Managing the nuances of securities finance in Asia

Securities finance in Asia is as diverse and complex as the region’s linguistic and cultural landscape. A playbook that might be useful in London, Frankfurt or New York will not necessarily work in Hong Kong or Singapore.

The potential rewards are significant, but geo-political tensions and volatile markets add to the underlying operational challenges. From Japan to Australia, India to Indonesia, China, Korea, Malaysia and the Philippines, not to mention the thriving Middle East, each investment environment is different.

Market participants must have robust operating processes to manage changeable liquidity and risk scenarios, and regulatory developments, whether local or from abroad.

The potential of securities finance in Asia, home to the world’s second and fourth-biggest economies, should not be underestimated.

Although APAC repo continues to account for a relatively small share of the global market, according to a recent ICMA/ASIFMA survey, there are signs it is maturing. European repo markets are net borrowers of APAC-issued collateral, particularly Japanese government bonds, volume between counterparties based in the region is growing, and electronic trading is on the rise.

Markets there are evolving quickly, with a rich sea of emerging opportunities waiting to be tapped by those who navigate the complexity. This requires firms to think holistically about how they operate and to invest in technology to do business effectively across jurisdictions and time zones.

No hiding from shorter settlement

Asia is less harmonized from a regulatory perspective than the US and Europe, which brings its own complexities in trading and operating there. But the big event this year will be the inescapable impact of T+1. On 28 May, settlement of trades in US securities must be done within one business day instead of two now.

Due to time-zone differences, adjustments and risks in Asia will be greater. This is especially true for foreign currency exposure, as firms executing trades in US securities will only have hours instead of days to ensure sufficient funds to settle. Moving from the current T+2 settlement period could generate inefficiencies regarding firms holding cash balances in different currencies.

In a more time-pressurized scenario, friction in post-trade processes could also prove costly through more time-consuming monitoring of trade exceptions and failures. Leaders agree that modernizing, streamlining and harmonizing internal functions to remove potential bottlenecks in the lifecycle of a trade is critical as more markets head towards T+1 and even same-day settlement. India, which switched to T+1 last year, has already notified its intention of moving to T+0.

T+1 is just one layer of complexity that market participants must contend with in cross-border trading. Requirements from other jurisdictions, such as the EU’s 2022 Central Securities Depository Regulation (CSDR), stipulating that capital markets firms adopt solutions to encourage straight-through processing (STP), add to the strains for firms still relying on manual processes.

This was made clear in a 2021 survey by the DTCC that listed the manual monitoring of settlement exceptions as one of the most significant pain points for firms operating in the Asia Pacific region. The US and China were singled out as markets that might generate settlement risk from trade exceptions. The situation is no more straightforward in 2024.

The regional intricacies of securities lending and collateral

International regulatory developments aside, a significant issue in the region is securities lending, especially with regard to China. Demand for exposure to the market is high, but there’s an obstacle — the inability to operate securities lending onshore. Market participants gain exposure via other economies, including Hong Kong, according to Northern Trust.

The development of the Shanghai-Hong Kong Stock Connect scheme in 2014 was symbolic as it gave offshore investors access to China A-shares, enabling them to be used as collateral in global securities finance transactions. However, the securities lending model remains primarily domestic, as foreign banks’ access is still limited.

Onshore lending obstacles exist in other large emerging economies, notably Indonesia and the Philippines. Demand for securities lending in both is healthy, said  Adnan Hussain, head of agency lending & liquidity services, markets & securities services at HSBC.

The start of offshore lending capability in Indonesia could persuade other markets to take the same step. The Philippines has moved to permit overseas securities as collateral for onshore transactions. Simon Lee, managing director and head of business development EMEA & APAC at eSecLending, stressed that in Indonesia it remains a bilateral product, with most offshore market participants excluded.

More broadly, the relationship between securities lending and collateral management in Asia is shaped by market dynamics, with customers demanding more STP and automation, often at an international level, according to BNP Paribas. According to Natalia Floate, head of markets & financing services in APAC, clients want data fast. Using a triparty agent has been increasing in the region, and global infrastructure is critical for custodian banks to provide a 24-hour service.

In short, the desire to automate is strong throughout the region, as is the demand for increased transparency and efficiency.

Invest now, save later

While regulatory and market developments place firms under pressure to ensure they remain aligned with global markets, especially as T+1 in the US approaches, there is also an opportunity to think longer-term about how to operate in faster, more integrated markets.

Digital technology has already addressed many issues, such as data inaccuracy, latency and settlement failures, but incremental adjustments might not suffice any more as markets evolve, expand and diversify. Firms looking to maximize their assets are often hampered by the lack of a central, consolidated inventory view due to internal silos.

Investment in middle- and back-office operations has not been a top priority for many firms, so now might be the opportune moment to take a strategic, enterprise-level approach. A zero-touch process, from trade execution to settlement, could help reduce costs and future-proof against evolving regulatory obligations.

It doesn’t come cheap, and with time running out to build a new operating framework, firms might want to consider alternatives. Using third-party providers with cloud-based and plug-in solutions that can be up and running in weeks might be the best option.