Australia's securities lending market has close to USD $300 billion of lendable equities, data from IHS Markit shows.
The country is viewed by many as having a stable and mature regulatory environment, with strong local market governance and engagement through associations such as AFMA, AIMA, ACSA, as well as ASLA.
“The SBL market is bifurcated between long term established domestic and offshore lending pools with lending and borrow desks contained both onshore in Australia and internationally,” Stuart Jones, chairman, and Paul Solway, communications officer, at the Pan Asia Securities Lending Association (PASLA) told Global Investor.
“In addition, the demand-side of the equation includes an established domestic hedge fund community served in addition to the global offshore hedge funds trading in the region.”
According to Jones and Solway, it is fair to say that it is the Australian tax rules that have led to the creation of the two lending pools which ultimately creates markets between differently sourced inventories.
Another aspect that should be respected is regarding proxy voting, that is widely common in Australia versus its international peers. This can lead to increased volatility in loan stability due to the resulting recalls that are generated.
“The market is a quiet achiever – Australian fixed income, along with Japanese JGBs, are seen by many as qualifying as high quality liquid assets (HQLA) that generate stable and solid returns,” PASLA’s executives added.
“Whilst equity returns are steady, Australia is often overlooked as it hasn’t recently had the level of special trading
opportunities that you see in Hong Kong; it doesn’t have the fee levels that you will see in South Korea or Taiwan and it’s hard to find untapped assets given the maturity of the domestic participants.”
That said, Australia cannot be ignored in APAC, and the value of relationships in the local market cannot be underestimated. Every major custodial/agent lender and prime broker is represented locally.
One of the most important aspects of Australia is the Superannuation Fund (retirement savings pool) space that has an estimated total of AUD2.2 trillion of AUM, with approximately 200+ funds that report to or are regulated by APRA (source ASFA Research and Resource Centre 2017).
“Securities lending is certainly growing in recognition within a number of Supers now, and those that are able and willing to participate are subsequently enjoying incremental alpha returns compared to their non-lending peers,” Solway and Jones continued.
“Such understanding, acceptance & growth within the Superannuation space is a trend that continues to grow that adds liquidity not only to the domestic securities market but more meaningfully, to the global equity & fixed income inventory pools.”
According to Simone Broadfield, APAC Head of Agency Securities Lending, BNP Paribas Securities Services, many superannuation funds are participating in lending programmes, particularly those with a larger mandate, however many medium to smaller funds are still not.
“These medium to smaller funds could be holding assets of real intrinsic lending value which are currently not being monetised,” Broadfield explained.
In terms of demand, global regulatory capital requirements have led to an increase in demand for global HQLA supply, with Australian Commonwealth Government Bonds (ACGB)/ Reserve Bank of Australia (RBA) repo-eligible semi-government issues of particular focus.
“Within the equities space, market concerns relating to the oversupply of global lithium reserves and a weakening in demand for Australian lithium exports have contributed to increased appetite for securities lending assets within this sector, specifically Pilbara Minerals, Orocobre and Galaxy Resources with lendable supply trading at a premium,” BNP Paribas’ Broadfield continued.
“Short interest levels have also increased across healthcare securities such as Japara Healthcare and Regis amidst the launch of a Royal Commission into Aged Care Quality and Safety.”