Of all the global forces affecting Asia, which are most pertinent this year?
Paul Solway: As seems always the case, reflecting on events that have happened since last March, time seems to have elapsed extremely quickly indeed. So that can only mean one thing: the landscape continues to evolve and change extremely rapidly.
The headlines continue to be dramatic as well as global in nature, mostly focusing on political change and the downstream effects on macroeconomics, trade and fiscal policy that ultimately drive interest rates and market sentiment. Negative interest rates, Brexit and the US election have all had their own unique influences over market activity.
The pace of increased regulation, both direct and indirect, has become the new normal in the US and Europe and the question of if it would affect Asia has been a resounding ‘yes’ for all global institutions. In the region, however, the growth opportunity is still at the forefront of many conversations but it is now balanced with the need for efficiency both from a regulatory and capital standpoint. This efficiency has led to certain constraints but some additional opportunities beyond the fundamental earning streams that lending has relied on in Asia. Fixed income lending is a good example of ‘new’ flows that are positively affecting Asia.
Glenn Horner: As Paul noted, regulatory change continues to be at the forefront of the global agenda. A large percentage of the securities lending intermediaries, whether they be agents lenders or prime brokers and broker dealers, are globally active firms, so regulatory activity in one region has an overflow effect into other regions. I would note that we appear to have hit an inflection point in the global regulatory agenda, as the response to the financial crisis resulted in a continuing stream of additional regulatory burdens on market participants.
However, we have seen significant political upheaval at both the national and global level during the past 12 months. This has become most evident by the apparent breakdown in the finalisation of amendments to the standardised approach, as global regulators appear to have diverging views on an appropriate capital floor.
Additionally, with the new administration in the US we see increased pressure on potentially rolling back regulation within that market, as President Donald Trump has called the Dodd-Frank Act a disaster and plans to make major changes to it. This political and regulatory upheaval will likely lead to increased uncertainty in the near term, but potentially an easing of regulatory burdens in the long run as politicians and regulators weigh the economic cost of increased systemic safety.
How are these factors represented in this year’s agenda?
Solway: The PASLA conference committee members are all active market participants, so current trends are always primary in the minds of our planning of the conference, with 2017 being no different. Having the conference in South Korea this year is important for a couple of reasons. We have not been back to Seoul for 12 years, and South Korean equities represented one of the top earning markets in region in 2016 for many institutions.
Fixed income continues to earn a place on the agenda given its growing importance as an asset class across Asia and our regional markets panel promises to be, as always, a crowd pleaser, especially as it will tackle markets such as India, Indonesia and China, including an update on the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programmes.
Horner: As usual the conference committee has put in place an agenda that will try to weave together both globally and locally important trends in legal, tax and regulatory, with how Asian markets and South Korea in particular are being impacted. We will then get a view into how the industry will continue to adapt and improve upon itself. The securities lending industry has a long history of not only surviving significant market disruptions, but actually thriving through constant innovation. The panels will provide attendees with a view of changes in technology and transparency, as well as how new tools such as central counterparties (CCPs) may create increased market efficiency.
Which topics are you looking forward to hearing speakers’ views on the most?
Solway: Many markets in Asia have both onshore and offshore models, rules and varying levels of securities lending participation and access. Moving the conference around the region is a fantastic opportunity to hear from both sides of the liquidity divide, borrowers, exchanges, lenders and market authorities. Wednesday morning has been dedicated solely to the South Korean market and should give a multi-angle overview of what is happening in this exciting and diverse market.
Collateral flexibility and liquidity solutions have never been more important, both in South Korea and beyond, so Thursday morning should also attract a good audience nice and early. Even for those who are unable to attend, the later CCP panel should provide good insight into the theory and practice of regulatory-friendly structures and if they really are getting the interest from both buy- and sell-side clients across Asia.
Horner: I think the stay protocol and legal, tax and regulatory panels should set the table for a robust discussion about how a rapidly changing environment will affect the Asian marketplace. While I anticipate all of the panels will be very informative, I believe that the business leaders coverage of the current and future state of securities finance will provide an excellent close to the conference and really pull together the global and local in a very powerful way.
South Korea is one of the most active markets in Asia, but how does it compare to others in terms of market development and regulatory sophistication?
Solway: Actually, South Korea was the first market in Asia to break the model of equity lending by using onshore intermediaries to facilitate reporting and transparency in 2004/5. At first it was seen as difficult and clunky but, over time, it became a new modern market standard that other Asian markets have replicated in one form or another. As a result, participants, exchanges and regulators have a lens into their marketplace in order to better understand the flows of demand and supply.
There will be more on this topic at the conference during the panel focused on the South Korean market at 9:45am on Wednesday.
Horner: South Korea clearly recognises the true value of a healthy securities lending environment in building wide acceptance of its place in global capital markets and essential as a component as it continued efforts to upgrade its status to a ‘developed’ market under the MSCI methodology. The foundation blocks of the securities lending market are built on sound principles, which encourage participation for all, and have aided the development of a domestic hedge fund industry.
The market has faced several tests, with short sale bans instituted during the financial crisis, but pragmatic minds have prevailed time and time again. In what is an extremely diverse region, practitioners with influence on policy from emerging markets have sought tried and tested solutions to bring lending to their shores. South Korea has proven itself as a gold standard which others seek to emulate.
What’s the one takeaway you would like non-Asia-based delegates to get from this event?
Solway: We have seen steady growth of volumes and earnings in Asia almost every year in modern times. However, 2016 was not as volatile as some previous years and so earnings saw a relative flattening to a certain extent. Despite MSCI delaying China’s inclusion in its indices last June, and some other markets still only allowing very limited domestic securities lending activities, there remains plenty of growth opportunities—even for mature markets such as Japan.
Bridging the perceived gap between onshore and offshore access and liquidity is key to deepening Asian markets. Structural harmonisation can only happen by education for all participants—regulators, lenders, exchanges, borrowers and depositories, which will assist in Asia’s constant evolution. From India to Japan, China to Australia, mature and emerging markets still have so much more to expand into.
Horner: It’s clear that the industry on a global scale suffers from various headwinds in terms of regulation, liquidity constraints and counterparty exposures, but when you look around the world, there is no doubt that Asia presents a unique opportunity for widespread growth from so many and varied sources. The way that multiple markets have so many idiosyncrasies can actually be an opportunity, not a barrier. The jewel in the crown would obviously be if one day China could develop a workable framework that permits the large offshore institutional investors to enter the lending market. If that was to come to fruition, along with acceptance into the MSCI indices, then the shift from retail to institutional bias may one day even help stabilise the underlying market and China could perhaps move into a more ‘developed’ status, presenting a colossal opportunity for all participants.
Some policymakers in Asia are still skeptical about the securities lending. Is progress still being made in informing regulators about these market tools?
Solway: When it comes to the global financial marketplace, size and experience still matter—equity markets can be volatile and sensitive to sentiment, especially in uncertain times.
Regulators have a duty to protect and uphold rules that set the parameters for a sustainable and fair investment environment. With development comes maturity and boundaries must adapt. PASLA was created for the furtherance of the securities lending industry and relies on regulators, exchanges and monetary authorities to have an active dialogue and interaction with our members, of which there are now 62. Membership is open to both international and local institutions who actively participate in securities lending.
If Asia wants to be globally recognised as having functional and efficient capital markets, PASLA offers a fantastic conduit of information sharing, building regional consensus and best practice as well as international insights that can be drawn from and shared. With more than 250 participants expected at the conference this year, what better forum is there to discuss the issues, trends, challenges and developments for securities lending across Asia?
Horner: The PASLA conference is the only sizeable annual conference in Asia that is solely dedicated to the subject of securities lending. Hundreds of people travel from around the globe to attend and discuss an array of topical subject matter, network with colleagues and strategise for the year ahead. Given the diversity of the membership and attendance of regulators, senior officials, exchanges and market participants, it is therefore a perfect environment to hear a comprehensive eclectic mix of opinions. Being sceptical of anything is perfectly understandable, but listening and debating the issues is what makes a more well informed and educated decision.