Hong Kong equity data supplied by IHS
- Hong Kong is the second largest market in Asia
- The $247m of revenues generated in 2016 missed the 2015
total by over 30%
- The disappointment was driven by fees which shrank by a
quarter to 1.52%
- Balances also contributed to falling revenues as they
fell by 10% on average to $15.4bn
- Holders of China Huishan Dairy generated over $31m of
Inventories also fell, with an 8% decrease in lendable to
Last year was not a particularly good one for securities
lending in Hong Kong. Gross revenue totalled (US) $238m in
2016, down 34% from US$358m the previous year, swopping places
in the league tables with Japan (which increased from US$196m
by 50% to US$294m). Nonetheless, it was the second greatest
revenue generating market in Asia Pacific.
"Average rates decreased a lot over the past year," notes Ariel
Winiger, head of secured financing Asia Pacific, Societe
Generale. "Rates [fees] reduced on average by about 30%. I see
no indication for this to turn upwards again – it
could go lower – but this really depends on corporate
There are still isolated pockets of high fees. "The only
exception is China-based ETFs, which are heavily in demand,"
says Winiger. "The fees come in and out – sometimes
they are traded at a really high level but it is quite
volatile. It is definitely a good trade but the problem here is
that not many lenders can lend ETFs so the holdings are
At the moment there is not enough supply, in part because
interest in China is not particularly high, investors are
typically more cautious than bullish. However, there is also
the question of ownership. "The main investors are retail ones
and these stocks do not normally come to the lending market,"
Chamil Ioussoupov, head of equity finance Hong Kong, Natixis
says: "The biggest impact we saw in 2016 was the development of
the Chinese story. China ETFs absolutely hijacked the story of
the Hong Kong stock lending market."
At the beginning of the year the inventory of private banks was
not targeted but as soon as Chinese ETFs became hot people
rushed to the private banks to fund the supply.
"The interesting thing was that the market corrected itself,"
says Ioussoupov. "The effort of people trying to get the ETF
supply in the first part of the year paid off and the market
naturally cooled off in the second part. Because ETFs were very
hot, people found an alternative way to fund the supply and the
market normalised, as happens in Europe."
The only major change to the equity market was the Shenzhen
Connect going live at the end of last year. As with the
established Shanghai Connect, the stock lending facility is not
really workable. It is reasonable to assume that the facility
has been consciously implemented in a way that does not foster
activity and that Chinese regulator will make changes if and
when its wants lending to take off.
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
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
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
"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
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
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.