BNY Mellon
Paul Solway
09 April 2019
While the Asian markets are still seen as emerging marketplaces, Paul Solway of BNY Mellon explains the market in Asia will continue to grow with nine securities lending markets and a further two with potential
Image: Shutterstock
Asian equity owners have enjoyed revenue growth over the past few years. What has contributed to this growth and do you see this trend continuing?
Asian markets are still seen as emerging marketplaces that continue to bring new stories both in terms of corporate and economic activity. This helps to provide traders with a plethora of long-short opportunities.
Japan and Hong Kong are still at the core of volumes and activity, given the former’s size and breadth domestically and the latter’s liquidity and access to corporate activity related to China.
Five out of the 10 top-earning stocks in Asia last year were from Japan. The country is also the number one revenue earner with huge volumes. South Korea is third and, despite lower on-loan volumes, spreads of more than 300 basis points make up for that.
Going forward, the market in Asia will continue to grow. There are now nine securities lending markets with a further two markets potentially opening up as well, with the Philippines recently adding new short-sell rules and Indonesia looking at potential models.
However, there are risks. While Asian markets are often seen as engines of global demand, impacts can be felt even if one company’s performance is down. For example, Taiwan felt Apple’s lower Q4 results which no doubt impacted supply chains.
How is technology influencing Asia?
Unlike other geographies, Asia still remains behind the curve in terms of technological advancement. Despite that, it is only logical that this gap will narrow in time as more institutions connect to new systems and improvements that have been made in other markets, like the US.
The make-up of the market also makes it harder for technology to develop in Asia given its disconnectedness, with traders in different markets having a diverse set of customs. This takes additional time and money for standardised systems to develop.
However, I expect there to be huge technological gains in Asia this year given that investment is now starting to flow into the market in this region.
Technological improvements won’t just help traders focus on higher value items like specials or more complex trades, but they also enable back and middle office advancements that are critical in order for the rest of the trade lifecycle to function efficiently. Without this, post-trade issues become inevitable.
As markets in the region evolve, various corporate events affected demand in the Hong Kong market. To what extent has this impacted the Asian market as a whole?
Hong Kong will always be hugely relevant to Asia given it is viewed as the easiest route to China, with topical sectors including property, heavy industry, transport and financials.
Last year was also a banner year for Hong Kong in an initial public offering (IPO). Companies such as Xiaomi, Meituan Dianping and China Tower listed and were responsible for 20 percent of the top 10 earners in Hong Kong.
What challenges do you see on the horizon for the securities finance industry in Asia 2019?
In Singapore, the Singapore Exchange (SGX) moved its settlement cycle from T+3 to T+2, creating some operational difficulties for the local market as a result of early settlement regulations which make it hard for institutions to move securities to the right place on time. This has meant some providers of lending liquidity have reduced or stopped their lending activity.
Can you name a market driver in Asia that industry players must be aware of for 2019 and any other key trend we should pick up on?
Like other markets, technology is going to be a big driver for Asia given its lack of standardisation—this will be relevant for both the trading floor and the operational side of the business, which both need to develop symbiotically in order to get the most out of those developments.
Additionally, traders have a plethora of short-selling rules to consider across each market, so using technology as an enabler to navigate quotas and other exchange limiters will certainly be of benefit to the high-frequency or quant traders.
In 2019, from a market perspective, Japan will continue to be the main focus of participants as it pulls out of low growth rates. We have already seen a good uptick in activity this year in corporate activity—such as Takeda Pharm/Shire deal and the SoftBank IPO at the end of last year. Technology will, of course, continue to be a key trend as it drives further efficiency in securities lending. It will help solve the issue of how to run this business better, faster, cheaper and safer.
← Previous interview
OpenGamma
Peter Rippon
