Developments in Hong Kong and Taiwan hint at a more progressive
view of securities based lending regulation in Asia, although
efforts to expand activity across the region are held back by
limited infrastructure in a number of jurisdictions. Martin
Corrall, chairman of the Pan Asia Securities Lending
Association (PASLA) recognises that the regulatory environment
for securities lending in the region is far from uniform.
"Clearly some markets – for example, Indonesia
– have yet to develop an infrastructure," he says.
"Others have nuances that may make them more challenging to
operate in, although they might consider themselves
Considering regulation from an equity market perspective,
Ed Oliver, managing director of product development at
eSecLending agrees that the regulatory disparity across the
region is a key consideration when considering whether it lend
its clients’, say, Indonesian assets.
"Some markets such as Hong Kong are mature, but there are
several others – such as Taiwan and Malaysia
– which remain challenged in terms of regulation," he
says. "In these markets, lending occurs but in an imperfect
structure. There are also a number of jurisdictions, including
India, Indonesia and the Philippines, that do not yet allow
foreign institutional investors."
In some Asian markets, borrowers are required to confirm that
the stock is available before they can execute a short sale.
Indeed, it is not just that the agent has to confirm the
availability of the stock, it also has to identify which
investor owns the securities, explains Roy Zimmerhansl, global
head of securities lending at HSBC. Korea and Malaysia have
specific identifiers for the investor that the agent has to
give to the borrower so it can execute the short
Several Asian regulators have tweaked their securities lending
rules in recent years. The Hong Kong Stock Exchange added a
number of securities to its short selling list last year, while
changes to Taiwan Stock Exchange Corporation’s
securities borrowing and lending rules in 2016 were also
designed to boost securities lending.
"The capacity for securities-based lending was enlarged, thus
enhancing market liquidity," explains a spokesperson for the
Taiwan Stock Exchange Corporation, adding that the number of
securities eligible for day trading varies slightly on daily
This is just one reason why it is vital to be cognisant of the
different rules in each market. Elsewhere, Korea recently
introduced some changes to its short selling regulations, while
in Malaysia there is a difference in terms of the settlement
times between buys and sells, which impacts securities lending
activity observes Zimmerhansl.
"The regulatory requirements for securities lending activity in
Asia are not onerous, but regulators in the region are
extremely vigilant in relation to buy-ins," he continues. "They
want efficiency in the markets and they don’t want
failed trades to add risk. This explains the focus on covered
short sales and that if trades fail, you are more likely to get
bought in than would be the case in other regions."
Asian regulators have gained a greater appreciation of the fact
that short selling and contrarian trading adds liquidity to the
market but, more importantly from a regulatory perspective,
tends to have a moderating effect on the peaks and troughs of
the market, adds Zimmerhansl.