PASLA: a roundup of the Asian market
19 March 2024
Having attended the PASLA Conference in Singapore earlier this month, Carmella Haswell provides a roundup of major findings from the Association's key industry discussions
Image: PASLA
The Pan Asia Securities Lending Association (PASLA) recently hosted its 18th annual conference in partnership with the Risk Management Association (RMA) on Asian securities lending in Singapore.
Around 385 participants and 133 firms were in attendance at the event, which saw the Association’s first ever CEO Stephen Howard and chairman Jason Wells welcome market participants to the three-day conference.
The event aims to provide an opportunity for industry participants to connect with peers and market professionals, gain valuable insights into the latest developments in securities lending in this vibrant region, as well as explore the key themes shaping the industry today.
PASLA serves an essential role in representing its members in communication with regulators and key stakeholders to align to an industry consensus on important issues that affect the viability and development of the securities finance business in Asia Pacific.
SFT has produced a roundup of the key findings of PASLA’s industry panel discussions.
Asia regions to establish securities lending programmes
South Korea, Indonesia and the Philippines look to strengthen access to securities lending and short selling, according to panellists at the PASLA conference.
Market participants discussed key market developments and challenges across the APAC region over the past 12 months in the PASLA APAC Market Updates session.
Over the course of 2024, the PASLA ASEAN working group aims to advance its goal to release a securities lending and short selling programme in the Philippines.
According to Ed Oliver, managing director for product development at eSecLending, the PASLA working group is engaged with the Philippines Stock Exchange to understand rule changes in the region following the introduction of a new regulatory framework on securities lending and short selling at the end of 2023.
In 2015, the ASEAN working group commenced its first workshop with the Philippines Stock Exchange to work through a number of barriers facing institutions that wanted to lend securities and to introduce short selling.
“There were two hurdles in the region that the Association’s working group had worked on for a long period of time," Oliver said. “The first hurdle was getting the Philippine regulators to accept the internationally regulated Global Masters Securities Lending Agreement (GMSLA). The second barrier was getting the market to accept offshore collateral and being able to lend securities.”
The new rules and regulations introduced last year addressed some of these challenges.
In Indonesia, Oliver said the ASEAN working group had been working alongside central counterparty ID Clear on the expansion of the entity’s securities lending solution.
He added: “We hope we are able to provide more opportunities in 2024 for institutions to lend securities for the first time. The final hurdle in achieving this is getting the region’s regulator’s to accept offshore collateral.
“As a working group we have explained how offshore collateral works and how triparty engagement plays a role in this. Currently, we are facing stepping stones, but we are getting closer to an end solution for Indonesia.”
In South Korea, a short selling ban marked an “intense period of engagement” between market participants and onshore agencies, according to Jeff Coyle, PASLA board member and head of Hong Kong agency trading, securities finance at Northern Trust.
During Q4 2022 and Q1 2023, there were a number of positive announcements on developments and the strengthening of the capital markets in South Korea.
This included the reduction of the securities transaction tax, the removal of tax on treasury bonds, as well as the removal of the “cumbersome” investor registration scheme. Coyle said this “fed into the optimism” in South Korea around the securities lending landscape.
However, in 2023, the region faced further regulatory scrutiny and regulatory punishments over short sell violations.
Coyle indicated that this led to an outright ban on short selling on 6 November 2023, which is due to remain in place until the end of June 2024. Coyle said regulators were working to improve rules and systems.
SFTR 2.0 coming to Europe
The Securities Financing Transactions Regulation (SFTR) 2.0 is coming to Europe for non-banking intermediaries and could face a number of changes in the pipeline for SFT reporting, according to Farrah Mahmood, director of regulatory affairs at ISLA.
SFTR 2.0 is likely to be rolled out when there is a new mandate from the European Commission in 2025.
An SFTR consultation, which is likely to commence before the end of Q2 2024, was announced as part of the European Commission’s report on a macro prudential framework for non-bank financial intermediaries in January.
Industry participants discussed the latest updates on Basel III Endgame and considered the key regulatory requirements facing the market, including 10c-1a and SFTR, as well as regional APAC regulatory developments at the conference.
According to Mahmood, the updated regulation could incorporate a tax element, following tax abuse scandals across Europe.
In addition, she anticipated that an environmental, social and governance (ESG) element could take root in the revised rules, with other regulatory initiatives such as MiFID also expected to incorporate sustainability preferences.
The International Securities Lending Association (ISLA) believes that principle-based rules may be included in the regime as part of the review.
SFTR came into effect in 2016 with the objective to increase transparency of securities financing transactions (SFTs) — particularly between non-banks and banks — to aid identification of potential risks and to understand if SFTs contributed to a build-up of leverage in the financial system.
It is one of the largest reporting frameworks with more than 150 data fields. Mahmood anticipated that additional reporting fields are likely to be introduced during a future review of the regulation.
This engages with an ongoing focus on data quality, and the type of data that is being collected, to ensure that reporting is accurate and meets with the regulation’s objective to promote transparency and effective risk monitoring of securities financing transactions.
In her conclusion, Mahmood highlighted five key themes for market participants to focus on over the next two years.
The first theme is capital requirements. Mahmood indicated that conversations are being had around incorporating ESG risk into capital requirements and how digital assets exposures should be treated under Basel regulation.
Mahmood says ESG is “making a comeback” with the continual creation of green taxonomies in Europe and in the APAC region.
A second theme is the digital agenda; ISLA is working to produce an annex to facilitate the borrowing and lending of digital assets.
Operational resilience and cyber security are also key themes: “there is a huge focus from regulators on the threat of cyber security on the stability of the financial system”, Mahmood added. This will be kept top of mind for evolving legislation.
The Association indicates that market participants should be aware of consumer protection and regulation for the retail space. Mahmood explained: “At ISLA, we are looking to engage more with the retail aggregator side of the market, as they are increasingly becoming involved in running securities lending programmes.”
Finally, there will be discussions on increased cross-border regulatory convergence at an international level.
Interoperation is key for DLT success
“As we build out the ecosystem of DLT platforms, we do not want to re-create the fragmentation of legacy securities settlement infrastructure. Interoperation across DLT platforms is paramount for the overall success of the global DLT ecosystem,” explained Guido Stroemer, HQLAX CEO.
At the event, panellists highlighted the different definitions of tokenisation that distributed ledger technology (DLT) platforms employ.
DLT platforms can represent books and records, or a registry-to-record ownership of legacy securities, fixed income and equity securities. Another form of tokenisation is the creation of a stable coin or a financial instrument that represents an actual security.
For Stroemer, synchronising ownership transfers for common clients across ledgers is key for the successful application of DLT platforms in global securities finance and repo industry.
DLT platforms are being used by global banks to drive tangible results in terms of client and shareholder value creation. Stroemer pinpointed a “real interoperability use case” that is currently in the works across HQLAX, J.P. Morgan’s Onyx platform, Wematch and Ownera.
An intraday repo market is being created to facilitate ownership transfers of securities on HQLAX ledger, synchronised with ownership transfers of deposit tokens on the Onyx ledger.
Through this collaboration, the four firms aim to develop a novel solution that will enable the execution of repurchase transactions executed on the Wematch platform with delivery-versus-payment (DvP) settlement across two different distributed ledgers.
He said DLT platforms can help drive bottom line results by addressing specific pain points.
For example, Stroemer outlined a use case that is “near and dear to the audience at PASLA”, a securities lending use case to help reduce settlement lags in the popular US Treasury (UST) / Japanese government bonds (JGB) collateral swap.
A final point raised by Stroemer highlighted that DLT platforms could provide the global regulatory community with “a bird’s eye view over collateral chains” in the global securities finance and repo markets.
He indicated that this could potentially be a more cost effective and efficient industry solution “compared to current market practice for securities finance transaction reporting to trade repositories”.
The panel concluded that the road to market adoption is to convert pain points into solutions.
Around 385 participants and 133 firms were in attendance at the event, which saw the Association’s first ever CEO Stephen Howard and chairman Jason Wells welcome market participants to the three-day conference.
The event aims to provide an opportunity for industry participants to connect with peers and market professionals, gain valuable insights into the latest developments in securities lending in this vibrant region, as well as explore the key themes shaping the industry today.
PASLA serves an essential role in representing its members in communication with regulators and key stakeholders to align to an industry consensus on important issues that affect the viability and development of the securities finance business in Asia Pacific.
SFT has produced a roundup of the key findings of PASLA’s industry panel discussions.
Asia regions to establish securities lending programmes
South Korea, Indonesia and the Philippines look to strengthen access to securities lending and short selling, according to panellists at the PASLA conference.
Market participants discussed key market developments and challenges across the APAC region over the past 12 months in the PASLA APAC Market Updates session.
Over the course of 2024, the PASLA ASEAN working group aims to advance its goal to release a securities lending and short selling programme in the Philippines.
According to Ed Oliver, managing director for product development at eSecLending, the PASLA working group is engaged with the Philippines Stock Exchange to understand rule changes in the region following the introduction of a new regulatory framework on securities lending and short selling at the end of 2023.
In 2015, the ASEAN working group commenced its first workshop with the Philippines Stock Exchange to work through a number of barriers facing institutions that wanted to lend securities and to introduce short selling.
“There were two hurdles in the region that the Association’s working group had worked on for a long period of time," Oliver said. “The first hurdle was getting the Philippine regulators to accept the internationally regulated Global Masters Securities Lending Agreement (GMSLA). The second barrier was getting the market to accept offshore collateral and being able to lend securities.”
The new rules and regulations introduced last year addressed some of these challenges.
In Indonesia, Oliver said the ASEAN working group had been working alongside central counterparty ID Clear on the expansion of the entity’s securities lending solution.
He added: “We hope we are able to provide more opportunities in 2024 for institutions to lend securities for the first time. The final hurdle in achieving this is getting the region’s regulator’s to accept offshore collateral.
“As a working group we have explained how offshore collateral works and how triparty engagement plays a role in this. Currently, we are facing stepping stones, but we are getting closer to an end solution for Indonesia.”
In South Korea, a short selling ban marked an “intense period of engagement” between market participants and onshore agencies, according to Jeff Coyle, PASLA board member and head of Hong Kong agency trading, securities finance at Northern Trust.
During Q4 2022 and Q1 2023, there were a number of positive announcements on developments and the strengthening of the capital markets in South Korea.
This included the reduction of the securities transaction tax, the removal of tax on treasury bonds, as well as the removal of the “cumbersome” investor registration scheme. Coyle said this “fed into the optimism” in South Korea around the securities lending landscape.
However, in 2023, the region faced further regulatory scrutiny and regulatory punishments over short sell violations.
Coyle indicated that this led to an outright ban on short selling on 6 November 2023, which is due to remain in place until the end of June 2024. Coyle said regulators were working to improve rules and systems.
SFTR 2.0 coming to Europe
The Securities Financing Transactions Regulation (SFTR) 2.0 is coming to Europe for non-banking intermediaries and could face a number of changes in the pipeline for SFT reporting, according to Farrah Mahmood, director of regulatory affairs at ISLA.
SFTR 2.0 is likely to be rolled out when there is a new mandate from the European Commission in 2025.
An SFTR consultation, which is likely to commence before the end of Q2 2024, was announced as part of the European Commission’s report on a macro prudential framework for non-bank financial intermediaries in January.
Industry participants discussed the latest updates on Basel III Endgame and considered the key regulatory requirements facing the market, including 10c-1a and SFTR, as well as regional APAC regulatory developments at the conference.
According to Mahmood, the updated regulation could incorporate a tax element, following tax abuse scandals across Europe.
In addition, she anticipated that an environmental, social and governance (ESG) element could take root in the revised rules, with other regulatory initiatives such as MiFID also expected to incorporate sustainability preferences.
The International Securities Lending Association (ISLA) believes that principle-based rules may be included in the regime as part of the review.
SFTR came into effect in 2016 with the objective to increase transparency of securities financing transactions (SFTs) — particularly between non-banks and banks — to aid identification of potential risks and to understand if SFTs contributed to a build-up of leverage in the financial system.
It is one of the largest reporting frameworks with more than 150 data fields. Mahmood anticipated that additional reporting fields are likely to be introduced during a future review of the regulation.
This engages with an ongoing focus on data quality, and the type of data that is being collected, to ensure that reporting is accurate and meets with the regulation’s objective to promote transparency and effective risk monitoring of securities financing transactions.
In her conclusion, Mahmood highlighted five key themes for market participants to focus on over the next two years.
The first theme is capital requirements. Mahmood indicated that conversations are being had around incorporating ESG risk into capital requirements and how digital assets exposures should be treated under Basel regulation.
Mahmood says ESG is “making a comeback” with the continual creation of green taxonomies in Europe and in the APAC region.
A second theme is the digital agenda; ISLA is working to produce an annex to facilitate the borrowing and lending of digital assets.
Operational resilience and cyber security are also key themes: “there is a huge focus from regulators on the threat of cyber security on the stability of the financial system”, Mahmood added. This will be kept top of mind for evolving legislation.
The Association indicates that market participants should be aware of consumer protection and regulation for the retail space. Mahmood explained: “At ISLA, we are looking to engage more with the retail aggregator side of the market, as they are increasingly becoming involved in running securities lending programmes.”
Finally, there will be discussions on increased cross-border regulatory convergence at an international level.
Interoperation is key for DLT success
“As we build out the ecosystem of DLT platforms, we do not want to re-create the fragmentation of legacy securities settlement infrastructure. Interoperation across DLT platforms is paramount for the overall success of the global DLT ecosystem,” explained Guido Stroemer, HQLAX CEO.
At the event, panellists highlighted the different definitions of tokenisation that distributed ledger technology (DLT) platforms employ.
DLT platforms can represent books and records, or a registry-to-record ownership of legacy securities, fixed income and equity securities. Another form of tokenisation is the creation of a stable coin or a financial instrument that represents an actual security.
For Stroemer, synchronising ownership transfers for common clients across ledgers is key for the successful application of DLT platforms in global securities finance and repo industry.
DLT platforms are being used by global banks to drive tangible results in terms of client and shareholder value creation. Stroemer pinpointed a “real interoperability use case” that is currently in the works across HQLAX, J.P. Morgan’s Onyx platform, Wematch and Ownera.
An intraday repo market is being created to facilitate ownership transfers of securities on HQLAX ledger, synchronised with ownership transfers of deposit tokens on the Onyx ledger.
Through this collaboration, the four firms aim to develop a novel solution that will enable the execution of repurchase transactions executed on the Wematch platform with delivery-versus-payment (DvP) settlement across two different distributed ledgers.
He said DLT platforms can help drive bottom line results by addressing specific pain points.
For example, Stroemer outlined a use case that is “near and dear to the audience at PASLA”, a securities lending use case to help reduce settlement lags in the popular US Treasury (UST) / Japanese government bonds (JGB) collateral swap.
A final point raised by Stroemer highlighted that DLT platforms could provide the global regulatory community with “a bird’s eye view over collateral chains” in the global securities finance and repo markets.
He indicated that this could potentially be a more cost effective and efficient industry solution “compared to current market practice for securities finance transaction reporting to trade repositories”.
The panel concluded that the road to market adoption is to convert pain points into solutions.
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