Free Trial Corporate Access

Global Investor Magazine
Global Investor Magazine Copying and distributing are prohibited without permission of the publisher
Email a friend
  • Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Country Profile: Hong Kong's securities finance market

15 March 2017

Besides China-based ETFs, which are in high demand, there are still isolated pockets of high fees and not enough supply

Hong Kong equity data supplied by IHS Markit:
  • Hong Kong is the second largest market in Asia Pacific
  • The $247m of revenues generated in 2016 missed the 2015 total by over 30%
  • The disappointment was driven by fees which shrank by a quarter to 1.52%
  • Balances also contributed to falling revenues as they fell by 10% on average to $15.4bn
  • Holders of China Huishan Dairy generated over $31m of revenues
  • Inventories also fell, with an 8% decrease in lendable to $237bn

Last year was not a particularly good one for securities lending in Hong Kong. Gross revenue totalled (US) $238m in 2016, down 34% from US$358m the previous year, swopping places in the league tables with Japan (which increased from US$196m by 50% to US$294m). Nonetheless, it was the second greatest revenue generating market in Asia Pacific.

"Average rates decreased a lot over the past year," notes Ariel Winiger, head of secured financing Asia Pacific, Societe Generale. "Rates [fees] reduced on average by about 30%. I see no indication for this to turn upwards again – it could go lower – but this really depends on corporate activity."

There are still isolated pockets of high fees. "The only exception is China-based ETFs, which are heavily in demand," says Winiger. "The fees come in and out – sometimes they are traded at a really high level but it is quite volatile. It is definitely a good trade but the problem here is that not many lenders can lend ETFs so the holdings are relatively modest."

At the moment there is not enough supply, in part because interest in China is not particularly high, investors are typically more cautious than bullish. However, there is also the question of ownership. "The main investors are retail ones and these stocks do not normally come to the lending market," notes Winiger.

Chamil Ioussoupov, head of equity finance Hong Kong, Natixis says: "The biggest impact we saw in 2016 was the development of the Chinese story. China ETFs absolutely hijacked the story of the Hong Kong stock lending market."

At the beginning of the year the inventory of private banks was not targeted but as soon as Chinese ETFs became hot people rushed to the private banks to fund the supply.

"The interesting thing was that the market corrected itself," says Ioussoupov. "The effort of people trying to get the ETF supply in the first part of the year paid off and the market naturally cooled off in the second part. Because ETFs were very hot, people found an alternative way to fund the supply and the market normalised, as happens in Europe."

The only major change to the equity market was the Shenzhen Connect going live at the end of last year. As with the established Shanghai Connect, the stock lending facility is not really workable. It is reasonable to assume that the facility has been consciously implemented in a way that does not foster activity and that Chinese regulator will make changes if and when its wants lending to take off.

Single Page 1 | 2

Have your say
  • All comments are subject to editorial review.
    All fields are compulsory.