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Securities borrowing and lending in the wild, wild East
In the last decade, the securities borrowing and lending (SBL) markets in the Asia-Pacific/Japan (APJ) region have undergone steady growth, unlike most other regions during that same time period. But where has that growth come from and, more importantly, will it continue, asks Richard Allin, senior vice-president, APAC, at SunGard’s Astec Analytics business
Richard Allin 6 Aug 2014
 
   

In the last decade, the securities borrowing and lending (SBL) markets in the Asia-Pacific/Japan (APJ) region have undergone steady growth, unlike most other regions during that same time period. But where has that growth come from and, more importantly, will it continue?

 

Reasons to get involved

 

Why are stakeholders in the SBL industry devoting more time and resources to Asia? Simply put, their clients want to be able to lend out the securities they hold in these regions, and lenders want to keep their clients happy.

 

Lending agents also like to be seen as forward thinking, truly global and different from their competitors. Naturally, lending cannot take place in a vacuum; it requires demand, and brokers see the potential demand and want the opportunity to offer these securities to the hedge funds in the region and beyond.

 

The revenue opportunities that exist are a big driver for firms as one would expect, and the history of securities lending over the last 25 years has shown that the greatest profits are realized by those that are first to market. So those that are looking to get involved want to be one of the first to start reaping the rewards. This is especially important since these rewards decline towards mature market levels at an increasing rate.

 

Profitability

 

There are many more "high-end" specials in Asia compared to the rest of the world and somewhat surprisingly, those specials are not just comprised of equities, but fixed income securities as well. The mix of equities versus fixed income is considerably higher than in Europe and North America, which may also help account for the higher average fees we see in the region. This region, more than any other, is one of an intrinsic value-based system of securities lending.

 

Borrowing cost

 

Australia and Japan remain two of the largest markets in the region. However, most would agree they are not the most interesting to the participants therein, as they are often the most transparent in terms of what's going on in the SBL market and usually don't have a large number of 'specials' occurring at any one time.

 

It's no surprise then that the average borrow rates in the emerging SBL markets are often much higher than those in the more established markets, with some as high as 4% on an annualized basis. That is in comparison to the market average rates of below 1% in many of the more established markets in the region. Malaysia, Taiwan and South Korea have some of the highest average borrowing costs in the region, which means that these smaller emerging markets have some of the highest income potential for the participants that choose to get involved.

 

Barriers to entry

 

We have seen new markets enter the mix and fully expect others to continue this trend, but at what pace have they entered the market and what are the barriers to entry?

 

While it's easy to look at the newer markets that are experiencing rapid growth and think, "Wow, that was quick," it actually wasn't. It took a considerable amount of time and a lot of effort to get them off the ground and achieve that growth. Even then, it's only after several years that the growth has really been noticeable.

 

One of the main reasons time-to-market is so long is that these emerging markets and their regulatory bodies realize the consequences of getting it right the first time, and they are increasingly taking their time and doing their homework. They want to establish the 'right' models before moving forward. One thing in their favour is that they have the opportunity to learn from those that have gone before them. They can pick and choose the way they want to develop their SBL programme, avoiding the pitfalls that the others might have experienced. On the other hand, they have to remember that while they want their SBL markets to be safe, they don't want to make the barriers to entry too onerous or costly.

 

Challenges

 

While firms continue to be open to exploring most, if not all, of the new markets, they remain very cautious. They have many regulatory hurdles to clear in order to participate in each market, which can take a considerable amount of time, effort and cost. As a result, they must seriously consider their options before jumping in. Additionally, they need to show that there is demand and that it will be profitable to enter any said market.

 

There is a host of additional challenges for these participants, starting with the geographical and political diversity of the markets in the region. It is an increasingly complex region in which to do business, and the rules seem to be changing on an almost daily basis. Participants must continually keep up with the latest news in each of these regions.

 

Firms also have to deal with multiple regulatory bodies, the reputation of securities lending, central counterparties, onshore bans, and differing collateral and booking and tax requirements. They also have to understand the differences of the onshore and offshore approaches to the business and weigh the risk associated with getting involved in these markets to make sure it makes sense for their firms.

 

The securities borrowing and lending markets of APJ are like the 'wild, wild East,' where the risks are high - but so are the rewards. There is growth potential and large profit margins, but the barriers to entry can be rigorous and fraught with danger. However, firms that manage to get it right, however timely or costly it may be, could be well rewarded.

 

Richard Allin is senior vice-president, APAC, at SunGard's Astec Analytics business

 

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