The various stages of securities borrowing and lending (SBL) development within Asia Pacific makes maintaining regulatory preparedness a trickier proposition than in other regions. In the past, sustained bouts of market turbulence have caused certain regulators to suddenly tighten the screws on SBL activity, at least on a short-term basis. 

Beneficial owners seeking plausible opportunities in the region are far more likely to be drawn to markets with a relatively consistent regulatory history. The enactment of short-sale bans, however brief, could cause some investors to look elsewhere while a clear, even-handed approach to oversight increases investor confidence. 

Regulators in the region certainly understand the link between regulatory steadiness and a more robust market infrastructure and have remained steadfast in their efforts to promote innovation. The high-profile arrival of Shanghai-Hong Kong Stock Connect is just one of many major initiatives to emerge. 

But with Asia Pacific equities once again under pressure due to ongoing economic uncertainty, could market development be curtailed and further SBL restrictions appear?

Regulation that specifically targets securities lending has been more prevalent in Asia than the US and EU. These include the need for a central clearing agent in some markets as well as greater transparency around reporting, which has often lead to increased transactional costs. 

While the overall outlook remains positive from a fundamentals standpoint, the likelihood of continued regulatory intervention, from renewed short-selling restrictions to increased focus on capital controls, could weigh on lending activity. 

The long view 

Rob Lees spent more than five years in Hong Kong with Brown Brothers Harriman (BBH), before taking a global role in 2014. He moved out from Boston shortly after the most severe period of the financial crisis and experienced must of the regulatory reaction first hand. He is now the global co-head of securities lending trading and co-head of securities lending EMEA. 

Some things have remained constant over the years for securities finance in Asia Pacific, notes Lees: “We’re still looking at a very heterogeneous region with multiple regulators and markets in varying stages of development.” 

The tentative approach to setting a regulatory agenda remains one of the key characteristics of Asia’s securities lending business, with regional heads often looking to the West to gauge the effectiveness of certain mandates, then responding accordingly.

“Some have been offering securities lending for quite some time, including both domestic and offshore services, whereas for other regions SBL is still in the nascent phase,” says Lees. “Regardless, we maintain the view that the Asia Pacific region is strategically important for our clients, as it has historically generated high-margin revenues and continues to do so on a year-over-year basis.” 

Targeted resources 

BBH continues to deploy significant resources on behalf of its Asia Pacific lending team in an effort to capitalise on the perceived upward momentum. “The disparate nature of lending development in the region requires a far more nuanced and sophisticated approach, not only with regard to trading but also the different regulatory mandates from one area to the next,” says Lees. 

Despite efforts to combat turbulence through trading safeguards, at the same time Asian regulators have also sought to engage more collaboratively with market participants in an effort to bring about workable, longer-term solutions. This was evident in the wake of China’s sustained downdraft last summer. 

“We’ve seen the Chinese regulators take a Goldilocks approach to maintaining order within the lending space – not too hot, yet not too cold either,” says Lees. “Consider that China and India remain the main drivers of global trading, accounting for more than a third of all equities transactions, yet both are still in the early days of developing an institutional framework. I believe that is key to understanding the regulatory activity that has taken place of late.” 

Patience required 

The regulatory seesaw in markets such as Taiwan and South Korea requires that lenders and their agents remain patient. 

For example, barely a year after imposing a series of trading quotas, in February Taiwanese regulators did an about-face, announcing unlimited day trading of nearly all securities used for margining and short selling in an effort to boost trade activity as well as give investors the ability to hedge. The rule change also green lights the use of borrowed securities as collateral to cover trading shortfalls, part of a broader effort to expand permissible securities lending assets. 

Though seemingly counterintuitive at first glance, those in the know consider such opposing positions as just part of the journey. “When looking at regulatory development in the region, it’s important for investors to remember that it is transitionary, and that the reality is we’re seeing more and more markets gradually maturing and developing their domestic and international frameworks along the way,” says Lees. 

Nor is the phenomenon exclusive to Asia. In the past, inflationary concerns over accelerated foreign fund inflows into Latin America, for instance, led to sudden and dramatic jumps in Brazil’s Tax on Financial Operations (IOF) – including a tripling of the rate from 2% to 6% over a two-week period at one point – before the tariff was ultimately dropped completely. 

Even the US has had its share of short-term regulatory tinkering during times of pronounced stress, such as the SEC’s three-month shorting ban following the Lehman collapse in late ‘08. “In that case you had Christopher Cox ultimately acknowledging that the cost of the shorting ban outweighed the benefits,” observes Lees. 

Growing pains 

By and large, though, this jagged pathway is very much a regular part of the emerging market experience, says Lees. “As an investor, I think you need to build into your expectations the notion that regulators are going to take these different types of positions as part of their longer-term development process, perhaps replicating the successful strategies of more mature markets along the way.” 

Lees points to the development of the Shanghai-Hong Kong Stock Connect, which, as Asia’s first major cross-border trade initiative, allows Shanghai and Hong Kong investors to execute trades using their respective regional brokerages. “Though it may take some time to become fully optimised from an international standpoint – perhaps five years or maybe longer – we nonetheless believe that this kind of innovation represents a phenomenal opportunity for clients,” says Lees. 

“The rate of growth that we’ve seen in the last three years alone has been quite incredible. This is why we have chosen to remain invested in this part of the world, because we want to ensure that our clients can take part in these new opportunities as they unfold. To date it’s been an incredible growth story for our programme, not just around lending but from a firm-wide perspective as well.” 

China’s regulatory efforts have generally been well received by the offshore community, and, given the rapid rate of change within the FX and overseas capital markets in recent times, such fluidity should not come as a surprise to participants. 

“Along this path to maturity it is perfectly reasonable to expect frequent pauses, if you will, that allow regulators to take stock and perhaps impose restrictions as they see fit,” says Lees. Though some of these moves may in fact exacerbate downdrafts or have other unintended consequences, it’s all part of the learning process, he adds. 

“With respect to the Asian markets, I think we have to try and take the long view, which can be a bit more difficult given that the market dynamics are relatively new and therefore make it easier to resort to Monday-morning quarterbacking. 

Yes, there may be some froth and subsequent corrections along the way –but the reality is that those charged with overseeing the markets have successfully worked through the problems in a timely and thoughtful manner. Have there been bumps along the way? Certainly – but on balance the track record has been quite solid.”