Session Summaries from the 2021 PASLA/RMA Update on Asian Securities Lending: New Asia Markets: Is 2021 the Year in Which Securities Finance Takes Off?

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

New Asia Markets: Is 2021 the Year in Which Securities Finance Takes Off?

Moderator: Ed Oliver, Managing Director, eSecLending

Panelists: K. Hari, Chief Business Officer, National Stock Exchange of India; Tim Murch, Vice President, Citi; Roel A. Refran, Chief Operating Officer, Philippine Stock Exchange Inc.

Roel Refran discussed the journey the Philippine Stock Exchange (PSE) has been travelling in respect of SBL and short selling. Laws were amended to ensure that securities borrowing and lending (SBL) transactions were not treated as outright sales. This framework historically was to address fails of management. The Philippine Stock Exchange, Inc. expanded its securities framework to make sure short transactions would be within the framework of SBL for execution purposes. Agent lenders and brokers must confirm that clients do not resort to naked shorts for purposes of executing trades. The PSE has not formally launched its securities lending framework but is close to doing so, aiming for a Q2 launch this year. The PSE has adopted what it believes are “suitable and appropriate” measures for the Philippine market. The exchange is looking at the lending agent model to enable short selling and hopes expanding short selling will attract custodians and institutional investors. There will be short selling ratios and transparency regarding activity.

Are issues such as being able to take foreign collateral on the table? For the PSE, the answer is yes, especially for the offshore collateral that would be eligible for mark-to-market requirements. The PSE has recommended that move to regulators, especially given how important it is for tax authorities to recognize this collateral. The Global Master Securities Lending Agreement (GMSLA) would have to be registered with the Philippine authorities, but using the standard GMSLA means avoiding the need to renegotiate and incur additional expenditures. The PSE anticipates those items will be approved by regulators and tax authorities soon. Lending agents will have to register too. The combination of registered lending agents and agreements means that the tax authorities will not charge tax on SBL movements.

Derivatives are on the agenda in the Philippines, and the exchange will soon launch futures, followed at some point by single stock options. The exchange is also going to relaunch its clearing and settlement system for purposes of forward planning as well as to prepare for derivative functionality. 

The SBL market in India is growing as well. There are about 700 stocks listed on the National Stock Exchange of India (NSE), and over 100 have derivatives driving the SBL route. The NSE has been working on changes to SBL contract tenures, particularly to facilitate certain corporate actions. There are new collateral options to expand from previously just being cash. The exchange is looking to attract domestic institutions, mutual funds, and other “good quality lenders.” The NSE said that the SBL market is the “next big thing.” The regulator, SEBI, is supportive of change in SBL and is encouraging exchanges to move to shorter term contracts that would be more attractive to lenders. India is currently a highly retail-dominated market, with about 35% of volumes in retail, although institutional investors are welcome. The exchange is comfortable with the existing system, which realizes solid fees and revenues—there is no thought now of moving away from a cleared SBL model.

Other Asian markets are opening again following bans introduced during the COVID crisis, but at their own pace. Regional exchanges reacted differently to the pandemic, some issuing short selling bans and others doing nothing. Their responses seemed to depend on existing infrastructures. Taiwan came back in June, Thailand in mid-fall and Malaysia has come back online recently. The market is “just about back to normal,” except for South Korea, which has taken a different stance, leaving the short sell ban in place for longer. South Korea is looking to bring short selling back in May and give retail investors the opportunity to participate in both short selling and securities lending. Among potential new markets is China, “the one everyone is watching.”

Panelists concluded with a discussion on the market growth among retail investors. There was cause for concern in January with the phenomenal spike of GameStop stock, raising alarm bells for purposes of examining margin requirements. Some exchanges noted more than 30% increases in January alone, with much of that coming from individual retail investors. Participants were able to fulfill margin requirements, but the question remained: How sufficient are the margins when there is a lot of volatility in the market? The PSE did introduce more circuit breakers to help. Retail investors will continue to increase in numbers, and market participants need fundamental requirements and risk filters in place, especially on the systems side. Front-end systems were stress tested on a real-time basis early this year, and adjustments should be made to the front-end functionality, infrastructure, and hardware ecosystem.