Compared to other regions of the world, stock exchanges in Asia tend to play a greater role in the securities lending sector or are considering ways to get involved, finds Finadium in its research report An Overview of Securities Finance and Collateral Management in Asia.
“It seems that exchanges see an opportunity where there are large pools of brokerage firms that are poorly served and small pools of very well served brokers who are able to access securities,” says Josh Galper, managing principal at Finadium.
In Korea, the Korean Securities Depository (KSD) can source securities from the Korea Stock Exchange (KSE) or shares registered with Korea Securities Dealers Automated Quotations (KOSDAQ). KSD also serves as CCP, allowing users to input loans.
Taiwan uses a similar model, where the Taiwan Stock Exchange (TWSE) can either source securities or borrowers and lenders can operate on a quasi-bilateral basis through the exchange, to which the parties report the transaction.
“In the Asian markets, market participants might be inclined to use an exchange because of the comfort in using the exchange for trading equities. There will also be closer business ties. For example, the manager of a pension plan might be also an executive of a listed company,” explains Galper.
Still, the bilateral model is more popular. In 2011, TWSE reported that 32% of transactions used the exchange to source securities, and 68% were conducted on a bilateral basis.
“The question for CCPs becomes: unless there’s a legal mandate to only use an exchange, can a competitive model be set up?” says Galper.
As short selling rules are relaxed in the region, more opportunities for securities lending will come up, and other countries are looking at following or buying the KSD model, but this is not an overnight transformation.
“There is no expectation that Asia is about to see a major upheaval. It’s business as usual, and any introduction of CCPs would be phased in over time,” says Galper.
If more CCPs were introduced in the region, it would not necessarily be profitable, but exchanges still might be interested because of the relationship gains with local market participants.
“My main takeaway for Asian exchanges looking at securities lending CCPs is that if it serves as a good corollary to other businesses then it could be worth it, but on its own it would be difficult to gain traction as a competitive market entity versus the established relationship between agent lenders and prime brokers,” says Galper.
“Another important consideration is that Asian markets are still pretty domestically focused, so each one of these small CCPs can compete because there’s not much international competition. Once you introduce competition between markets then that would change the dynamics,” he adds.
On this front too, there seems to be no indicator that the dynamics will change anytime soon.
“I see the market as being fairly status quo as far as using CCPs for securities lending. A potentially more dynamic conversation is the use of repo versus unsecured lending and how much do regulators want to move towards secured lending,” says Galper.
Currently, the region favors unsecured lending, but regulators could eventually mandate secured financing. In August 2013, the Financial Stability Board (FSB) said “there may be a case for welcoming the establishment and wider use of CCPs for inter-dealer repos against safe collateral (i.e. government securities) for financial stability purposes. However, existing incentives to use CCPs in these markets seem sufficiently strong (e.g. balance sheet netting) and no further regulatory or other actions appear necessary.” If the FSB were to ever change course and require CCPs, then Asian exchanges with existing CCP models for securities financing would of course stand to benefit.
The Role of Asian Exchanges in Securities Lending
Compared to other regions of the world, stock exchanges in Asia tend to play a greater role in the securities lending sector or are considering ways to get involved, finds Finadium.
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