PASLA/RMA Conference – 5 March 2013
Securities Lending Tutorial
Dominick Falco, Managing Director, Bank of New York Mellon Ltd, Hong Kong, and Robert Nichols, Vice President, J.P. Morgan, Hong Kong held an informative intro to securities lending tutorial session yesterday for 60 of the PASLA/RMA 2013 Conference attendees.
Falco opened with the basics: a definition of securities lending, identifying the market participants, why they lend and the types of lenders and borrowers. He went on to discuss the key benefits such as market liquidity, risk management using hedging techniques, and covering fails to keep timely settlements. Additionally the incremental revenue derived from participating in securities lending helps pension funds, mutual funds and other types of beneficial owners enhance investment performance.
Falco and Nichols discussed the various agreements utilized globally between borrowers and agents. Additionally they listed the various components needed within these agreements necessary to execute orderly securities lending activities. An important key feature of the agreement, Nichols emphasized, was that the commercial terms cannot override regulatory issues.
The discussion turned to transaction collateral – cash vs. non-cash. The inherent risk of cash collateral is the reinvestment of that cash into short term investments that can fluctuate in value. Risk mitigation allows safe investments such as repo and other 2(a)-7 like investments. Non-cash investment doesn’t have the reinvestment risk, but must be aggressively marked-to-market appropriately to collateralize both the asset and liability sides of the loan.
The tutorial concluded with an update on the Asian market. Japan is the most liquid followed by Hong Kong. Taiwan is the market to watch in this region b/c of its dramatic increase in amount of supply in the market, and it will continue to build. This is due mostly to Taiwan’s heavy tech sector which is in high demand. It was stressed by both instructors to keep in mind, that with high demand, there will also come high fees. And fees jump quickly in Asia.
Operations and Technology Session
The PASLA Op and Technology Subcommittee engaged in a 2-part panel discussion, beginning with an update of the operational and regulatory challenges in Asian markets, including Korea, Thailand, and Taiwan. According to the update, over the past year, Korea and Thailand have seen further restrictions around short selling, whereas Taiwan has experienced an enhancement.
Also discussed were the key considerations – settlement processes, tax rules, manufactured dividends, clients sales – for entering emerging markets: Malaysia, Taiwan, and India.
The panel then defined and discussed the benefits and challenges of a CCP, Central counterparty. Benefits of operating through a CCP include:
- Improved liquidity / access to wider distribution
- Borrower and Lender negotiate the stock loan terms and rebate / anonymous trading also facilitated
- Counterparty risk reduced; need for multiple credit evaluations eliminated
- Significant reduction in capital allocated – minimizes regulatory capital requirement for borrowers
Some of the challenges faced operating a CCP include having to run a CCP in tandem with the current OTC structure; and additional costs such as new fees or mark ups.
Part two of the panel discussion focused on how technology can help improve efficiency in the Asian markets. The panel suggested that one way technology can help mitigate risk is for businesses to move more to automated systems. This would also assist with short term growth as the panel found that most lenders won’t transact unless working with an automated service.
It was agreed that appropriate technology will hugely aid the needs in keeping in compliance and monitoring the many areas that regulators want addressed. Those areas are still being defined by regulators and the businesses.
There was a lively discussion between panel and participants around regulatory requirements, specifically, trying to determine what the regulators are looking for.
The 10th Annual PASLA/RMA Conference on Asian Securities Lending begins 5 March 2013 and continues through Thursday 7 March 2013. Please check back with the RMA blog for conference updates and follow conference tweets from @rmajournal