ISSUE045 - Securities Lending Times

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PanelDebatethe regulatory hurdles, it shows that this marketis starting to move forward. A number ofChinese firms are looking to open internationalsecurities lending desks outside of China. Thismarket will continue to grow and become ofeven greater interest to global securities lendingfirms over the coming year. However, the Chinesemarket allowing foreign firms to participateindependently of any Chinese collaboration in afully open market remains to be seen.Squillacioti: It is verydifficult to know whenan offshore marketwill be in place, weare keeping an eyeon developmentsin ChinaSquillacioti: There is quite a lot of interest inthis topic, and judging from this and from proxyactivity in H Shares, it is reasonable to assumethat there will be substantial interest when themarket is developed and open. Though it is verydifficult to know when an offshore market willbe in place, we are keeping an eye on developmentsin China, and look to prepare for thisdevelopment as much as possible.Bhatia: There is no doubt that China is goingto one day play a central role within the contextof a regional securities lending programme. Traditionallya major supplier of US and Europeanfixed income securities for securities lending,the 2008 financial crisis did spark a pullback,with Chinese lenders suspending their participationin programmes.However, as the world’s financial markets andthe global economic recovery stabilise in tandem,we are seeing Chinese lenders re-enteringthe securities lending market. One of the importantdrivers of this move back onto the playingfield, is the ongoing development of China’sQualified Domestic Institutional Investor (QDII)scheme, which will be a strong source for equitiesliquidity as QDII participants increasinglylook to securities lending programmes.Domestically, China is also making strong progressin integrating securities lending practicesinto the broader financial markets. The recentannouncement that it is planning to establisha centralised securities lending exchange is aAwad: Regulation varies from one country tothe next and it is important to understand thenuances of each. Asian markets have historipositiveindication of things to come, though weare watching the markets for more news on theexact timing.Tomlinson: As one of the BRIC countries Chinaof course will become increasingly important,however it remains restricted to onshore lenders/borrowerswith no sign of that changing inthe near term. As it stands right now and fromBNY Mellon’s perspective the other BRIC countriessuch as Brazil via the CBLC or Russia areeither already open to a form of securities lendingor working on solutions and offer more immediateopportunities.Awad: We have seen the influence of China inthe performance of markets such as Hong Kongand Taiwan where strong growth has led torobust lending markets. China will have an importantindirect impact (and in the longer term apotential direct impact) on lending as they movetowards more transparent and open stock markets.As a stand alone lending market, Chinahas significant potential however foreign participationin securities borrowing and lending isstill far off as lending is currently only conductedby local participants onshore under a pilot programme.China is taking steps towards a morerobust securities lending market. In 2010 it starteda government run pilot programme involving2225 brokers and covering 90 eligible stocks. In2011 the list of eligible stocks was expanded to278 and seven ETFs, however the 25 brokersare only able to lend securities from their ownfunds and holdings are not significant.SLT: What impact is the new globalregulatory environment having onthe market in Asia?Bhatia: As the world’s regulatory environmentcontinues to evolve, we’re remaining focusedon delivering value to our clients, who are inturn focusing on market fundamentals in termsof executing their strategic growth plans. As youcan see from the figures we have shared previously,the significant growth in securities lendingacross Asia is a clear indication that the marketcontinues to move in the face of regulatory flux.Regulatory change, the anticipation of regulatorychange and the need to adapt as and whenthings evolve has become almost business asusual – a constant that needs to built into regularpractices. That is not going to change in theforeseeable future.www.securitieslendingtimes.com
PanelDebatement systems which is why some institutionsand infrastructures are now looking to insourcethis function.Daswani: The impactof these regulationsremains largelyundefined currentlysince details of howthey will beimplemented areyet to be finalisedcally imposed specific securities lending rulesaimed at greater transparency. Regulators aregenerally supportive of the practice and oftenwork with the industry to create solutions.They have the advantage of already havingestablished securities lending policies and canwait and see what/how US/European regulatorschange theirs and then consider applyingwhere appropriate.Bhatia: The significantgrowth in securitieslending across Asia isa clear indication thatthe market continuesto move in the face ofregulatory fluxRossler: Basel II implementation is still ‘inprogress’ in Asia; some countries have implementednew regulations, for example, HongKong, while others such as China are still inthe course of implementation.Asian countries seem generally supportive ofBasel III implementation although many havenot made public commitments. However China,Japan and Singapore have all confirmed in oneway or another that they support Basel III.Financial institutions across the globe are facingthe additional burdens of increased collateralmanagement as required under the G20decisions taken in Pittsburgh in 2009. But researchcommissioned by Clearstream from Accenturerevealed that many banks are paying ahigh price for inefficient collateral managementwithin their institutions. Accenture studied anumber of international banks and found thatsome 10 to 15 per cent of available collateral isoften left unused because it cannot be consolidated.The cost of fragmented collateral wasestimated by Accenture at more than USD 5.27billion a year – but this estimate reflects thecurrent situation; the Basel III measures canonly increase this figure.The main problem identified in the report wasthat internal structure in global banking operationshas now become very complex and soprevents many institutions from having a singleview of their available collateral. All of the institutionswhich took part in the in-depth studyreported having inadequate collateral manage-23Daswani: The importance of the global regulatoryenvironment will remain a prominent securitieslending theme this year, with the roll-outanticipated of rules stemming from regulationssuch as Dodd-Frank, Basel III, and global shortselling rules. However, the impact of these regulationsremains largely undefined currently sincedetails of how they will be implemented are yetto be finalised in most cases.Northern Trust’s securities lending expertsare active participants in the discussions beinghad by industry associations with regulatorsaround the world, allowing us to providevaluable input to the various agencies responsiblefor drafting these new regulations. Ourinvolvement also puts us at the forefront ofregulatory and market changes with our abilityto influence and drive positive change ultimatelybenefitting our clients.Regulation in Asia for securities lending hasbeen restrictive in some cases and onerousin others and continues to be at the forefrontof conversation, particularly regardingemerging markets.Short selling rules imposed in 2011 constraineddemand and although lifted in South Korea fornon-financials in November 2011, these continueto be a threat amidst market volatility giventhe difficulties in hedging against it.Short selling reporting regimes such as thosein Australia (and soon-to-be in Hong Kong),whilst onerous on market participants, have notemerged as disincentives to invest and the consensusis that such transparency is beneficial,provided the information is accurate and protectiveof entity disclosure. There has not been anyspecific impact ahead of the roll-out of Basel IIIalthough it is perhaps premature to speculateat this stage.www.securitieslendingtimes.com
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ISSUE045 - Securities Lending Times

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