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Country Profile: Australia's securities finance market

09 March 2017

Traditionally, the Australian financing and stock loan activity was seen as largely between domestic counterparts, but this is now evolving to include global market participants

Australia equity data supplied by IHS Markit:

  • Australia is the fourth largest market in Asia Pacific
  • Australian equity securities lending revenue grew by 15% to $73.3m
  • The 4bps in fees registered was offset by an 18% jump in average balances
  • Material firms were heavily represented among highest revenue generators including  Fortescue Metals
  • Inventories grew by 17% for the year to $195bn

Australia is a mature lending market with a diverse range of supply and demand dynamics. It is well developed, with a robust regulatory framework and attractive liquidity profile. "These attributes make it an obvious destination for investors to deploy their trading strategies," says Dane Fannin head of capital markets, Asia Pacific, Northern Trust.

Australia has stable supply for the main index securities. "Overall, supply within the market has increased due to new participants and capital inflows to superannuation and managed investment schemes," says Stewart Cowan, head of securities lending, Asia Pacific, J.P.Morgan.

"As 2017 gets underway we continue to see strong appetite from beneficial owners to participate in securities lending. This is reflected in the lendable inventory in both equities and fixed income which has increased year-on-year."

 Australia has a vibrant and dynamic onshore market and it is also open to offshore participants. In terms of specials, the supply versus demand dynamic is no different other mature markets except for the franking or imputation credit. "The franking credit is only available to onshore lenders, hence, there is differential pricing and certain demand dynamics between the onshore and offshore supply," adds Cowan.

Unfortunately, demand to borrow remains subdued due to Basel III and other regulations. "We saw increased volatility within the fixed income book as banks and broker-dealers needed to manage their balance sheet activities," added Cowan.

However, despite demand not keeping up with supply, the Australian market is expected to continue to generate reasonable returns buoyed by the commodity and retail sectors.

 In September 2008, ASIC introduced a short selling ban which covered both naked and covered short sales. The ban was in response to concerns around market volatility which raised concerns around fair and orderly operation of markets. The ban was lifted in May 2009 and ASIC released a post-implementation report REP302 (see . It provided an interesting insight: "It should be noted, however, that the ban on short selling may have exacerbated market volatility.

 It also potentially inhibited price discovery in the market and may have reduced market liquidity."

 It is also improving in the eyes of beneficial owners, says Fannin: "Perceptions of securities lending are changing in a positive way, particularly in the context of a low interest environment. The idea that it can generate an attractive stream of alpha at relatively low risk is driving increased interest from beneficial owners."

The Australian Securities and Investment Commission (ASIC) issued Regulatory Guide 196 (RG196) in April 2011, which prohibits naked short selling and introduced short selling disclosure obligations. There are currently rules in place for naked short selling as well as various reporting obligations in relation to short sales and loans transactions. ASIC provides the market with transparency in relation to these positions and they are published on its website (see .

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