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Country Profile: Hong Kong's securities finance market

15 March 2017

Besides China-based ETFs, which are in high demand, there are still isolated pockets of high fees and not enough supply

 While investors can almost get near full access to the Chinese markets, the two Connects are not being utilised for stock lending for several reasons including issues around title transfer and the CNY repo market. It all adds up to not being commercially viable.

 The reconciliation of these issues is under consideration by the Chinese authorities but is not thought to be a top priority. Says Ioussoupov: "I would say the key regulatory factor is now the development of China – the Shanghai and Shenzhen Connects and the all new bond channel. Beyond that the next step is of course the opening of derivatives."

 By contrast, the Hong Kong regulator is widely considered to be supportive of securities lending. "HKMA is a very pragmatic body – it always consults on the impact on market participants," says Ioussoupov.

  Tri-party collateral management

  "Hong Kong collateral continues to be easily accessible to source and a popular choice of asset to hold for many financing and stock lending traders," says Natalie Wallder, head of collateral management & segregation, Asia Pacific, BNY Mellon.

"China continues to increase in importance as the market explores new infrastructure to connect to China. BNY Mellon already supports offshore renminbi tri-party repo transactions and offshore renminbi collateral assets in tri-party, both settling through Hong Kong. It is certainly exciting times ahead, with room for more innovative ways to help support this market evolution including facilitating tri-party access to Connect, which is an area where we are currently supporting within our asset servicing solutions."

Davin Cheung, global funding and financing sales, APAC, Clearstream Banking, says: "We are seeing quite a number of major Chinese investment banks setting up repo and securities finance desks in Hong Kong. They are looking at tri-party, because they are holding quite large portfolios of paper that they are looking to finance as a basket."

ICBC Standard Bank: Expert eye on repo

Hong Kong is the traditional hub for the repo market in Northern Asia. Like Singapore to the south, it is home to a number of banks and many professionals operating in a varied financing market. Business conducted in Hong Kong does not often involve securities denominated in HK dollar (HKD) and is incredibly varied in terms of collateral, currency and tenor. Typically, as a percentage of overall volume, there are more structured transactions conducted in Hong Kong than in any other major centres in Asia. 

The international banks tend to have local Hong Kong teams in place to ensure thorough regional coverage, but trade using their main balance sheet either domiciled in Europe or the US.

Simon Clairet, who co-ordinates ICBC Standard Bank’s regional operations from the Hong Kong office, says: "Hong Kong is a busy financing market. Together with a good deal of interest in structuring longer-term financing trades there is very regular flow financing business, which provides the collateral to deliver returns to a number of our tri-party accounts domiciled in Europe." The market is mature and well-developed and the bulk of collateral is US dollar-denominated and settled in Euroclear.

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