Positive outlook for Asian securities lending, yet risk still tops the agenda

Some rather interesting opinions were expressed at this week’s annual gathering of the great and the good of Asian securities financing at the PASLA event in Singapore. In summary, the attendees were very upbeat about the future with only 14% predicting that revenue in the region will stay flat or decline. Given that income is the most important thing, it is lucky that the most positive comments were reserved for this aspect. On other topics the audience expressed signs of regulatory fatigue. 

First, a little more detail on where this revenue growth is expected. 35% of respondents forecast that loan in Taiwan would grow the most. Hong Kong was not far behind at 29% which, though biased slightly by the fact that many attendees are based in that city, is significant given it is a large market already. Yet only 10% of those voting expected Japan to lead growth.

No matter how the question was asked, and no matter which part of the market they represented, the unanimous view was that risk is the dominant theme of the day. This contrasts with reports from the recent IMN conference in the US, where asset owners were beginning to bring the debate back towards the art of making more money from securities lending. This is certainly not the case in Asia with 90% saying that risk has risen up their agenda since the credit crunch. The Agent Lenders in the room (Custodians) voted unanimously (100%) that they spend more time on risk. Paradoxically, only 83% of Beneficial Owners were devoting greater effort to understanding risk. This group would presumably tell us that since there was no risk in their program in the first place there has been no need to address it.

There seems to be some way to go before everyone races into the newly formed Indian securities lending and borrowing market. Only 38% said they were planning to go into this market this year with 85% attributing their slow movement to the complexities involved and a lack of understanding of how the Indian market works. It is unclear, however, the extent to which this misunderstanding is as a result of difficult rules or simply that many market participants have not properly looked into it. One third of the audience, it must be said, were not based full time in Asia and this could explain how little they knew about the Indian setup.

The subject of the “central counterpart” (CCP) method of lending and borrowing received its habitual “no thanks unless forced by regulators” verdict with only 7% predicting “major developments” this year. A contradiction arises since the CCP model exists in Taiwan already and this does not stop delegates predicting this market to grow the most this year. The particular focus of concern is the fact that a CCP, as in the case of how India works, holds title to collateral. 68% said they were “not keen” on that.

The majority of people (43%) felt that regulation was the area most likely to interrupt growth. Clearly, this is the domain where PASLA can help the industry by educating and lobbying the regulators.

On the thorny subject of capital usage, 48% admitted that they do not have a daily way of understanding how much capital is at risk due to their securities financing activities. Along with a slight lack of institutional supply to borrow, this can explain why 78% feel that there will be more synthetic business traded this year, up from the 10-30% of the existing lending and borrowing that most said it currently represented.