Eye on Asia

Zubair Nizami, head of Asian securities lending trading at Brown Brothers Harriman talks to Drew Nicol about the state of the industry in the region

How has Hong Kong’s securities lending market fared in 2017 so far?

It’s been a solid year overall, but demand has certainly strengthened since the start of Q2, and that has carried forward into year. The strong equity market rally we saw early in the year perhaps contributed to dampened directional lending activity and led to a softer environment for specials in Q1, but since then we’ve seen a strong recovery. The mainland Chinese property and auto sectors have been particularly interesting.

Hong Kong continues to be a focus market in the Asia Pacific region, given its deep liquidity and close connectivity to mainland China. We expect that to continue for the remainder of 2017.

Another significant market in the region is Japan, where increased corporate and specials activity has spurred demand. End users of securities lending prefer trading in this market because of its deep liquidity and ability to act as a proxy for short access to Chinese and Taiwanese companies.
Has Hong Kong’s economic proximity to China helped or hindered its development?

Hong Kong and mainland China have benefitted in many ways from their close economic relationship since the handover of sovereignty in 1997. Hong Kong is the bridge between mainland China and the world—helping facilitate two-way capital flows, significant trade and investment, and also acts as a hub for equity financing.

The introduction of Stock Connect for both equities and bonds perfectly illustrates the ongoing importance of Hong Kong’s role in the further liberalisation of China’s capital markets. For mainland China, Hong Kong’s stable investment environment—protected by fair and transparent courts that enforce the rule of law—has provided essential support for its financial markets to develop.

Some might argue that Hong Kong is gradually losing its importance to mainland China–the city’s economy now contributes approximately 3 percent of its total GDP compared to 16 percent in 1997. But this glosses over the fact that mainland China’s economic pie has become significantly larger in this time period and, for a city of just over 7 million people, Hong Kong’s contribution can and should be seen in a very positive light.

Looking at the wider Asia region, what are the main trends you’re seeing in the borrowing and
lending markets?

The increased drive towards automation is a key trend BBH has seen globally this year. Although it touches all aspects of the business, the trading execution discipline has seen some of the greatest benefits. While the main benefit of technology is of course to increase efficiencies between counterparties, it’s also now a necessity to meet the more sophisticated needs of end-users, who not only rely on breadth of lendable supply, but also speed of execution.

Speaking for our business specifically, clients are responding well to the focus on technology. As they see the benefits first hand, we’re having more and more conversations with them about how we can use technology to deliver information differently and find new opportunities–both for borrowers and lenders. We’ve been able to build a new dialogue with all parties and we’ll keep investing in new capabilities that keep us all moving forward.

The need for collateral flexibility also continues to be a key theme, as borrowers look to seek further capital efficiency gains. We have seen increased activity in the financing space in the Asia Pacific region in recent years as borrowers are increasingly focused on putting in place myriad funding structures to meet their high-quality liquid assets requirements.

Several other Asian markets are making significant changes to their securities lending, short selling, and repo, regulatory frameworks. Which market stands out to you as one to watch in the second half of 2017, and beyond?

Malaysia is definitely one of the emerging markets to watch this year. Supported by a business friendly exchange operator and regulator, we expect there to be further reforms to the offshore lending model in the near future which will help spur volumes and increase market participation.

BBH is a cross-border specialist with a strong focus in Greater China so we’re certainly continuing to closely monitor developments here, especially in light of the addition of Chinese A shares to the MSCI Emerging Markets index beginning in June 2018.

Although the initial inclusion weighting will be small, this is a significant leap forward that illustrates China’s commitment to further liberalise its capital markets. While a lending model for offshore holders of Shanghai listed A-Shares does exist via the Stock Connect scheme, its use remains limited due to various restrictions that curb both lending supply and end-user demand.

We are hopeful that an increase in the MSCI weighting for Chinese A shares will provide impetus for the CSRC and HKEx to introduce gradual reforms to the offshore securities finance market. That said, we expect it will take more than a few years to develop a more scalable offshore lending model in China.

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