India
07 August 2018
Over the last year, India鈥檚 securities lending model has continued to grow. With plans to introduce tri-party repo and showing signs of achieving derivatives success, what else can it brag about on its securities lending CV?
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Key skills
Few emerging markets promise what India can, but different elements of its securities lending structure are like a squeaking door and need their hinges tightening. This is particularly true where it concerns Indian hedge fund growth, or lack thereof, especially in the last 12 months. But overall, India鈥檚 securities lending market is still showing signs of ongoing expansion.
Fairly new in its creation, an emerging market, the country has become a heavy anchor within Asia鈥檚 market since its National Stock Exchange started operating in 1994 and its framework for securities lending was first specified in 2008 by the 网爆吃瓜 and Exchange Board of India.
The majority of securities lending in India takes place through the National Stock Exchange (NSE). The Organisation National 网爆吃瓜 Clearing Corporation Limited, a wholly-owned subsidiary of NSE, carries out clearing and settlement of the trades executed in the equities and derivatives segments of the NSE.
As it stands, securities lending participants can conduct trades for terms of up to 12 months, with early recalls embedded in. A rollover facility of three months exists, and transactions are charged at a rate of 2.5 percent, payable to the NSE, on each lend, borrow and rollover.
Strengths
Asia's significant growth profile is unlikely to change anytime soon, according to a source from PASLA, speaking at the 15th Annual Pan Asian 网爆吃瓜 Lending Association (PASLA) conference.
India was named one of the emerging markets, which presents 鈥渟ignificant opportunity鈥� for industry participants in the long term.
They explained that from a beneficial owners perspective, the industry is seeing increased engagement in many institutions, who recognise the benefits of a securities lending programme.
In addition, The 网爆吃瓜 and Exchange Board of India (SEBI) has altered its securities lending rulebook, following market calls for change.
As of 1 January 2018, position limits of borrowed shares have been capped at 10 percent of the free float capital of the company in terms of the number of shares. The rule change effects both institutional investors and clearing members.
Room for improvement
In July 2017, India-focused funds continued to lead in returns, putting up 4.96 percent in July which brought year-to-date returns to 24.90 percent.
After leading returns for hedge funds last year, India-focused hedge funds are having a tougher time this year with performance, as eVestment, a data firm covering analytics for institutions managers indicates.
Last year, hedge funds were on track for their best annual revenue since 2013 with average returns of 7.7 percent.
But eVestment found that for June, in terms of emerging markets, India overtook Brazil for volumes of losses this year, at a loss of 12.3 percent.
Peter Laurelli, global head of research at eVestment said: 鈥淲e track about a total of 71 products that invest in India primarily. About 25 of those have reported their returns for June. The universe itself has been鈥攑rior to this year鈥攐ne of the better performing emerging market groups, if not the best next to China since 2013.鈥�
鈥淭his has been a stellar year for India, which is somewhat surprising given the results year-to-date.鈥�
Laurelli added: 鈥淲hat is interesting is, for the first quarter [India鈥檚] performance was in line with what was going on with the start of the year with the clients, but since then, in the second quarter, it looks like things have changed significantly. This group of product has produced almost equally negative returns than they did in the first quarter of the year.鈥�
In addition, late last year, IHS Markit has found that economic activity in India was hampered by the double shock of demonetisation and the introduction of the goods and services tax. Could this be the reason why 2018 has seen ups and down?
In light of the uncertainties added to the markets and the lingering effects on economic growth, IHS Markit reviewed its Research Signals India model.
IHS Markit found from July 2018 the average India equity returned 1.06 percent monthly on average, with the stocks in the top quintile (longs) returning 1.75 percent and the bottom quintile (shorts) returning 0.23 percent on average.
Let鈥檚 talk equities and repo
In a discussion paper, released late last year, SEBI acknowledged the need for growth and development of equity derivative market in India, focusing on issues surrounding physical settlement in stock derivatives.
In the paper, SEBI stated: 鈥淎 prerequisite for successful introduction of physical settlement of derivatives is efficient and transparent lending and borrowing mechanism in cash segment.鈥�
The board added that a 鈥渧ibrant mechanism鈥� for securities lending and borrowing is essential to avoid a short squeeze in the India鈥檚 financial markets. SEBI also outlined its intentions to phase in physical settlement in stock derivative contracts with single stock contracts.
The Reserve Bank of India has also set out a framework for a tri party repo market to enable participants to use underlying collateral more efficiently and facilitate the development of the term 鈥榬epo market in India鈥�.
IT skills
NSE was the first exchange in India to implement electronic or screen-based trading.
Recently, the NSE officially signed an agreement for Nasdaq to deliver a customised real-time clearing, risk management and settlement technology to one of the world鈥檚 largest stock exchanges.
In addition to the post-trade agreement, Nasdaq has also signed an agreement with NSEIT to utilise NSEIT鈥檚 capability in implementations and project augmentation globally.
According to NSE, the technology will provide a state-of-the-art architecture utilising the Nasdaq Financial Framework, which will enable all asset classes to be cleared and settled in one system.
These changes will increase efficiency, effectiveness of the market, supported by a modern, flexible and efficient technology that reduces risks in the post-trade area alongside international best practices and standards.
Future prospects
A further source from PASLA sees foreign participation as a
key concern. Adding 锟絀t锟絪 expensive for foreign borrowers in India. I can understand concerns around opening up the market to foreign institutions.锟�
鈥淚ndia has the potential to be a significant market. It鈥檚 probably second only to China in Asia in terms of opportunity. We anticipate in due course changes will materialise to move towards what we see in more developed capital markets.鈥�
Few emerging markets promise what India can, but different elements of its securities lending structure are like a squeaking door and need their hinges tightening. This is particularly true where it concerns Indian hedge fund growth, or lack thereof, especially in the last 12 months. But overall, India鈥檚 securities lending market is still showing signs of ongoing expansion.
Fairly new in its creation, an emerging market, the country has become a heavy anchor within Asia鈥檚 market since its National Stock Exchange started operating in 1994 and its framework for securities lending was first specified in 2008 by the 网爆吃瓜 and Exchange Board of India.
The majority of securities lending in India takes place through the National Stock Exchange (NSE). The Organisation National 网爆吃瓜 Clearing Corporation Limited, a wholly-owned subsidiary of NSE, carries out clearing and settlement of the trades executed in the equities and derivatives segments of the NSE.
As it stands, securities lending participants can conduct trades for terms of up to 12 months, with early recalls embedded in. A rollover facility of three months exists, and transactions are charged at a rate of 2.5 percent, payable to the NSE, on each lend, borrow and rollover.
Strengths
Asia's significant growth profile is unlikely to change anytime soon, according to a source from PASLA, speaking at the 15th Annual Pan Asian 网爆吃瓜 Lending Association (PASLA) conference.
India was named one of the emerging markets, which presents 鈥渟ignificant opportunity鈥� for industry participants in the long term.
They explained that from a beneficial owners perspective, the industry is seeing increased engagement in many institutions, who recognise the benefits of a securities lending programme.
In addition, The 网爆吃瓜 and Exchange Board of India (SEBI) has altered its securities lending rulebook, following market calls for change.
As of 1 January 2018, position limits of borrowed shares have been capped at 10 percent of the free float capital of the company in terms of the number of shares. The rule change effects both institutional investors and clearing members.
Room for improvement
In July 2017, India-focused funds continued to lead in returns, putting up 4.96 percent in July which brought year-to-date returns to 24.90 percent.
After leading returns for hedge funds last year, India-focused hedge funds are having a tougher time this year with performance, as eVestment, a data firm covering analytics for institutions managers indicates.
Last year, hedge funds were on track for their best annual revenue since 2013 with average returns of 7.7 percent.
But eVestment found that for June, in terms of emerging markets, India overtook Brazil for volumes of losses this year, at a loss of 12.3 percent.
Peter Laurelli, global head of research at eVestment said: 鈥淲e track about a total of 71 products that invest in India primarily. About 25 of those have reported their returns for June. The universe itself has been鈥攑rior to this year鈥攐ne of the better performing emerging market groups, if not the best next to China since 2013.鈥�
鈥淭his has been a stellar year for India, which is somewhat surprising given the results year-to-date.鈥�
Laurelli added: 鈥淲hat is interesting is, for the first quarter [India鈥檚] performance was in line with what was going on with the start of the year with the clients, but since then, in the second quarter, it looks like things have changed significantly. This group of product has produced almost equally negative returns than they did in the first quarter of the year.鈥�
In addition, late last year, IHS Markit has found that economic activity in India was hampered by the double shock of demonetisation and the introduction of the goods and services tax. Could this be the reason why 2018 has seen ups and down?
In light of the uncertainties added to the markets and the lingering effects on economic growth, IHS Markit reviewed its Research Signals India model.
IHS Markit found from July 2018 the average India equity returned 1.06 percent monthly on average, with the stocks in the top quintile (longs) returning 1.75 percent and the bottom quintile (shorts) returning 0.23 percent on average.
Let鈥檚 talk equities and repo
In a discussion paper, released late last year, SEBI acknowledged the need for growth and development of equity derivative market in India, focusing on issues surrounding physical settlement in stock derivatives.
In the paper, SEBI stated: 鈥淎 prerequisite for successful introduction of physical settlement of derivatives is efficient and transparent lending and borrowing mechanism in cash segment.鈥�
The board added that a 鈥渧ibrant mechanism鈥� for securities lending and borrowing is essential to avoid a short squeeze in the India鈥檚 financial markets. SEBI also outlined its intentions to phase in physical settlement in stock derivative contracts with single stock contracts.
The Reserve Bank of India has also set out a framework for a tri party repo market to enable participants to use underlying collateral more efficiently and facilitate the development of the term 鈥榬epo market in India鈥�.
IT skills
NSE was the first exchange in India to implement electronic or screen-based trading.
Recently, the NSE officially signed an agreement for Nasdaq to deliver a customised real-time clearing, risk management and settlement technology to one of the world鈥檚 largest stock exchanges.
In addition to the post-trade agreement, Nasdaq has also signed an agreement with NSEIT to utilise NSEIT鈥檚 capability in implementations and project augmentation globally.
According to NSE, the technology will provide a state-of-the-art architecture utilising the Nasdaq Financial Framework, which will enable all asset classes to be cleared and settled in one system.
These changes will increase efficiency, effectiveness of the market, supported by a modern, flexible and efficient technology that reduces risks in the post-trade area alongside international best practices and standards.
Future prospects
A further source from PASLA sees foreign participation as a
key concern. Adding 锟絀t锟絪 expensive for foreign borrowers in India. I can understand concerns around opening up the market to foreign institutions.锟�
鈥淚ndia has the potential to be a significant market. It鈥檚 probably second only to China in Asia in terms of opportunity. We anticipate in due course changes will materialise to move towards what we see in more developed capital markets.鈥�
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