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Trading Technology

09 March 2017

Technology is not only improving data quality and analytics in Asia Pacific securities lending – it is also facilitating more efficient trading strategies, says Paul Golden

 A number of countries in Asia could still be defined as frontier markets and therefore require synthetic or other bespoke market access solutions. As a result, in many respects the region remains a fragmented CSD environment, further complicated by the fact that many banks still clear through their EU or US entities.

 The Asian securities lending market is characterised by comparatively high volumes, offset by a rich specials market generating high returns, says Philip Morgan, head of business development at Pirum Systems.

"Settlement transaction costs are generally quite high, which when paired with both new loan and return volumes can be a significant factor in ensuring a profitable programme. There is typically more sensitivity around the recalls process and sell fails in Asian markets due to quite strict policies around settlement failures on the exchanges, which often results in clients holding higher buffers (up to 50% in some cases) for in-region securities. This means that significant specials revenue can be left on the table."

 By closing the right position and using tools that allow minimum duration and return size, agent lenders can limit their transaction costs. Additionally, markets such as India have very specific CCP requirements and unique operating models, which require local technology builds.

Solution adoption

Without technology, trading and post-trade activities can be prone to errors from the manual processes involved. "Automated trading platforms and post-trade technology not only allow agent lenders and broker dealers to optimise their efficiency, but also reduce costs and minimise the risk of manual input errors," says Andrew McCardle, head of EquiLend Asia.

 "Market data allows lenders and borrowers to make informed trading decisions. However, there are still some domestic markets within the region that are reluctant to accept technology vendors as eagerly as the global participants have. Even when you have a global standard, it does not mean that those standards are adopted by all markets."

McCardle suggests that beneficial owners in Asia Pacific face the same issues as their peers in other parts of the world and are demanding a similar level of clarification on performance. "There is certainly a better understanding of benchmarking by beneficial owners in smaller regional markets than there ever has been, due to the work agents have undertaken to educate these markets."

Real-time processing and a obtaining a multi-asset view of all securities and associated collateral are becoming central requirements. Broadridge’s head of strategy and business development Asia, James Marsden, says that he is surprised by the number of legacy systems that are unable to cope with the shortening settlement cycles coming through in Asia Pacific markets, such as the move to T+2 in Australia and New Zealand and forthcoming changes in Japan.

"These shortening settlement cycles increase the need to borrow due to the higher likelihood of failed settlements with non-residents as a result of time zone differences," says Marsden. "As the market evolves we expect this drive towards greater transparency to become a feature of Asian markets. The ability to aggregate data, visualise it in a way that supports strategic decision making and then automate internal, client and regulatory reporting of this data is the key to dealing with the demands of the new market and regulatory environment."

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