Through droughts and rains
19 March 2019
Delegates down under gathered at this year’s PASLA/RMA conference in Sydney where hot topics included technology and forecasts for securities lending in APAC, as well as regional updates in this space
Image: Shutterstock
This year, at the Shangri-La Hotel in Sydney, Australia, PASLA and RMA held their 16th annual conference on Asian securities lending. Panellists at the conference discussed the current forecast for securities lending in the Asia Pacific (APAC) as well as other hot topics such as technology, women in finance, and the future of APAC securities finance.
Tim Hogben, COO of the Australian Stock Exchange, kicked off the conference with welcoming remarks and said that ASX is making headwinds in the technology space. Hogben suggested that while technology might erode some of the traditional values across many industries, many consumers have benefitted and they now have a substantially higher value proposition.
He cited: “The winners seem to be the large technology companies rather than the traditional services providers. Why aren’t we following their lead? It is hard and expensive digitising businesses. While our industry has made significant process in automating and straight through processing, it is generally having trouble consolidating the significant infrastructure. Why? Because it is really complex and is a global issue and not just an issue in Australia.”
“Let’s consider this, you can order and get espresso coffee specifically held in a warehouse delivered to you in five hours, I’m also told you can order an outfit online and have it delivered in two hours, and yet it takes two days to move an ownership of shares held on a hard drive. Customers question whether they will get the same service in financial services as they get in other parts of their personal lives. The answer is that they should.”
Later elaborating on this in a panel on regional market updates for offshore participants, it was explained that ASX’s replacement of its post-trade systems will mean that receiving the settlement of a trade will be a lot quicker for the securities lending industry. ASX announced last year that it would be replacing its current post-trade system with distributed ledger technology. One panellist on the panel suggested that this move would “allow for greater innovation and a much easier way to implement change”.
“In doing this, it brings a test to the market. We are not looking for a like-for-like replacement and we are not demanding the market move to move to distributed ledger technology (DLT), there will be a message-based way to communicate with systems as well as a direct way to communicate, which would allow you to get all of the benefits of the DLT solution.”
Additionally, the speaker said ASX is also adding an auto-borrow functionality, which is one of many functionalities that we will be added to the new platform when it goes live in April 2021. The auto borrow capability will allow for cheaper access for borrowing in the market. The speaker explained that ASX is laying down the technology in order to make that happen.
Meanwhile on a separate panel at the conference, an audience poll revealed that industry participants would like to see more liquidity in China. One panellist said that efforts to increase this are happening although there is a lot of work to be done in order to achieve this. Market participants also discussed the expansion of offshore securities lending in the Asian markets, which has often resulted in unforeseen barriers to entry. These barriers range from lack of regulatory, legal, and tax reform to technology issues, all of which impact and potentially hinder market growth.
The moderator asked the panel how things currently stand in India and what changes are currently happening there. In response, a panellist said the changes happening in India are in the derivatives space. They explained: “In India, if you are the Foreign Portfolio Investment you cannot short the cash market, so there are people who are unable to short cash markets. There is a need for them to borrow and short in the cash market.”
“The Securities and Exchange Board of India (SEBI) has said that soon in 2019 all of the securities which are available from the derivatives segment will no longer be settled in cash, they will instead have to be settled physically.”
This comes after SEBI notified that stocks of heightened volatility will move to physical settlement in addition to the existing schedule of stock derivatives moving to physical settlement.
Other movements in India include a trend of more borrowers and fewer lenders causing the need to talk to institutions such as the mutual funds. One speaker commented: “We think the next best thing for the Indian market will be the way people trade derivatives in the India marketplace because this is going to change dramatically. Investor participation is key to the success that India needs. In addition to the onshore liquidity, you are going to need some offshore liquidity to help facilitate and be efficient.”
On another panel at the conference, a speaker said that securities lending is “no longer that closed secret door where everyone is trying to get one up on everyone else,” in relation to the borrower and lender relationship in securities lending. According to the panellist, “we are here to work together because we are all out to build a business”.
The moderator asked the panel: “As a borrower, you may have experienced some layers between yourself and a lender, are you seeing more demand in terms of information and pricing and a bit more awareness in general?”
One panellist replied: “Over the last ten years on the prime brokerage side, and on the securities lending side, in particular, has developed from that middle-back office function to a fully fledged trading product on the trading floor. Both sides [borrower and lender] need to understand each other and make sure that what is actually agreed is best for both sides; if one side doesn’t understand that then that is not going to be good for the transaction. We are constantly out there looking to educate, share and provide information to people. We will speak to people directly and we have those conversations not just in Australia but globally.”
Looking at the role of borrowers, the moderator asked the panel if they see a trend in Australia or anything unusual that is happening compared to the rest of the world.
A speaker replied: “Based on demand, Australia is a developed market and is no different to the US, UK, Japan or Hong Kong in that sense. The hedge fund community is extremely developed down here from a longshore angle. Australia does have some specific corporate actions down here, however, which are different. From a prime brokerage borrower perspective, we are looking for stable cheap easy-to-find demand. We are looking for a borrower who is long-term in the programme.”
Another panellist added: “Australia does have some nuances but this is nothing that we don’t see in other parts of the globe. We know that environmental social and governance is becoming a bigger part of the globe, and governance in particular impacts securities lending down here.”
On the second day of the conference, participants on a ‘Women in Finance’ panel discussed the growth of the Fearless Girl campaign, which has resulted in 301 boards adding a female director. Indeed, the Fearless Girl campaign has ignited a global conversation about the power of women in leadership and inspired companies around the world to add women to their boards, according to State Street.
The panel’s discussions on the campaign follow the recent unveiling of the Fearless Girl campaign, which was recently brought to London with a new statue in Paternoster Square, against the backdrop of St Paul’s Cathedral. One panellist said that further results of the campaign have found 28 commitments to add female directors as well as 15 trillion total shareholders assets backing board diversity.
It was noted that the campaign aims to improve gender diversity at the senior leadership level and so they focused on working with 1,227 companies without a single woman director on their boards. The speaker from State Street explained that they called on companies from their portfolio to increase the number of women across the boards.
Further topics at the conference involved discussions on central clearing counterparties (CCPs) with one speaker remarking that CCPs are a natural evolution of the industry. The panellist said: “We want more transparency and diversification from banks. The point is not to disintermediate banks—it is a diversification away from banks if anything. You could make some strong arguments that certain institutional hedge funds would be less risky counterparties than some of the banking counterparties.”
On this panel, speakers weighed up China Securities Finance Corporation Limited (CSFC) collateral acceptance, with one panellist saying: “There is so much change happening in China and it is hard to keep up with it all. I would place caution on the announcements, as they can be different as to what happens in practice. For example, it was said that stock connect was short seller eligible but there was a diversion. There was a big announcement in China in late January on utilisation so we might need to see where that goes in practice first, in my opinion.”
The panel also debated physical securities based lending versus synthetics, and which is preferable. One speaker noted that the question is becoming more prominent.
One panellist commented: “There are markets where one or the other is preferable but this is not always the case. The regulation has made things somewhat fragmented in the sense that you can be based in an entity in London but they may have a different experience in an entity in the US or Singapore.”
“The great thing about securities lending is that it has become standardised over the past 30 years, and there has been a lot of work towards that end. Synthetics are not standardised, every bank has a different operating model. It is operationally intensive it is a great product, there is an obvious demand for it, it works but it takes a lot of effort.”
Echoing this, a fellow panellist exclaimed: “Balance sheet optimisation is what drives the existence of synthetics but the factors that determine what you do, focus on and how you balance, really has to be on the operational platform set up.”
“If you’re doing it manually then it is not scalable and if it is not scalable then you’re not really deciding between one versus the other. That setup, the systems and risk management is automatically there to weigh the factors to determine what you’re going to do and how you’re going to achieve it.”
Tim Hogben, COO of the Australian Stock Exchange, kicked off the conference with welcoming remarks and said that ASX is making headwinds in the technology space. Hogben suggested that while technology might erode some of the traditional values across many industries, many consumers have benefitted and they now have a substantially higher value proposition.
He cited: “The winners seem to be the large technology companies rather than the traditional services providers. Why aren’t we following their lead? It is hard and expensive digitising businesses. While our industry has made significant process in automating and straight through processing, it is generally having trouble consolidating the significant infrastructure. Why? Because it is really complex and is a global issue and not just an issue in Australia.”
“Let’s consider this, you can order and get espresso coffee specifically held in a warehouse delivered to you in five hours, I’m also told you can order an outfit online and have it delivered in two hours, and yet it takes two days to move an ownership of shares held on a hard drive. Customers question whether they will get the same service in financial services as they get in other parts of their personal lives. The answer is that they should.”
Later elaborating on this in a panel on regional market updates for offshore participants, it was explained that ASX’s replacement of its post-trade systems will mean that receiving the settlement of a trade will be a lot quicker for the securities lending industry. ASX announced last year that it would be replacing its current post-trade system with distributed ledger technology. One panellist on the panel suggested that this move would “allow for greater innovation and a much easier way to implement change”.
“In doing this, it brings a test to the market. We are not looking for a like-for-like replacement and we are not demanding the market move to move to distributed ledger technology (DLT), there will be a message-based way to communicate with systems as well as a direct way to communicate, which would allow you to get all of the benefits of the DLT solution.”
Additionally, the speaker said ASX is also adding an auto-borrow functionality, which is one of many functionalities that we will be added to the new platform when it goes live in April 2021. The auto borrow capability will allow for cheaper access for borrowing in the market. The speaker explained that ASX is laying down the technology in order to make that happen.
Meanwhile on a separate panel at the conference, an audience poll revealed that industry participants would like to see more liquidity in China. One panellist said that efforts to increase this are happening although there is a lot of work to be done in order to achieve this. Market participants also discussed the expansion of offshore securities lending in the Asian markets, which has often resulted in unforeseen barriers to entry. These barriers range from lack of regulatory, legal, and tax reform to technology issues, all of which impact and potentially hinder market growth.
The moderator asked the panel how things currently stand in India and what changes are currently happening there. In response, a panellist said the changes happening in India are in the derivatives space. They explained: “In India, if you are the Foreign Portfolio Investment you cannot short the cash market, so there are people who are unable to short cash markets. There is a need for them to borrow and short in the cash market.”
“The Securities and Exchange Board of India (SEBI) has said that soon in 2019 all of the securities which are available from the derivatives segment will no longer be settled in cash, they will instead have to be settled physically.”
This comes after SEBI notified that stocks of heightened volatility will move to physical settlement in addition to the existing schedule of stock derivatives moving to physical settlement.
Other movements in India include a trend of more borrowers and fewer lenders causing the need to talk to institutions such as the mutual funds. One speaker commented: “We think the next best thing for the Indian market will be the way people trade derivatives in the India marketplace because this is going to change dramatically. Investor participation is key to the success that India needs. In addition to the onshore liquidity, you are going to need some offshore liquidity to help facilitate and be efficient.”
On another panel at the conference, a speaker said that securities lending is “no longer that closed secret door where everyone is trying to get one up on everyone else,” in relation to the borrower and lender relationship in securities lending. According to the panellist, “we are here to work together because we are all out to build a business”.
The moderator asked the panel: “As a borrower, you may have experienced some layers between yourself and a lender, are you seeing more demand in terms of information and pricing and a bit more awareness in general?”
One panellist replied: “Over the last ten years on the prime brokerage side, and on the securities lending side, in particular, has developed from that middle-back office function to a fully fledged trading product on the trading floor. Both sides [borrower and lender] need to understand each other and make sure that what is actually agreed is best for both sides; if one side doesn’t understand that then that is not going to be good for the transaction. We are constantly out there looking to educate, share and provide information to people. We will speak to people directly and we have those conversations not just in Australia but globally.”
Looking at the role of borrowers, the moderator asked the panel if they see a trend in Australia or anything unusual that is happening compared to the rest of the world.
A speaker replied: “Based on demand, Australia is a developed market and is no different to the US, UK, Japan or Hong Kong in that sense. The hedge fund community is extremely developed down here from a longshore angle. Australia does have some specific corporate actions down here, however, which are different. From a prime brokerage borrower perspective, we are looking for stable cheap easy-to-find demand. We are looking for a borrower who is long-term in the programme.”
Another panellist added: “Australia does have some nuances but this is nothing that we don’t see in other parts of the globe. We know that environmental social and governance is becoming a bigger part of the globe, and governance in particular impacts securities lending down here.”
On the second day of the conference, participants on a ‘Women in Finance’ panel discussed the growth of the Fearless Girl campaign, which has resulted in 301 boards adding a female director. Indeed, the Fearless Girl campaign has ignited a global conversation about the power of women in leadership and inspired companies around the world to add women to their boards, according to State Street.
The panel’s discussions on the campaign follow the recent unveiling of the Fearless Girl campaign, which was recently brought to London with a new statue in Paternoster Square, against the backdrop of St Paul’s Cathedral. One panellist said that further results of the campaign have found 28 commitments to add female directors as well as 15 trillion total shareholders assets backing board diversity.
It was noted that the campaign aims to improve gender diversity at the senior leadership level and so they focused on working with 1,227 companies without a single woman director on their boards. The speaker from State Street explained that they called on companies from their portfolio to increase the number of women across the boards.
Further topics at the conference involved discussions on central clearing counterparties (CCPs) with one speaker remarking that CCPs are a natural evolution of the industry. The panellist said: “We want more transparency and diversification from banks. The point is not to disintermediate banks—it is a diversification away from banks if anything. You could make some strong arguments that certain institutional hedge funds would be less risky counterparties than some of the banking counterparties.”
On this panel, speakers weighed up China Securities Finance Corporation Limited (CSFC) collateral acceptance, with one panellist saying: “There is so much change happening in China and it is hard to keep up with it all. I would place caution on the announcements, as they can be different as to what happens in practice. For example, it was said that stock connect was short seller eligible but there was a diversion. There was a big announcement in China in late January on utilisation so we might need to see where that goes in practice first, in my opinion.”
The panel also debated physical securities based lending versus synthetics, and which is preferable. One speaker noted that the question is becoming more prominent.
One panellist commented: “There are markets where one or the other is preferable but this is not always the case. The regulation has made things somewhat fragmented in the sense that you can be based in an entity in London but they may have a different experience in an entity in the US or Singapore.”
“The great thing about securities lending is that it has become standardised over the past 30 years, and there has been a lot of work towards that end. Synthetics are not standardised, every bank has a different operating model. It is operationally intensive it is a great product, there is an obvious demand for it, it works but it takes a lot of effort.”
Echoing this, a fellow panellist exclaimed: “Balance sheet optimisation is what drives the existence of synthetics but the factors that determine what you do, focus on and how you balance, really has to be on the operational platform set up.”
“If you’re doing it manually then it is not scalable and if it is not scalable then you’re not really deciding between one versus the other. That setup, the systems and risk management is automatically there to weigh the factors to determine what you’re going to do and how you’re going to achieve it.”
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