Securities Lending in Asia-Pacific
Asia-Pacific ("APAC") is a diverse region with a combination of mature and emerging markets. We conduct our business in many different languages and with respect to the many diverse cultures over this expansive geographical area. J.P. Morgan is the region's leading Securities Lending Agent with a team including six dedicated loan traders covering nine markets, two portfolio managers managing AUD and USD cash collateral, six portfolio advisors focused on client coverage spanning ten countries, plus middle- and back-office staff who provide local time zone operational support for Asian assets and clients.
Barry Griffin is the regional Head of Trading and Stewart Cowan has responsibility for Product and Portfolio Advisory. Barry and Stewart provide their insights into some of the region's opportunities and challenges
How would you describe the current lending environment in APAC?
BG: From a trading perspective, the market continues to be challenging. Most markets across APAC have rallied over the year, forcing the return of a number of directional positions. Whilst at a macro level there is minimal M&A activity, Asia remains stronger in relative terms, accounting for 49% of all IPOs globally in the third quarter of 2013.
SC: APAC lenders have been focused on the mix of global regulations, as well as domestic reforms, leaving some lenders seeking additional sources of alpha from investment activities such as lending. There is also a general sense that the worst of the market volatility has passed, so many clients are open to one-off loans, term trades and relaxing collateral guidelines. Low demand and spreads on the trading side, as Barry mentioned, have been offset by increasing assets values and this appetite for enhanced broader trade opportunities.
What has been happening in 2013?
BG: Year-on-year, balances remain positive across Asia, with the exception of Australia, where there have been significantly fewer Dividend Reinvestment Plan trade opportunities, a key revenue generator historically.
Our highest regional balances are in Hong Kong and Japan. September 2013 was a particularly good dividend season for Japanese equities because, depending on the domicile of the client, withholding tax could increase to 15% in 2014, provided the holder has owned the stock for the two prior record dates. Some brokers have preemptively borrowed stock in order to fulfill this requirement.
SC: For the first time since the financial crisis, beneficial owners have been actively looking to lend, or reassessing their current risk profiles to take advantage of both global and local opportunities. The driver for lending varies, from clients wishing to supplement low-yielding Fixed Income securities, to covering the ever increasing regulatory costs and reducing fund expense.
What aspects are unique about APAC?
BG: In May 2012, J.P. Morgan became the first oversees lender in Malaysia, and as such, is the lender of choice for borrowers, resulting in a steady increase in volumes. Thailand has been an active market for longer but only recently have we seen a material increase in demand. In Taiwan, hedge funds have primarily shorted the tech sector this year, which has resulted in solid lending returns. However, the market is very heavily regulated, with restrictions that severely impact lending. No on-lending is allowed and no more than 20% of a security may be borrowed. The Taiwan restrictions are a popular topic amongst industry participants who share the same frustrations.
SC: We experience challenges within a multi-jurisdictional region like APAC but there are opportunities too, and this is where our established infrastructure really comes into its own.
In June, in association with our colleagues in tri-party collateral management, we became the first international lender to be able to support same-day loans via tri-party in most markets. This has gone down extremely well with the borrowers and our securities collateral balances are rising accordingly.
Our Australia-based portfolio managers have consistently generated excellent returns over the last few years – albeit within quite conservative parameters. The Australian cash market maintains higher interest rates compared to other major currencies, with our cash fund yielding 2.72%.
What is the J.P. Morgan footprint in APAC, and how is it growing?
BG: J.P. Morgan is the largest lender within APAC; the recent statistics from Markit and EquiLend confirm this position. We continue to expand our local capabilities, having recently added an additional Hong Kong based trader and substantially increasing our regional Corporate Bond trading via Euroclear. There has been more short interest in certain corporate bonds, but as supply is plentiful in the bond market, it is essential to capture any demand efficiently. Previously, these trades had to wait until London opened but we are now uniquely placed to book these trades throughout the Asian day to maximize revenue opportunities.
SC: APAC is a growing region and China's economic rise creates significant opportunities for future growth. Lendable assets have increased by 35% year-overyear, driven by new lenders and the increasing asset values of existing lenders. We recognize the value of being on the ground, in person, to which end we have added additional staff to cover new countries in South East Asia, and we have plans for further expansion in 2014.
Can you expound upon the developments you've been working on?
BG: In 2013, the team has been focused on leveraging the EquiLend and BondLend automated loan systems. We have also begun accepting Japanese Government Bonds as collateral, which has proved to be highly successful in the region, helping grow balances as borrowers have been keen to optimize their existing collateral pools.
SC: We have recently appointed Darren Measures as regional Agent Lending Product Management Head. Darren is undertaking extensive analysis of the region in order to effectively expand our product capability for both local and global lenders. A key priority is to develop new market opportunities in Indonesia, India, the Philippines, and in the future, China. We will also continue to expand our collateral capability with the addition of new form of collateral (e.g., KTBs [Korean Treasury Bonds]). On the cash reinvestment side, we have recently been approved lines to purchase Chinese banks' issuances.
What is the outlook for the coming months and next year?
BG: We are expecting 2014 to look broadly similar to 2013. Demand will likely continue to fall as borrowers try to minimize their expense and more supply enters key markets such as Taiwan. However, on a more positive note, we do expect trading to become increasingly automated, using Equilend and T20, which will allow the traders to focus their energy on more special and complex opportunities. We believe that stagnant growth in China will inevitably lead to more directional shorts in sectors such as resources and manufacturing and we also expect a rise in yield enhancement trading in Japan.
SC: 2014 is shaping up to be a busy year. J.P. Morgan has a strong pipeline of new business and a significant product agenda to execute which will enhance returns. We are keen to support our lenders in Asia who have traditionally held purely domestic portfolios and are gradually diversifying into international, lendable assets. We are actively dealing with local tax authorities to introduce equity repo in the region, which will enhance returns on reinvestment income.
Whilst we are under no illusion that 2014 will continue to present challenges, we feel well placed for solid growth in the region and to retain our market-leading position.