The recent PASLA/RMA Update on Asian Securities Lending brought together leaders in the securities lending industry in the APAC region for two great days of panel discussions from industry leaders. Discussion topics included:
- Environmental, Social, and Governance
- The Future of Securities Lending in the Asia Pacific Region
- Fintech and Emerging Technologies
- The Hong Kong/China Relationship
- Developing Market Opportunities
- Key Figures in the Industry
Session: Industry Leaders: The Future of Securities Finance in Asia-Pacific
Moderator: Jeff Coyle, Head of Securities Lending Trading, Northern Trust
Panelists: Jack Chang, Head of Capital Markets, Financing Distribution, APAC, UBS; Natalie Floate, APAC, Head of Market & Financing Services, BNP Paribas Securities Services; Chunhua Ou, Head of Agency Securities Relationship Management —APAC, Securities Services, J.P.Morgan; Nick Silver, Head of Japan Equities, Credit Suisse
2020 was a challenging year for securities lending markets in terms of revenue generation, with the imposition of several short-selling bans from various regional regulators partly to blame. But panelists said it was not “all doom and gloom.” Toward the end of the year, China saw a change in its Qualified Foreign Investor rules which permit QFI participation in securities lending and short selling.
Market volatility was huge for APAC in 2020. On one side, there was increased demand in markets where clients were looking for liquidity. Markets, which implemented short-selling bans, saw client flows coming out of those countries as clients searched for liquidity elsewhere. Initially, markets saw clients de-risking at the start of the pandemic, but as the year progressed, they started to add back risk, and market participants saw elevated volumes across Asia. As investors adjusted to the new liquidity environment, and central banks poured liquidity into the market in support, significant re-risking occurred followed by improved performance. By the third quarter of 2020, confidence had returned to the markets.
From a beneficial owner perspective, the reaction to the initial volatility last March was relatively calm compared to the global financial crisis. There were more informed discussions, with some clients adjusting their programs according to their risk appetite. Measured conversations took place around exposure, risk profiles, and liquidity in lending programs, and only a few decided to suspend their lending programs. Panelists believe this demonstrated clients’ sophistication levels and the ability of agent lenders to support programs through heightened volatility supported by lessons learned post the GFC. One unusual dynamic was that some governments introduced schemes where liquidity could be drawn down early, particularly for pension funds. This drove some clients to halt activities.
Several trends were coming from the pandemic. For one, the work-from-home environment presented a technology challenge, which was met impressively. But digging further, how do you adapt to change? What work-from-home contingencies are necessary for processes that were 100% in-house? These are questions that companies and regulators alike had to address.
Clients wanted to explore alternative ways of conducting business, looking at available tools like securities lending and deploying them to other areas such as Treasury management. Firms were also faced with enacting changes like outsourcing trading for certain types of instruments because clients wanted flexibility. In addition, clients have been laser-focused in the current low-yield environment, searching for ways to capture higher yields. Consequently, following the height of the volatility there has been a desire to look at risk parameters including more flexible collateral sets and alternative vehicles to raise cash.
Technology affects every project, so the focus on tech is a trend that will likely accelerate. Time to market and flexibility are key drivers, forcing companies to update or replace legacy systems. Regulations will change along with the technology, and the role of securities lending will continue to evolve. It has gone from a back-office revenue generator to a facilitation tool appreciated across front offices.
Hedge fund clients as well have adapted to the work-from-home environment. Many Hong Kong clients had already been in a work-from-home scenario for a few months before the pandemic hit globally. Also, many traders have not been in their offices for a year and are still productive. Corporate access has been helped significantly by the rise of Zoom, WebEx, and other virtual meeting tools.
On a macro level, regulators provided the requisite levels of flexibility, recognizing early there was a problem and banks needed to be able to adapt quickly. This required regulators to develop creative ways to ensure markets continued to function. Japan, for example, which historically relied on a paper-based system and physical signatures, moved quickly to adapt digitalization of some documents. Once the dust settled and the realization set in that work from home was going to be the norm for a while, there was a divergence in the performance of stocks. Some sectors suffered, particularly real estate, while others, such as those in the do-it-yourself space, prospered.
As we moved into 2021 and positive news surfaced about the development of vaccines, there have been several positive signs for markets, including the removal of the last short selling restrictions. Clients are also rethinking their environmental, social, and governance (ESG) strategies following the political and social unrest of 2020. There is a heightened awareness of the importance of ESG not just in securities financing but across the finance industry in general. The industry seems to be moving in a direction where ESG is more compliant. There is no uniform view of ESG compliance currently, especially in regions like APAC which are given to fragmentation. It will be up to market participants to help the industry develop in this area, particularly agent lenders working with clients in understanding their requirements and forming that bridge to the demand side, which might have a different view of how ESG fits with securities lending. Many clients are still evaluating the value of ESG and how it can be incorporated into investment strategies, but this will take time.
In response to a query raised during the session about the long-term implications of the regional short sell bans, the varying degrees of action taken by regional regulators—from none, to reduced short sell quotas and uptick rules, to outright restrictions—were influenced by a combination of historical events and current political pressures. Australia was one market which introduced a ban during the Global Financial Crisis but on this occasion felt there was no need to take such action. Korea on the other hand introduced an outright ban during the GFC and last March which will only be lifted, partially, in May of this year. It seeks to balance the benefits of short selling to financial markets with political concerns and the inclusion of its retail investor base in short-selling activity. Empirical backward-looking studies on the functioning of markets during the period covering any bans or restrictions would go a long way to addressing whether the bans were beneficial or effective in their desired outcome, which was ultimately reducing volatility. Even so, individual countries may never reach a consensus on this topic and when the next market shock occurs, as doubtless it will, countries will act in accordance with their own regulatory and/or political direction at that juncture.
Where will the focus be in 2021? The consensus is that the spotlight will be on the continuing growth market of China. There is more supply coming into that market, and 2020 was significant in that China allowed short selling by offshore participants for the first time. Other markets developing their SBL infrastructure in APAC are also starting to let in international participants, although most markets are at different stages of deployment. Developed markets like Australia and Japan continue to be positive, with global accounts making sure they have enough capital deployed there.
The pace of change is rapid and the SBL ecosystem including financing and liquidity management is evolving at an unprecedented rate. Exciting times are ahead!