While the Australian market did not technically fall into recession - one of the few Western economies to be able to ride the global financial storm - there has been a severe impact on the markets in the country, with securities lending affected as a result.
While the Australian market did not technically fall into recession - one of the few Western economies to be able to ride the global financial storm - there has been a severe impact on the markets in the country, with securities lending affected as a result.
Levels of borrowing and lending are down, and while they are starting to recover, the volumes remain lower than three years ago. A proposed tie-up between the Australian and Singapore exchanges collapsed, following the country’s reluctance to have its exchange fall into overseas hands.
“The securities lending market in Australia is well-developed,” says James Jennings, head of global prime finance for Australia and New Zealand Global Markets at Deutsche Bank. “There is still flow, however the market has not fared well since the market downturn and securities borrowed and on loan are a lot lower than pre global financial crisis levels.”
Some market participants say that the relative calmness of the market is down to the speedy actions of the regulators. When the worst of the crisis was threatening to bring down some of the world’s biggest banks, the Australian Securities and Investments Commission (ASIC) introduced a short selling ban on financial stocks - a ban that was removed in May 2009.
“We don’t want to see restrictions on market practices,” says one participant, “But when the ban came into force, ASIC was quick to say that this was only ever going to be a temporary measure. ASLA (the Australian Securities Lending Association) was working well with ASIC and the ban was effective in that it made sure we didn’t have any long-term problems, but it was also timely - there wasn’t a huge amount of liquidity in the market at that time anyway, so the ban didn’t have a huge affect on the amount of business we were able to do.”
However, Australian was one of the last major global markets to lift its ban and some within the industry were starting to get frustrated by the delay. “We could have done with [the ban] ending sooner - we knew it was going to end, we just didn’t know when and we felt like we were going to get left behind,” says one player.
However, one of the main reasons for Australia’s relative immunity against the downturn happening elsewhere was its closer ties to the Asian market. Over the past couple of decades, the country has been aligning itself to its neighbours, while maintaining its historic links to Europe and the US.
There remain differences, though. “The Asian market is not homogenous,” explains Jennings. “Australia, like the rest of the Asian markets, has different nuances to it - regulatory, reporting and so on. Australia is closely aligned with Asia, as it is with all the major global markets.”
And this is reflected in the number of institutions that service the securities lending industry. For a relatively small (in global terms) market, it has a wealth of operators with a footprint in Sydney. Almost all the major global players have a presence, which is matched by an exceptionally strong domestic presence. The likes of Macquarie Bank and National Australia Bank more than compete with their better-known global competitors. However, some of the smaller firms have withdrawn from the business in the last couple of years.
“Australia is a fairly well-brokered market with a number of the big global players present,” says DB’s Jennings. “Before the global financial crisis, there were some niche smaller players, however I would say the space now is dominated by the larger players.”
In terms of the funds that are active in the market, one type dominates. While other domestic and international pension and mutual funds play a part, the Australian compulsory superannuation scheme is the big beast. Launched in 1992, employers are now required to pay nine per cent of salaries into the fund, with employees able - and it seems the majority are willing - to pay in a similar amount. Many of these funds are active participants in the securities lending market.
The pension and superannuation market is now the fourth largest in the world, and this has driven growth in other areas. The hedge fund industry in Australia has grown four times faster than the global average, and it’s this that is encouraging the big players in securities lending to set up shop.
Regulation
There have been complaints that the regulatory side of the business is too tough, and the criticisms about the delay on the removal of the ban on short selling financial stocks still dominate the market.
In September 2008, ASIC took emergency action to temporarily ban short selling in Australia, including naked short sales and covered short sales. The ban on covered short selling of non-financial securities was lifted on November 19, 2008. The ban on covered short selling of financial securities was lifted on May 25, 2009.
The Federal Government introduced new legislative requirements to regulate the use of short selling in Australia in December 2008 and December 2009, under the Corporations Amendment (Short selling) Act 2008 and the Corporations Amendment Regulations 2009 (No. 8). These requirements include a ban on naked short selling, subject to some minor exceptions, and the imposition of specific reporting obligations in relation to covered short sales. The legislation that commenced in December 2008 also clarified the scope of ASIC’s powers in relation to the short selling provisions in the Corporations Act.
Since June 1, 2010 short-sellers have been required to report to ASIC their short position in a listed security or other listed product and in January 2011 ASIC clarified that for reporting purposes it will not be possible to net-off long and short positions where those positions are held in different capacities.
“The regulator is good at telling the markets what it’s up to, but that’s about all it’s good at,” says one participant. “We feel that ASIC doesn’t trust the market and if it continues in this way, Australia will fall behind.”
Jennings is not so critical, but he does believe ASIC has work to do. “The industry still feels that the regulations are too restrictive,” he says. “In the event that you have restrictive regulations this can and does have adverse effects on global flow into the market.
“There is room for improvement in the Australian market. We would like to see the re-introduction of conditional holds to offer out securities to clients. The current requirement to have an unconditional right to vest securities, pre-settled borrow, is too restrictive and onerous.”
The future
An expected wave of M&A activity and new listings has so far failed to appear, which has dampened expectations for a swift recovery in the securities lending sector.
This is combined with a feeling that the regulator is proving too tough on the market and its drive for transparency is obscuring the need for an overhaul of the restrictions it places on market participants.
However, the quality of market participants, and the liquidity and willingness of the major funds to participate in the securities lending industry means that the likelihood of Australia continuing to be a major force - both in the Asian markets and globally - remains good.
