Islamic Securities Selling and Buying — Negotiated Transaction (ISSBNT) framework, “the world’s first” Shariah-compliant alternative to the SBL framework, was enhanced in January 2023 to create a more facilitative trading environment that would encourage greater liquidity and trading velocity of Shariah-compliant securities.
To further boost the attractiveness of the ISSBNT trading framework, the Malaysian government announced in its Budget 2024 that income from ISSBNT transactions will be tax-exempt beginning in 2024.
The exchange is also in the process of updating the “cumbersome” rules on Approved Reasons for Transfer (ART), which Wells explains will “do wonders” for beneficial owners in the event of a close-out, allowing them to accelerate the process to a swift conclusion.
The Malaysian equity and securities finance market is an important market for regional and ASEAN asset allocation strategies. Speaking to SFT, Howard emphasises the region’s work to develop its market structure to “the right size for its broader equity aspirations”.
This includes supporting more than 1000 issuers coming to the equity capital markets, consolidating its capabilities in the bilateral securities finance market, expanding the range of eligible securities, and encouraging high-quality passive investors internationally to participate, to drive lower risk returns. “It is a similiar story regionally, however, driven by local market needs,” he explains.
It has been an active 12 months for PASLA as the association continues to focus on the Malaysia market, review regulatory structure, work on global netting opinions to ensure set-off, and collaborates with Bursa Malaysia to develop the market infrastructure to, as Howard recalls, “drive constructive commercial and compliant structures that aim to deliver a broad range of investors and issuers with a depth of capabilities”.
Recently, the region’s stock exchange joined PASLA as an official member. In response to this, Howard comments: “Bursa Malaysia joining our association is yet another example of another regional exchange seeing the value that PASLA can bring to bear for their business development initiatives under our PASLA Solutions membership structure.
“Malaysia is one of the integral markets for our ASEAN footprint, has progressively liberalised its market to align with the broader aspirations of both issuers, investors and a range of market participants.”
The relationship with Bursa Malaysia is fully aligned with the common goal to increase liquidity and provide a stronger capital market in Malaysia,” according to PASLA ASEAN working group lead, Ed Oliver — managing director of product development at eSecLending.
Being a part of PASLA promotes sharing of information and best practices among its members, adds See Meng. “It is also a platform to encourage a better understanding of the Malaysian market to institutional investors, to facilitate greater cooperation on securities financing, ultimately contributing to greater market vibrancy in the Malaysian securities market,” he continues.
On the horizon
As market participants look ahead over the next five-year period, the outlook appears to be positive with some expecting the region to continue to evolve and mature.
In line with other regional markets, Forsyth believes overall growth will be driven by global investor participation in local markets, as well as an increase in local asset owners participating in SBL, as they become more familiar with the product, building out operational and counterparty relationships.
To aid Malaysia’s development, PASLA’s strategy remains consistent. The association will work to broaden access to the market, which it calls a “two-layered strategy”: one relating to the products and markets, and another on the variety and range of market participants.
Firms are monitoring a number of expected developments in the pipeline for Malaysia. Forsyth pinpoints the development of products with delta one characteristics, such as exchange traded single stock futures, as part of the market's evolution. The introduction of these and associated activities in the market should raise greater investor participation and inventory utilisation, says Forsyth.
In addition, developing Shariah-compliant SBL solutions and services continues to be a core focus for Maybank Investment Banking Group, as its clients display increasing demand, driven by internal mandates to enhance the performance of Shariah-compliant portfolios.
With anticipated investment into system upgrades, Wells expects to see a resolution to the perennial “stock turnaround” issue which has “dampened” beneficial owners’ enthusiasm to participate in lending for fear of incurring onward delivery settlement failures.
He adds: “The market currently depends on an ‘exemption from buy-in’ facility but this is seen as a stop-gap solution without scale. Efforts to address the timing mismatch in settlements, if executed well, will go a long way to improving liquidity in the lending pools of Malaysian equities.”
Industry participants are eager to contribute to the improved market structure of Malaysia, a region which has proved promising for those taking advantage of its securities finance offerings. As PASLA continues its advocacy in this region, and Bursa Malaysia continues to advance the local ecosystem, the future looks bright for this vibrant market.
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