What has changed in Australia’s securities lending market since the last conference was held there?
Stuart Jones: The industry was at its most bullish when we last held the conference in Australia. We were on the cusp of the financial crisis, but still, securities lending and short selling remained largely out of the press and unscathed. As a business, cash reinvest by beneficial owners was almost more lucrative than the rates on the actual loan of securities—latterly we know why of course.
The Australian economy emerged ‘relatively’ unscathed when compared to many of the worst hit economies, however, there were spectacular defaults by retail brokers, pushing securities lending and short selling into the press for the first time. The impact of that saw Australia as one of a number of markets in Asia to institute a short-selling ban and then later we saw more stringent rules implemented around short selling and securities lending. During that period, in an event not unique to Australia, we saw many beneficial owners reduce or restrict securities lending on their portfolio as they reevaluated the value proposition.
The overall globalisation of investment strategies has also had the unintended consequence of increasing liquidity in securities lending markets, as in many cases assets purchased by onshore asset managers are made available in lending pools. As time has gone on a lot of those assets that pulled out of lending programmes have come back and increased the domestic pools of liquidity as well. But, it’s fair to say that everyone is far better educated on the product as well as the risks associated with collateral and what credit or counterparty risk is in the securities lending space. While Australia has quietly become more aligned to global norms on operational models, other markets have also adopted similar short sell reporting practices to Australia.
Jane Wagner: From a securities lending and borrowing perspective, the market is active and stable. On-loan balances have been growing but in a measured, incremental way. Desks are active, and the inventory of Australian securities available to borrow has been increasing. Hopefully, this is telling us that beneficial owners are becoming increasingly comfortable with securities lending.
Regarding trading, large issuers such as banks are again offering dividend reinvestment incentives to their shareholders, which brings back an element of borrow demand that we have not seen in recent times. The need for collateral has hit the Australian market in the same way that it has in other jurisdictions, and the demand for collateral upgrade trades—when a borrower uses one profile of securities to exchange for another with a strong credit profile via a loan transaction—has continued to increase.
As more over-the-counter (OTC) trades become subject to mandatory clearing and collateralisation obligations with new global regulatory deadlines, it will also fuel an increased need for collateral. This holds particularly true in Australia where the OTC market was typically collateralised on a limited basis and then by Australian dollars only, which can be expensive because of the cost of funding. As the scope of transactions requiring collateral increases, the cost of the trade and position increases.
Switching from cash to non-cash reduces this cost, particularly for many in the market, who have large pools of securities, such as pension funds. Collateral and balance sheet management or optimisation was historically a topic for group treasurers but is now a key element of discussion across all trading floors. From a balance sheet management perspective, optimisation has become key. For large prime brokers, the increased growth in demand for synthetic short exposure has mandated that they change the way they cover or hedge these trades to optimise balance sheet efficiency. Large asset owners with an inventory of high-quality liquid assets (HQLA) have a new revenue source via lending these to treasurers looking to strengthen their balance sheet and liquidity coverage ratios.
What can delegates expect from this year’s PASLA conference in Sydney?
Wagner: Globally, we have seen two major themes in the securities financing industry emerge: regulatory capital constraints of borrowers and agent lenders, and increased regulatory reporting and transparency. These topics were discussed in previous Pan Asia Securities Lending Association (PALSA)/Risk Management Association (RMA) conferences.
While we will continue to discuss these same issues in this conference, we will also discuss the current updates as well as further insights and developments that have evolved since the last conference. Regulatory capital constraints of the borrowers and agent lenders plus the increased regulatory reporting and transparency have made the industry more complex, and the economics of the business more challenging and expensive for many participants. These themes were just beginning to emerge during the last conference and this year we will explore the reactions and methods that participants have developed to deal with these challenges.
Jones: This year’s event will, once again, provide the industry with the opportunity to review developments across the region over the last 12 months as well as look forward to
upcoming opportunities. The PASLA executive committee will give an update of the areas that PASLA has been working on as well as a regional market panel, which will focus on the current barriers of entry within certain markets and consider ways in which these might evolve with the assistance of local regulators and exchanges.
As per previous conferences, we are leveraging our location to consider that particular market. One panel will focus specifically on your previous question—what has changed since the conference was last held in Sydney in 2008.
We are, for the first time, including a panel that will focus on women in finance and the challenges faced in a continually changing work environment. Senior women professionals will consider the impact of the recent global focus on gender balance and diversity as well as review the challenges that remain. Given that International Women’s Day is on 8 March, the timing is definitely appropriate.
One of our keynotes, Dr Adam Fraser, will be using his expertise to consider the psychology of performance and how productivity can be improved while maintaining a healthy work-life balance.
We try to make sure that this is all as relevant as possible to the challenges and opportunities facing Asia. While it’s important to address and acknowledge the global issues that face the industry, we are here to make a conference that tells an Asia story. There will be a lot of visitors from out of town and we want them to hear a slightly different story from the conferences that they already attend and speak at.
Lastly, it’s important to us to ensure that this conference continues to provide some positive surprises (as with a lot of the fintech skew last year), while also being driven by the asks from the industry. We don’t organise this in a locked room, we want contributors from the industry and we want critique from all. We only get better that way.
How does it differ from previous years? And what do you expect the hot topics to be at this year’s event?
Jones: This is key to us. While we will indeed have panels that are the same every year, as we hope there will always be developments and exciting changes to discuss, we want this conference to look and feel slightly different every year. We aren’t talking about reinventing the wheel, but we are talking about being a forum for thought-provoking debate, disruptive discussions and speakers that are engaging and true leaders in their fields.
This year we have continued to focus on all aspects of diversity, work in a changing economic climate, regulation and how that impacts the allocation of scarce resources. We couldn’t ever miss technology off the agenda. Technology and fintech were core components of our conference last year and they always stir solid debate, especially around disruption. We’ve come a long way in all these topics, as an industry, but as an association, we want to evolve that further still.
Wagner: One difference this year is that we will be delving into current industry trends from the beneficial owner’s perspective. Securities lending is no longer just a way for certain beneficial owners to cover operational costs, such as custody; it has emerged as a vehicle to capture alpha.
We will explore how the new complexity and economic challenges of the industry are affecting the approach and revenue streams of beneficial owner lending programmes and what could possibly be their new routes to market.
As the challenges in the economics of securities lending continue, situations that could increase costs or risk are being discussed more frequently. For example, corporate actions, which are complex and if not properly handled, could cause a costly error. Securities Financing Transaction Regulation (SFTR) reporting is extensive and consequently may become expensive. Some of the rules have still not been finalised, such as minimum haircuts for securities financing transactions, single counterparty credit limits, and the Basel capital rules. Therefore, we will need to continue to discuss these topics and the solutions that can be developed to deal with the impacts of these rules on the industry and revenue streams.
As a result of the regulatory capital constraints of the borrowers and agent lenders as well as the increased regulatory reporting and transparency, the evolution and development of technology have become even more important today than in the past. Any new trend that eases the regulatory capital and makes the transaction economical has become more common in the discussion. Central clearing counterparties (CCPs) and equities as collateral have always been discussed but the discussion is becoming more prevalent.
What were PASLA’s biggest challenges last year? And how did the association overcome them?
Jones: Challenges are the starting point for us as we look to evolve and develop the securities lending markets in Asia. The challenge that we needed to overcome was in organising ourselves in a more effective manner and giving ourselves a clear mandate and roadmap to execute that. Using more of the connectivity and resources across our member firms was a significant shift. We were aware of the risk of the competitive nature at an individual firm level, being prioritised over the greater good. I can tell you that everyone that sits on the executive committee wants to do what is in the best interests of the industry and put that first.
We asked for that a few years ago and are now in a position where we are focused on execution and not organisation. We know we need to have relationships with the right people in the right places. Whether that’s at an exchange or regulator, or the work we do with our partners at the Asia Securities Industry and Financial Markets Association (ASIFMA), we have been building those dialogues.
Additionally, we understand the need to be accurate in representing the industry as a whole. Filtering out individual nuances in favour of targeting the ideal format or structure takes a bit of time, but allows us to be more credible in our dialogue.
Wagner: There are quite a few issues facing the industry that will be challenging. The first would be regulatory challenges such as the implementation of the International Swaps and Derivatives Association (ISDA) stay protocol/stay protocols across regions, the single counterparty credit limit (SCCL) and how market participants have adjusted since implementation. And finally, the Basel III rules being finalised and recognised in SCCL.
The second area is data reporting and transparency. The big issue is the SFTR and the reporting issues and challenges lending firms are facing. The other issue the industry needs to consider is Agency Lending Disclosure requirements and the changes that need to be made to consider such things as authority and capacity, as well as the consideration of legal entity identifiers (LEI).
The third issue is an issue that has been lingering and will continue to get more attention from the industry: collateral management and cash reinvestment. There are issues around managing risks in rising short-term interest rate environment, especially considering we haven’t been in a rising rate environment in over a decade.
Additionally, in terms of non-cash collateral, there has been a focus on increasing the use of non-cash and what role a tri-party could play in the future collateral management infrastructure. This will take on greater importance if equities is a potential form of collateral for securities lending activities. There have been discussions in the industry around accepting equities as collateral impacts securities lending going forward.
I am also concerned about voluntary and mandatory corporate actions including processing issues and how the industry looks to address the identified challenges, challenges within the front and middle settlements teams, and potential solutions and overall market impact.
The last issue is something that all firms need to be thinking about and I think they are, and that is around innovation and automation. Questions of concern that institutions need to be asking themselves are: What have been the challenges from a governance and controls perspective? What are the anticipated benefits for all participants in the lending value chain? How do firms see automation (artificial intelligence, machine learning, natural language) changing the lending execution and collateral/cash management activities?
Do you think 2018 was a year of growth for Asia’s securities lending market?
Wagner: The Asia Pacific region continued to generate securities lending demand in 2018, specifically in Hong Kong, Japan and Korea. For Asian securities lending markets, lending revenue increased throughout the year, primarily due to an escalation of US-China trade tensions, which increased volatility across the region. Hong Kong saw initial public offering and broad capital raising activity. Meanwhile, Chinese government tightening in the online game sector hurt developers.
Lastly, Japan and South Korea saw directional short interest in the technology, biotech and pharmaceutical sectors as investors grew concerned about valuations after a strong market rally in 2017.
Jones: Indeed there has been plenty of activity on many fronts in 2018 that has certainly kept PASLA busy—which should not be surprising as one contemplates the nine active, two onshore and two emerging markets that span our geography across the region. We have been working on a lot of initiatives and with a lot of markets that are opening or developing.
As mentioned, ASIFMA has been a great partner on a lot of these work streams and our partners at the regulators and exchanges across the region have been excellent. We feel that engagement and communication are currently the best it has been.
What will PASLA be working on over the next 12 months?
Jones: A lot—naturally, we will continue ongoing dialogues with the multiple active and developing markets across the region. We have some excellent and advanced dialogue with ASIFMA, Hong Kong Exchange and our partners in China.
Discussions with the Philippines on the pending short selling mechanism continue and we are also engaging the Singapore exchange following the impact of moving to T+2 settlement.
The unknown is always what keeps us busy and is why we have more regular board meetings. We don’t want to wait for problems to arise and everyone ‘figure out’ their own way of resolving an issue. We want to continue to drive the industry forward.
We know there will never be a single perfect model that we can give to every single country/market but we should strive towards a place where we get close
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