SBL 

The Australian SBL market is dominated by domestic participants. A substantial onshore superannuation business provides ample supply. Most superannuation funds are large buyers of equities. Trading is mainly bilateral through cash collateral. 

In terms of market access, Australia is not that different from any other international market. However, there is a quirk in that Australian lenders have the ability to claim a franking or imputation credit. 

“Essentially, the tax an Australian company pays can be claimed by the beneficiary of the dividend. 

While they maintain a tax advantage, this mechanism negatively affects domestic lenders,” says Stewart Cowan, executive director, securities lending Asia Pacific at JPMorgan. “If a borrower has a choice between a foreign lender and a domestic lender they will choose a foreign lender because they won’t have to manufacture a franking credit back to the foreign lender.” 

Basel III and balance sheet considerations are currently driving demand, creating trends such as boosting appetite for fixed income and evergreen borrowing structures. 

Meanwhile, the search for value in a low interest rate environment is driving supply, with many funds looking at lending to boost returns and offset some expenses. JPMorgan aren’t seeing a lot of movement with clients and over the next year expect more funds to join and increase supply in the market. 

Collateral flexibility is an ongoing issue. Each bank and broker-dealer has nuanced rules about what collateral they accept or offer, dependent on internal balance sheet considerations. 

“What’s key for us is to be flexible enough to accommodate broker-dealer requirements,” says Cowen. “We have to weigh up our balance sheet costs and those of the broker-dealers. However, we have started accepting corporate bonds and we already accept a range of equities as well as government bonds and cash.” 

Even with increasing collateral flexibility, many borrowers are still opting for high quality collateral. Driven by balance sheet considerations, many borrowers still choose to put up cash as it is the most cost-effective form of collateral. 

During the 2008 financial crisis the Australian Securities and Investments Commission (ASIC) enforced a short selling ban, which was replaced with a ban on only uncovered short selling and a reporting regime. These changes have since become more standard internationally and the regulatory framework in Australia has been stable. 

“The regulators have put the right measures in place and I think that the securities lending markets in Australia are working well,” adds Cowan. 

Synthetics 

Australia has traditionally been characterised as an equity repo market but, since regulations following the financial crisis, total return swaps have been becoming increasingly popular as an alternative. This is because they don’t create the same strain as equity repo on balance sheets. 

The trend has been led by the offshore market but now increasingly locals banks are offering synthetic services. Offshore collateral stock is again at an advantage because of rules regarding franking credits. 

Australia’s regulation has been in line with the global standard although Australian Prudential Regulation Authority rules make it difficult for local banks to compete on sub-three month funding, according to an industry expert. However, this only presents minimal issues as most counterparties prefer term funding. 

The Australian legislation to implement G20 reforms commenced in 2013. As a result, the over the counter (OTC) derivatives market in Australia has experienced a pronounced shift towards centralised clearing. ASIC also introduced transaction reporting rules which dictate that derivatives transactions and positions need to be reported to a repository. 

However, the regulators have not yet recommended a mandatory platform trading obligation for derivatives. In April 2014, the Council of Financial Regulators (CFR) released a report on the Australian over-the-counter (OTC) derivatives market; it indicated that it would like an international consensus to emerge across other jurisdictions regarding the characteristics of platforms to trade derivatives. Among other considerations, the report noted that liquidity in the Australian OTC derivatives market is still not high for many asset classes. 

Repo 

Australia is a major repo centre in the Asia Pacific region, with gross outstanding positions in market totalling more than $110bn. 

The size of the Australian repo market has increased by more than 40% since 2013, according to the Reserve Bank of Australia, primarily due to larger positions held by the central bank and by foreign institutions acting as cash providers in the Australian market. Most repos are contracted for terms of fewer than 14 days. 

Around 85% of repo is contracted against tier one general collateral, with most of the remaining repo against tier two collateral. Tier two collateral includes debt issued by authorised deposittaking institutions, asset-backed securities and supranational, foreign agency and governmentguaranteed debt, as well as other triple-A securities. 

The domestic repo market is fuelled by large domestic and international banks that are market makers in domestic government securities, as well as some smaller institutional non-dealer participants and the Reserve Bank of Australia. As of November 2014, repos with the central bank accounted for around 35% of outstanding market positions, according to its figures. 

The Australian Securities Exchange is planning to transition to a T+2 settlement cycle for cash equities in March 2016. This will align the market with other markets including Europe and Hong Kong, as well as creating capital and margin savings for industry and faster settlement of transactions. It also aims to lower systemic risk by reducing counterparty risk for market participants.