Risk Management Association Blog

PASLA/RMA Conference
7 March 2013 – Day Two

The “new regulatory paradigm” consists of a barrage of rules, regulations and guidance from every angle.  And according to Greg Lyons, Partner, Debevoise & Plimpton, LLP, and Paget Dare Bryan, Partner, Clifford Chance, the regulatory reform process is far from over.

Day Two of the 10^th Annual PASLA/RMA Conference on Asian Securities Lending highlighted some of the proposed regulatory developments and their possible effects on the Asia/Pacific region. 

Lyons kicked off the discussion highlighting how capital would be affected through the proposed Dodd-Frank Rule 165, and Basel III.  There is a particular focus on counterparty activities, like securities finance and derivatives that could put the US banks at a competitive disadvantage.  According to Bryan capital requirements are substantially increased under Basel III.  Even though Basel III implementation is still a work in progress, some organizations in Asia (Hong Kong, Singapore) have already begun adopting its methodology.    

Next the discussion turned to the FSB work stream on shadow banking.  The proposed regulation would include: increased transparency through the use of trade repositories, higher margin haircuts, and limitations on collateral reinvestment. 

The panel then focused on the European Union Financial Transaction Tax. This tax could be detrimental to trade profitability in many European countries b/c it taxes each transaction. 

While all of these actions are specific, their implementation remains in flux. For ex., Dodd Frank is only ¼ implemented as of this conference (a rule that was supposed to be implemented in July 2012). 
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Thank you
Thank you to the PASLA and RMA teams, as well as this year’s Conference sponsors, exhibitors, and attendees, with special thanks to the staff at the JW Marriott Hong Kong, for making the 10th Annual PASLA/RMA Conference on Asian Securities Lending a success! 

See you next year for the 11th Annual PASLA/RMA Conference on Asian Securities Lending in Tokyo, 4-6 March 2014

PASLA/RMA Conference
6 March 2013 – Day One

The 10^th Annual PASLA/RMA Conference on Asian Securities Lending kicked off Wednesday in Hong Kong with 300 attendees. Panelists and speakers were focused on the future of APAC with an overarching concern of pending regulation.  Taiwan continues to be an emerging market to watch with great potential.  Other new markets such as Indonesia, Malaysia, and India continue to develop as viable lending markets. Sound risk management was stressed throughout the day.

In the Future of Securities Finance Panel, speakers discussed the highly regulated environment and how future regulation may be sweeping in from the west.  Dodd Frank 165 and FSB Work Stream on Shadow Banking continue to be the most concerning processes to both the panelists and the attendees. With risk profiling no longer being the key issue, the quest for yield has come to the forefront.  Agent lenders are focusing on high margin (intrinsic) transactions within this low yield environment.

Keynoter William Lee, Managing Director, Citi, NY, provided an overview of the global economy and described overall growth as “modest”.  Despite high unemployment and fiscal uncertainties, US growth has strengthened around energy and consumer spending (auto). In Europe, banks are highly leveraged and political/structural impediments to a viable currency union loom, but productivity can improve through structural reforms.  When Lee discussed emerging markets, he focused on China and its’ shift from an investment-driven exporter towards more domestic consumption.  China’s new growth drivers include raising wages to promote consumption and becoming a global leader in environmental protection.

The Regional Collateral Management/Repo panel opened with their concerns around the highly regulated environment and the continued need for improved transparency.  When asked how the aftermath of the economic crisis has shaped business, panelists agreed that gaining momentum of triparty repo in Asia is key.  More creativity and complicated structuring were also mentioned as additional outcomes from the aftermath.

Dr. Kalok Chan, shared findings from his recent paper on Short Sale Constraints and A-H Share Premiums.  Chan provided further evidence that short sale restrictions in China and other countries are inefficient and harm market liquidity.  Panelists and Chan discussed the overriding theme of failed restricted shorting regimes beginning with the US in 2008.

Martin Corrall, PASLA Chairman, provided recent Asian industry trends including continued development in the Taiwanese market along growth in the Asian lending markets as a whole.  Also discussed were periodic outreach calls and comment letters with other associations including RMA.

Jason Strofs, RMA Chairman, Committee on Securities Lending gave an update on RMA’s activities , citing regulatory affairs as a key area of focus.  Some of RMA’s activities over the past 12 months included partnering with PASLA on an FSB comment letter addressing shadow banking risks and quarterly outreach meetings with regulators.  RMA also held the RMA-UNC Academic Forum for Securities Lending Research in NYC, and the Annual Conference on Securities Lending in Key Biscayne FL, October 8-11.

PASLA/RMA Conference – 5 March 2013
Preconference events

Securities Lending Tutorial
Dominick Falco, Managing Director, Bank of New York Mellon Ltd, Hong Kong, and Robert Nichols, Vice President, J.P. Morgan, Hong Kong held an informative intro to securities lending tutorial session yesterday for 60 of the PASLA/RMA 2013 Conference attendees.

Falco opened with the basics: a definition of securities lending, identifying the market participants, why they lend and the types of lenders and borrowers.  He went on to discuss the key benefits such as market liquidity, risk management using hedging techniques, and covering fails to keep timely settlements.  Additionally the incremental revenue derived from participating in securities lending helps pension funds, mutual funds and other types of beneficial owners enhance investment performance.

Falco and Nichols discussed the various agreements utilized globally between borrowers and agents.  Additionally they listed the various components needed within these agreements necessary to execute orderly securities lending activities.  An important key feature of the agreement, Nichols emphasized, was that the commercial terms cannot override regulatory issues.

The discussion turned to transaction collateral – cash vs. non-cash.  The inherent risk of cash collateral is the reinvestment of that cash into short term investments that can fluctuate in value.  Risk mitigation allows safe investments such as repo and other 2(a)-7 like investments.  Non-cash investment doesn’t have the reinvestment risk, but must be aggressively marked-to-market appropriately to collateralize both the asset and liability sides of the loan.

The tutorial concluded with an update on the Asian market.  Japan is the most liquid followed by Hong Kong.  Taiwan is the market to watch in this region b/c of its dramatic increase in amount of supply in the market, and it will continue to build. This is due mostly to Taiwan’s heavy tech sector which is in high demand.  It was stressed by both instructors to keep in mind, that with high demand, there will also come high fees.  And fees jump quickly in Asia.

Operations and Technology Session
The PASLA Op and Technology Subcommittee engaged in a 2-part panel discussion, beginning with an update of the operational and regulatory challenges in Asian markets, including Korea, Thailand, and Taiwan.  According to the update, over the past year, Korea and Thailand have seen further restrictions around short selling, whereas Taiwan has experienced an enhancement.

Also discussed were the key considerations – settlement processes, tax rules, manufactured dividends, clients sales – for entering emerging markets: Malaysia, Taiwan, and India.

The panel then defined and discussed the benefits and challenges of a CCP, Central counterparty.  Benefits of operating through a CCP include:

• Improved liquidity / access to wider distribution
• Borrower and Lender negotiate the stock loan terms and rebate / anonymous trading also facilitated
• Counterparty risk reduced; need for multiple credit evaluations eliminated
• Significant reduction in capital allocated  – minimizes regulatory capital requirement for borrowers

Some of the challenges faced operating a CCP include having to run a CCP in tandem with the current OTC structure; and additional costs such as new fees or mark ups.

Part two of the panel discussion focused on how technology can help improve efficiency in the Asian markets.  The panel suggested that one way technology can help mitigate risk is for businesses to move more to automated systems.  This would also assist with short term growth as the panel found that most lenders won’t transact unless working with an automated service.

It was agreed that appropriate technology will hugely aid the needs in keeping in compliance and monitoring the many areas that regulators want addressed.  Those areas are still being defined by regulators and the businesses.

There was a lively discussion between panel and participants around regulatory requirements, specifically, trying to determine what the regulators are looking for.

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The 10th Annual PASLA/RMA Conference on Asian Securities Lending begins 5 March 2013 and continues through Thursday 7 March 2013.  Please check back with the RMA blog for conference updates and follow conference tweets from @rmajournal