Finadium has conducted an investigation into local currency repo in Asia. This report offers market sizing, a review of specific country and pan-Asian repo trends, and data on how impactful repo could be for deepening capital market liquidity. The end result is a set of options that regulators and regional market participants may wish to consider for market development.
Asian financing markets are working well; there is no indication that for individual market participants, not using repo is causing any difficulty. For the market as a whole however, a lack of repo means that corporate and government bonds are losing an important piece of liquidity that could aid in the development of the region’s capital markets and help local companies raise money at lower cost.
A loss of potential repo activity also hinders a regional goal of moving away from the US dollar towards local currencies. A strong demand for dollars keeps the FX swaps market healthy, but part of this is because there are few other means for some countries to access their local currency for financing in international markets. Repo markets for domestic bonds would enable more business to be conducted in their currencies, leading to a reinforcing cycle of economic development.
Sizing the Asian local currency repo markets requires a variety of sources, including primary surveys, government data and publications from regional exchanges, central counterparties and Central Securities Depositories. We conducted a broad data collection effort that we supported with conversations from regional actors. The result provides a reasonable estimate on the size of Asian local currency repo markets with breakouts by type and major jurisdiction.
Our analysis focuses on fixed income markets looking to finance securities or procure US dollar liquidity. While this is a diverse audience, it suggests a market of large, sophisticated players engaging in multiple types of financial services activity. Regional banks, insurance companies, hedge funds and pensions may all be market participants. Unlike the 2017 ASIFMA/ICMA survey, we are not concerned with where banks book the trade; our focus is on where market actors reside and the purpose of their need for funding. The trend line of needing USD funding is a key ingredient for market demand at this time and warrants consideration as we consider market evolution.
This report should be read by any funding or financing market participants with interests in the Asian region.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/local-currency-repo-in-asia-collateral-growth-and-the-path-to-mass-adoption/
For non-subscribers, more information is available here.