RegionalProfileWayne Burlingham, global head of securitieslending at HSBC <strong>Securities</strong> Services, identifiesHong Kong as the most exciting developedmarket in Asia currently, where he has seenrevenues pick up across the board in a mostlyspecials environment of consistent demand.Meanwhile the regulatory environment is stillconducive to international players, he adds. Giventhat economic conditions remain the same,he anticipates that the island will continue to bea good place for securities lending business.“The whole of Asia is an exciting region for HSBC.If you look at the number of potential lending marketsin the east versus the west, for example Malaysia,Philippines and beyond that Vietnam andIndonesia, from an agent lending point of viewthere is a lot of justification in keeping a close eyeon Asia versus Europe and the US. It is a regionof great potential basically,” he notes.He adds, however, that the real growth sectors forsecurities lending markets generally, such as collateraltransformation trades, do not apply to Asiato the same extent as they do in Europe and theUS. The region is still about borrowing stock asopposed to seeking other trading opportunities.That may be because so many of Asia’s marketsand exchanges are in development. Meanwhile,just as developed markets are seeing challengesto economic growth, emerging economiesare exhibiting strong fundamentals. The localmarket ending 2011 as Asia’s best performerwas the Philippine Stock Exchange (PSE), witha four per cent gain. Capital raised on the PSElast year hit a peak of PHP 107.5 billion ($2.5bn)and there are indications that the exchange’sleadership would like to see the market upswingget a further boost by introducing ETFs and securitieslending in the second half of this year.The market slightly ahead of the Philippinesin terms of development is Malaysia’s, whichissued new rules recently making the environment“more lender friendly” Burlingham adds.For example, if a stock is on loan, it can be soldwithout being considered a short sale. He predictsthat regulators and market participants willcontinue to work through other barriers to openup the Malaysian market.China v IndiaAs the two powerhouse economies in Asia,mainland China and India are subject to their fairshare of speculation on when and how securitieslending markets will open up or improve. Thereis plenty of work to be done in both, but whereasIndia has an established market, mainland Chinais yet to allow entry to international participants.Commentators have noted that though mainlandChina has had forward momentum overthe last couple of years, when any initiatives areannounced in the public domain, markets take adive. From the point of view of Chinese regulators,it is a daunting task to expose markets tothese kinds of forces.“If you are the regulator hitting the green button,even in quiet market conditions that is a bigleap of faith. But if you can imagine going forit in the turbulent markets we have right now,when volatility is at historic levels, that is a massivecall for any regulator. So for anyone to thinkthe market can suddenly go from nothing to beingwide open in a short space of time… that isjust not that likely to happen,” Burlingham says,adding that he does not expect to see too muchdevelopment in 2012.The same is true for India, where the market hasarguably been relatively slow to develop. Rulesthat are in place are not particularly friendly tolenders or borrowers, explains Burlingham, andhe would need to see further rule changes tofeel comfortable. Moreover, he does not seeborrowers actively pushing for supply.“Until it gets to the point where everyone feelsquite comfortable it will remain a very limitedmarket...where we have to do things very differentlythere are risks, pure and simple. The marketpreference is always to have a lightly regulatedmarket with professional participants in it. We arehappy to work to a reasonable set of rules, butIndian regulations are very tight comparatively.At the same time, it may be that India is happyto have a domestic market without internationalparticipation. Each country has its own ways ofdoing things and these choices may suit theirmarket right now,” Burlingham says.Fixed income spaceAt the same time, advocacy group ASIFMA(Asia <strong>Securities</strong> Industry & Financial MarketsAssociation) is watching developments closelyin the Indian repo markets. Almost all of the repomarket is overnight, which contributes to anabsence of liquidity in the underlying markets,notes Nicholas de Boursac, CEO of ASIFMA. Inaddition, there is still some progress yet to bemade on issues such as title transfer and eliminatingshort selling restrictions.A working group is currently preparing to makerecommendations for measures to improve secondmarket liquidity. A report is anticipated bythe end of the first quarter this year.“I think it is going to become more and morebroadly accepted within Indian governmentcircles that they need more foreign financingfor the expansion of their economy and infrastructures,and therefore I expect, because governmentdebt is going to carry on growing, thatthere will be changes in regulations which willmake investing in India’s government securitiesmore attractive as they face that economic reality,”de Boursac says.At the moment, ASIFMA is focused on the fixedincome markets in India, China and Korea.Similar to India, China still needs to make progresstowards what de Boursac calls “a classicrepo market”, in other words, one where there isproper transfer of title, documentation, tax andaccounting treatments and liquidity. Some 85per cent of China’s domestic RMB repo marketis pledge repo, while the remaining 15 per cent14of title transfer repo is not suitably documentedand short term. He expects to see improvementwithin the next two years but does not anticipatethat the country will see any “major disturbance”in financial markets in 2012.“China has taken the decision that they want tomake their markets more liquid and deeper andin some ways more integrated with the globalmarkets, so that is a debate that is settled. I doanticipate some changes, but 2012 is a difficultyear. There is a political transition underway andtypically some of the reform agenda gets delayedso as not to get in the way of the political process.But I suspect once this transition is over, we willhave some rapid progress in terms of modernisingthe financial system,” de Boursac says.Of all the markets straddling the emerging/developedclassification fence, Korea is noteworthyfor both its repo development and recenthardline stance on short selling restrictions. Interms of the won repo market, ASIFMA pointsto continued growth - outstanding volumes havequadrupled to some $20 trillion won ($17.8 billion)in the last three or four years. Outside ofJapan, Korea has one of the most developedfixed income markets in Asia.The country is also going through a leadershipchange with elections this year. Along with achange in government, there is some anticipationthat short selling restrictions introduced in the summerwhen markets plunged could be reversed.“Most technicians will tell you that short selling isgood for markets and works for market liquidity,but you will find that those regulations are put inplace for political reasons. I suspect that if thereis a change in government there is a possibilitythat they will reverse those rules, but of coursethere are no guarantees,” de Boursac says.Regulatory arbitrage?Both Wayne Burlingham and Nicholas de Boursacnote that the global regulation conversationhas far more to do with the west than the east.Burlingham explains that many of the Europeanand US regulations such as Dodd Frank or BaselIII affect western holders of Asian assets toa greater extent.De Boursac takes issue with comments, whichinfer that Asian banks will compete for businessby engaging in regulatory arbitrage. He pointsout that the loan to deposit ratio in Asian banksis far more favourable and dependency onwholesale funding is considerably lower than inEuropean institutions at the moment.“Can you treat Asia as a group? You can in certainareas, such as the fact that most sizeableAsian banks will probably be Basel III compliantbefore European banks…but if you look at sophistication,these markets are not fully developedin many cases and that is the challenge– to get markets to develop rather than regulatethem,” de Boursac says.www.securitieslendingtimes.com
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