Overseas investors key to unlocking the Asian repo market 

Encouraging international players to engage with the Asian repo market is the key to unlocking its full potential, believes Philip Dirckx, Head of Fixed Income at the Asia Securities Industry & Financial Markets Association (ASIFMA). 

Dirckx, who works with market participants and regulators across Asia to establish the most effective ways to develop the repo markets across the region, explains that attracting more international investors is crucial to their development. He says: “The overall goal is to communicate to the regulators that, if they want to further develop their capital market, then it has to go hand-in-hand with opening up the market to international players, and aligning with international standards and best practices.”

ASIFMA is engaging with all market players, including investors and regulators, to position the repo market as one of the “key elements” of a sophisticated and well-functioning market. Specifically, Dirckx hopes to educate regulators on how repo can support both the primary and secondary markets, and position it as a hedging tool.

ASIFMA, in collaboration with the International Capital Markets Association, published in November 2020 a survey of the Asian repo market. For the next survey, expected in November 2021, Dirckx hopes to provide readers with a much deeper insight into the onshore developments taking place across the region.

He notes: “Our most recent survey was the first one that we have done, so we are lacking comparability. It is clear that there is a big focus on the US dollar and yen in terms of currencies that are used for repo. The survey did not capture the developments in local markets (onshore) because its focus was mainly crossborder, on international players gaining access to Asian markets and how domestic players are looking to engage with the international markets.

“To that extent, the repo market across the region is developing, but it is clearly not as sophisticated as some of the markets seen across Europe, excluding Japan. Repo in China has grown. There are still a number of issues that they are working out but the market is expanding. In India, the market continues to evolve, but all transactions continue to be centrally cleared. There are a number of trends in the region that truly make each market unique, so it is hard to draw comparisons.”

Addressing the lack of foreign investment in the Asian repo markets, Dirckx refers to China specifically, noting there is “virtually no liquidity” on the renminbi repo side, which is linked to the limited adoption of the currency and low foreign ownership of Chinese securities. The other challenge facing the Chinese market is that the securities are pledged rather than transferred, meaning that rehypothecation is not possible, therefore reducing liquidity and creating counterparty risk.

Dirckx continues: “We are actively engaging the regulators and explaining that, specifically for repo, they need to introduce a structure that caters for the transfer of ownership, which will therefore make the market more accessible for international players. The use of a tri-party agent will also support the market. There are talks of the China Central Depository & Clearing Co. to become a tri-party agent in China, which we are hoping will materialise this year, and this is something we have been lobbying with the regulators in China.”

Access to the Asian repo market for offshore investors still remains a significant challenge. The ASIFMA head of fixed income notes that an offshore asset manager will struggle to use its assets to secure its repo operations, whereas those headquartered onshore, such as in China and India, are able to do so.

The report, published in November 2020, revealed that Asian repo market participants favoured shorter-term repos as their usage was up significantly when compared to 2017. The number of repos that matured within a month accounted for 24% of all transactions across the region and 29% in Japan in 2020, compared to just 13% in 2017. Previously, Asian markets favoured the one to three month term, which accounted for 33% of all trades in 2017. In 2020, however, trades with this term represented just 11% in Japan and 21% in the broader region.

However, the report fails to cover the onshore developments taking place across the regions, highlights Dirckx, adding that it “only really high-lights how international firms are accessing the repo market” across Asia. He notes that just 15 firms responded to last year’s survey, which he labelled a “good start” but underlines that it “limits” the view of the market for international investors.

“In the next survey, we plan to analyse the figures from the onshore market, which is something that we have not done previously,” he notes.

Many countries across the region, such as South Korea, upped their repo operations in 2020 to inject additional liquidity into their financial system to combat the impacts of the Covid-19 pandemic. The Bank of Korea, headquartered in Seoul, launched a programme in April 2020 to purchase an unlimited amount of bonds from local financial firms on a weekly basis. The programme was due to run for just three months, but it was extended by one month as the pandemic continued to cripple economies across the region. The central bank made the decision to end the programme on July 22, citing “improved market liquidity conditions and reduced demands”.

This article is part of our Asia Pacific Securities Finance Guide 2021, and if you want to find more click here to download the whole whitepaper.