By Ed Oliver, Managing Director, Product Development at eSecLending (Europe) Ltd.
The early part of 2019 has seen a pick-up in activity in markets that are looking to add the possibility for foreign investors to participate in lending local shares. Some of this has been driven by new additions to the Emerging Market Indices, some by a reaction to other markets taking a leadership role, and others by continuing to work through long-term projects to add new liquidity sources.
Saudi Arabian securities will be included in the MSCI Emerging Markets Index and the MSCI ACWI Index in a two-step process starting in June 2019. In addition, Saudi Arabian securities were included in the FTSE Emerging Index as of March 2019, as part of a phased implementation through to December 2019. Saudi Arabia is expected to represent approximately 2.6% of the MSCI Emerging Markets Index and 2.7% of the FTSE Emerging Index. The Saudi Stock Exchange (Tadawul) has published Securities Borrowing and Lending Regulations. It is highly likely that there will be a pre-sale notification requirement as securities are required to be in custody before sales can be executed. Thus, in order to recall securities on loan, a pre-sale notification will be required similar to the situation we have lending securities in Taiwan.
Like Saudi Arabia, the Chinese A share market has benefited from being added to the MSCI Emerging Markets Index. This process started in May 2018 with the addition of China large-cap A shares to represent 0.7% of the Index. This will increase to 3.3% during the remainder of 2019. China A shares will also be included in the FTSE Emerging Markets Index from June 2019, eventually representing approximately 5.5% of the Index. There was a flurry of excitement in 2015 with the introduction of the Stock Connect product. Unfortunately, this was a false dawn as it became apparent that foreign investors could not participate in securities lending. This is expected to change with the recent announcement of the Hong Kong Exchange Strategic Plan for 2019-2021 which includes the initiative to enhance Stock Connect. This involves working with onshore regulators to expand securities lending and borrowing. The Pan-Asia Securities Lending Association (PASLA) is leading discussions with onshore regulators to assist in the development of securities lending.
eSecLending, as part of a PASLA delegation, met with representatives from the Philippines twice in 2018 to discuss how to implement a securities lending structure that will allow foreign investor participation. PASLA continues to be involved in discussions with the Philippines Stock Exchange (PSE) to enable change in legal documentation and acceptance of overseas collateral when lending Philippine equities. The PSE CEO recently confirmed that short selling would commence within the year.
Indonesia and India
We expect more engagement with regulators and representatives in both these markets during 2019. This is primarily the “China effect” with the increased “muscle” of China in the emerging markets indices leading to other markets becoming more interested in adding liquidity solutions to the marketplace.
In March 2019, the Bolsa de Valores de Lima (BVL) announced an enhanced securities lending platform featuring Cavali, the Peruvian Central Securities Depository, as well as other local players. It is intended that this platform will enable non-Peruvian investors to borrow and lend securities in Peru and requires a Peruvian Appendix to the Global Master Securities Lending Agreement (GMSLA).
It looks like the remainder of 2019 could be interesting for most lending agents with passive investors investing in the likes of Saudi Arabia and China for the first time. There will be assets in custody that will make the research and due diligence to add these markets a worthwhile exercise.