Securities Lending in Asia Appears to Be Picking Up Steam

The near meltdown of our global financial infrastructure in 2007 and 2008 sent risk managers across the planet scurrying back to the drawing boards. Their task was to conceive new strategies that would lock down the apparent risks for any heretofore activity that either lacked sufficient oversight. Questions have come rapidly from various audit committees with internal risk mitigation the driving force at the board level. As the old management adage warns, “You can’t manage what you don’t measure.”

In the process of this research, new rules and controls have evolved, prior to any new government regulations seeing the light of day. In this environment, growth may be halted in deference to discretion until the activity gets an approval from on high to start pushing forward. One such activity within banking that has not escaped the wary eye of risk auditors is the practice of security lending. For those with experience, this activity is not an independent growth industry. It primarily facilitates other transactions to take place and provides another income stream that can be shared by business partners.

Concerns arise due to collateral values that are at risk and if the income and risk are shared disproportionately between the parties to the transaction. Increased liquidity and additional fee income are the benefits, but caution has been the watchword until a general understanding of the risks involved was achieved, at least by more than the arcane few that deal in these transactions on a daily basis. Many have withdrawn from the market as a consequence of these reviews, but there have been exceptions.

In Asia, typically more cautious by cultural standards, there has been a rebirth of sorts of security lending practices. The losses that were sustained from de-leveraging collateralized debt instruments did not wreak as much havoc in the Orient. Australia, however, was the exception to the rule. Market values did tumble, and many large players in the market chose to reduce their ongoing exposure related to lending securities, but there even appears to be positive movement in this country as well.

Generally traded on an over-the-counter market where statistics are not easy to obtain, security-lending agents have reported an up-tick of 25% or more over the past year. At a recent trade conference in Singapore, the general consensus of 80% of those polled on the subject was that revenues in this area would surely grow, but unevenly by market. Since the activity is a low-margin/high-volume business model, only the very largest global banks can participate, but agents and their clients can also capitalize.

Taiwan is expected to lead in this arena, with Hong Kong a close second. India is presently on the sidelines in research mode, while Japan is still in a cautionary and less positive state. Major banks like HSBC, Barclays, and J.P. Morgan are the players, with new entrants opening offices to serve agents and clients. Data Explorers, the leading global provider of securities financing data and daily long and short institutional fund flow insight, opened its new office in Hong Kong in October of last year.

Jules Pittam, a managing director with Data Explorers, said, “Asia stands out as a region where the income from securities lending is gently rising. We have long term relationships with clients across Asia and Japan who use our daily global content to support their investment decisions and manage risk. The number of firms setting up offices in the region is increasing, due in large part to the belief that it is leading the global economic recovery.”

Once again, Asia is leading the way.

Editorial Contribution By Tom Cleveland
Business Consultant and Analyst for Forex Traders

Securities Lending in Asia Appears to Be Picking Up Steam
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