The Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) held the 18th annual conference on Asian securities lending in Singapore last week, bringing together over 380 participants and delegates from across the entire industry doing business in the APAC region. We highlight some of the key observations and speaking points.
Buy-side investment interest is dramatically shifting in APAC: In brief, China is out, and Japan is in. The sentiment shift since 2021 is about more than just interest rates, and one fund manager noted that there’s a big “reality check from China to the rest of the world.” How long it’ll be until China swings back was a matter of debate, with one speaker saying “soon-ish” while another said their firm is “very bearish” and that nothing will change unless there is “serious regime change”.
India and Korea are gaining, and it was noted that Korea is following Japan’s lead on corporate governance reform. One panelist defended Korea’s short selling ban, which will remain in place until July this year, confirming that there was an abundance of illegal short selling and that market participants can expect regulators to use the time to implement necessary reforms.
Indonesia and Philippines were highlighted as jurisdictions to watch as securities lending equity market structures get built out amid supportive regulatory reforms. Thailand and Taiwan were spotlighted as strong and deep liquid markets on the equity financing side.
Looking forward, panelists representing a buy-side view said that the biggest market moving potential over 2024 will be Fed timing on interest rates, growth of artificial intelligence, Japan’s central bank policies, and greater scrutiny of investable strategies by fund allocators.
Consolidation of securities financing products continues apace enabled by technology: Optimization remains a big topic with panelists reporting an increase in demand for capital efficient structures and “synergies across multiple products” – in other words, the continuing trend of securities financing, derivatives and collateral management becoming more operationally entangled. One panelist noted that there’s still “lots of work to industrialize, but the collateral business case is there”. Overall, experts described technological change as an enabler.
The promise of DLT feels more concrete at every conference: One panel highlighted the partnership between HQLAX, Ownera, J.P. Morgan and Wematch for repo execution with DvP settlement across two different distributed ledgers.
J.P. Morgan will provide the “cash on ledger” via the JPM Coin System, which will serve as a payment rail and deposit account ledger; Wematch provides the user interface to agree the repos; HQLAX serves as the “securities on ledger”, allowing ownership to be represented by Digital Collateral Records (DCR); while Ownera provides the FinP2P routing protocol to interconnect peer-to-peer and orchestrate the DvP settlement of transactions. Panelists stressed that “this is not an experiment” and highlighted the importance of interoperability between multiple blockchains, which will ensure asset mobility and avoid liquidity loss.
According to an audience poll, the main challenges to tokenization and DLT adoption were: regulatory framework (43%); operational and technology (29%)’ and legal framework (29%). Respondents overwhelmingly identified operational benefits as the main benefit they’re expecting from the use of technology in securities financing (60%), with risk reduction, capital optimization, transparency and increased liquidity of assets all sharing 10%.
China’s recent announcements related to opening up repo markets pricked up ears: It’s widely agreed that opening up China markets to all institutional investors would reflect a “massive change” for participants, but one legal expert noted that there’s still a fairly wide opinion gap between those who are “quite ambitious” versus “very skeptical”. Whatever pace this moves forward at, we are sure any developments coming out of regulatory consultations will be closely scrutinized, particularly any language that points to GMRAs being allowed for repo transactions.
Some market observers called for an honest examination of why securities lending has not picked up in Asia: One panelist noted that with some $16 trillion in assets under custody, the utilization rate in Asia is only about 7%. Anecdotally, among the region’s beneficial owners, there is a “hoarding mentality” such that “we need to save this for a rainy day”, said one panelist. Meanwhile, there are “pockets of trapped liquidity” but no integrated regional platforms or interoperability, and one speaker decried the lack of an Asian ICSD that can standardize terms and conditions.