Australia
03 September 2024
From central clearing and T+1 to new technology and regional collaboration, Daniel Tison looks at some of the key themes shaping the Australian securities lending market
Image: stock.adobe.com/rudi1976
A market driven by investor hedging demand and the provision of liquidity is how Stephen Howard, CEO of the Pan Asia Securities Lending Association (PASLA), defines the securities finance industry in Australia.
鈥淏oth Australia and New Zealand are markets that have stable, pragmatic and robust market structures for all market participants,鈥 says Howard. 鈥淸They] can be characterised as aligned with investor and issuer needs, and that has been reflected in both long-term investment flows and the growth of indexation products, supported by a broad range of risk participants providing market-driven liquidity.鈥
Consisting of mainland Australia, Tasmania, and several smaller islands, the Commonwealth of Australia is the largest country in Oceania, with a very diverse landscape 鈥 from tropical rainforest and savannas in the north, through arid deserts in the centre, to mountain ranges in the south.
Its abundant natural resources and well-developed international trade relations are crucial to the country鈥檚 economy, which generates one of the highest per capita incomes in the world 鈥 US$66,627 as of 2024, according to the International Monetary Fund.
S&P Global Market Intelligence lists Australia among the top five securities lending revenue-generating markets within the APAC region, alongside Japan, Taiwan, Hong Kong, and South Korea. In March 2024, EquiLend recorded 2,049 companies in Australia, with a total market cap of US$1.8 trillion.
With one of the highest endemicity rates, Australia naturally differs from the rest of the world. In terms of securities finance regulation, the main difference is that the country traditionally uses the Australian Master Securities Lending Agreement (AMSLA), while the rest of the world works with the Global Master Securities Lending Agreement (GMSLA).
鈥淭he reason for this is that there's capital gains tax (CGT) relief for the AMSLA,鈥 explains Sophie Gerber, co-CEO of the trade and transaction reporting services provider TRAction. 鈥淵ou don't incur CGT if you return the borrowed shares before the end of 12 months.鈥
Nevertheless, both agreements allow for the collateralisation of loans by cash or alternative collateral of equity or fixed income securities, which are delivered prior to the loan of Australian securities (prepay).
Short selling is permissible in Australia under the Corporations Act 2001, with no pricing requirements for short sale. The threshold for reporting is when a firm鈥檚 short position is more than AU$100,000 or 0.01 per cent of the total quantity of securities or products in the relevant class.
Both domestic and international lenders have to lodge collateral before the physical shares can move in Australia. This can be Australian and American dollars, British sterling, or Japanese yen cash, as well as forms of equities and government debt. Standard collateral headroom is 105 per cent of the stock鈥檚 market value.
The Reserve Bank of Australia (RBA) operates securities lending facilities on its own behalf and separately on behalf of the Australian Office of Financial Management (AOFM), where eligible counterparties can borrow Australian government bonds (AGS) and semi-government bonds.
鈥淭his ensures that these securities lending markets continue to operate efficiently,鈥 says a spokesperson for the Australian Treasury.
Strong competitor, yet prevailing uncertainty
According to Benoit Uhlen, head of market and financing services for APAC at BNP Paribas, the Australian securities lending market is 鈥渙ne of the most efficient, liquid and mature in the region鈥.
BNP Paribas operates as an agent lender for its custody clients in Australia, and its Global Markets business serves corporate and institutional clients in the country.
鈥淎ustralia distinguishes itself from other APAC markets, as it offers a greater emphasis and focus on cash collateral, specifically in Australian dollars,鈥 says Uhlen. 鈥淲hile the Japanese yen is under the limelight from a cash perspective, Australia leads the way for cash reinvestment structures and opportunities in the region.
"The levels of sophistication in Australian lenders are proliferating due to the need for Alpha, the contraction of the numbers of lenders, and the expansion of knowledge brought to these businesses from these mergers. The demands in terms of mechanisms like RAPIDs or proxy callable voting lead to the Australian market differentiating itself from many other markets in APAC."
DataLend鈥檚 dataset shows that the Australian market has had an excess of US$19 billion of demand-driven flows annually over the past decade, utilisation rates average around five per cent, and broad market fees deliver returns in the range of 35 to 95 basis points.
In terms of utilisation rates, Howard compares Australia to Hong Kong, for its hedging demand, yet the Australian market pricing is closer to Japan, he says, which means 鈥渁 more efficient market operating at scale with many active market participants鈥.
The Australian Securities Exchange (ASX) settles equities daily in a multilateral net batch process to facilitate the settlement process. The incidence of market participants failing to deliver their equity is 鈥渧ery low鈥, according to the Treasury, which attributes this to 鈥渢he reliability of this process鈥. ASX鈥檚 analysis of settlement failure rates between 2019 and 2023 set the average around 0.3 per cent (volume-based) and 0.1 per cent (value-based).
However, Australian equities have been underperforming in comparison to their peers across the APAC region. S&P Global Market Intelligence reported a 21 per cent year-over-year (YoY) decline in Australian equities lending revenues for the first half of 2024, generating US$56 million, while Asian equities as a whole declined by just one per cent YoY.
Over the past four years, an average of 56 per cent of all market revenues have been derived from securities finance of small cap equities within the country, according to S&P Global Market Intelligence. Many of these stocks belong to the Australasian materials sector, which has recently been under pressure due to the slowdown in economic activity across China.
The highest revenue-generating stock for July was Vulcan Energy Resources, with US$780,000 in returns. Other popular borrows focus on the Australasia semiconductor sector, such as Weebit Nano, and the software and services sector like Brainchip Holdings.
According to Matt Chessum, director of securities finance at S&P Global Market Intelligence, both of these sectors have attracted borrower interest globally as geopolitical risk and the AI boom have remained 鈥減rominent themes鈥 throughout the first half of 2024.
In 2023, mineral-related stocks, such as Pilbara Minerals, Core Lithium, and Liontown Resources, drew a lot of interest from borrowers as Lithium prices tanked and positioning took place in regard to some of the identified shorts across the electric vehicle sector, Chessum says.
In the fixed income market, the borrowing of Australian government bonds has been on the rise. Annual lending revenues have grown from US$10.5 million in 2020 to around US$42 million in both 2022 and 2023. Utilisation across the asset class has grown to around 32 per cent throughout 2024, with volume-weighted average fees sitting around 14bps.
While for most major economies, inflation has been falling, and many other central banks across the world have started reducing interest rates as a result, this is not the case in Australia, as uncertainty continues to prevail. Therefore, interest rates remain higher than in other countries.
According to Chessum, this slows economic activity, as borrowing is more expensive, and companies find it more challenging to borrow and invest. He says: 鈥淭here is uncertainty as to whether rates will need to rise again or not. This uncertainty leads to increased levels of speculation by investors and a greater potential for short selling.鈥
How clean is your market?
The key regulator for local securities is the Australian Securities and Investments Commission (ASIC), which is an independent Australian government body.
ASIC鈥檚 report from July 2024 showed that Australia鈥檚 equity markets 鈥渃ontinue to operate with a high level of integrity and remain consistently among the cleanest in the world鈥.
Commenting on the report, ASIC Chair Joe Longo said: 鈥淐lean financial markets are essential for the financial wellbeing of Australians and fundamental to an efficient economy. They enable businesses to raise capital and manage risk and give investors confidence to invest.鈥
The report found that there were two periods of temporary deterioration in market cleanliness in the five years up to 30 April 2024. The first was during the coronavirus pandemic, when global markets experienced high market volatility and trading, and the second one was in late 2023 as corporate activity increased. In both instances, ASIC claims to have addressed the harmful conduct through regulatory interventions.
To enhance its enforcement capabilities further, ASIC is establishing a dedicated criminal investigation team to progress insider trading investigations and increase the number of criminal briefs referred to the Commonwealth Director of Public Prosecutions.
Longo adds: 鈥淲e will continue to invest in data and technology to hunt and detect all forms of market misconduct. As our financial landscape evolves, we will expand our market cleanliness work to capture private markets and products in the coming year.鈥
Increasing potential for a CCP
Due to the absence of a central counterparty (CCP) in the Australian bond and repo markets, clearing occurs bilaterally and 鈥渞eflects the complex web of transactions鈥 that occur between participants, according to the Council of Financial Regulators (CFR).
The Australian bond market plays an important role in the country鈥檚 economy, says the CFR, while repos are the key instruments used by the RBA to conduct its domestic market operations and to provide liquidity through its standing facilities.
RBA鈥檚 analysis from 2023 indicated that the potential benefits of central clearing in the Australian market had increased since the bank鈥檚 consultation on the topic in 2015.
Changes like 鈥渟ubstantial鈥 growth in the size of the market and increased participation of non-resident investors have strengthened the case for central clearing, according to the paper.
鈥淐entral clearing would simplify the market structure and could yield other benefits, especially in times of stress,鈥 says RBA. 鈥淔or example, our estimates suggest multilateral netting has the potential to lower settlement obligations by US$60 billion per day.鈥
In response, the CFR is currently holding a consultation on reassessing the case for central clearing of bonds and repos in Australia. By 4 September, the council is seeking feedback from stakeholders regarding the introduction of a CCP.
By this move, the CFR aims to increase its understanding of the circumstances under which an overseas provider could safely and efficiently operate a bond and repo CCP, and what additional protections may be required in such a scenario.
The Treasury adds: 鈥淭he introduction of central clearing may serve to increase efficiency, integrity, and stability, while providing a focal point for regulation and risk management. However, central clearing also incurs operational costs and concentrates counterparty risk while benefits are not experienced equally across participants.鈥
Obstacles on the way to T+1
With the US, Canada, and Mexico having moved to the T+1 settlement cycle this year, there is currently a discussion about whether Australia and other APAC markets will follow suit. Although China already uses T+0 for stock settlement and T+1 for cash settlement, the rest of the region continues to operate on a T+2 basis.
Located in the Australian Eastern Standard Time (AEST) zone, the capital city of Canberra is nine hours ahead of London and 14 hours ahead of Washington DC. Besides a strong jet lag for travellers, the time difference brings certain challenges when it comes to shortening the settlement cycle.
鈥淎ustralia currently effectively settles at T+1陆, with settlement processing at midday on T+1,鈥 says the Treasury. 鈥淭his means that a move to T+1 is likely to require an adjustment to the timing of certain operations throughout the trading day.鈥
For investors from the East Coast of North America and the UK, the move to T+1 would mean that the majority of their trade processing and matching would need to happen overnight when investing in Australia 鈥 essentially T+0.
Another obstacle on the way to T+1 is that its implementation overlaps with the ongoing development of a new electronic system for clearing and settlement, which may significantly delay the process.
The Australian cash equity market uses the ASX鈥檚 Clearing House Electronic Subregister System (CHESS) for all trades executed on ASX, Cboe Australia, National Stock Exchange of Australia (NSX), and Sydney Stock Exchange (SSX). The system, accommodating around 2,200 listed companies and nearly four million investors, currently works on a T+2 settlement cycle.
However, ASX is currently developing a replacement for CHESS, which will allow more flexibility in settlement cycles. Besides T+1, the new system should provide capacity for further changes, according to ASX, which plans to implement the new system in two releases.
The Treasury says: 鈥淎 potential move to T+1 must be considered with respect to Australia鈥檚 position and balanced with the safe delivery of the CHESS replacement project, which serves to modernise Australia鈥檚 critical financial market infrastructure.鈥
Release 1, taking place in the first half of 2026, will replace the clearing component of CHESS and introduce Financial Information Exchange (FIX) messaging for trade registration. 鈥淩elease 2 will replace the settlement and subregister functionality, deliver improved corporate action functionality, and make further enhancements to clearing鈥, ASX says, setting the deadline to early 2029.
On 2 August 2024, ASX published a summary of feedback from industry stakeholders who indicated that 鈥渨hile the transition to T+1 is not urgently required, there is a need to find the balance between the safe delivery of CHESS replacement and alignment with global markets鈥.
Some respondents of the consultation also suggested that T+1 could impact the availability of lendable securities or the willingness of participants to lend securities in Australia, and they agreed that regulatory reporting requirements should be considered to accommodate the shorter settlement cycle.
As a member of the ASX, BNP Paribas participated in the white paper, providing lessons learned from T+1 implementation in the US market. According to Uhlen, the adoption of T+1 could reduce securities lending in Australia due to recall challenges, and general collateral fees could increase in the early stages of the change.
ASX adds: 鈥淲hile further discussions are needed on the T+1 solution and implementation plan, it is evident that the market recognises and values the critical priority of CHESS replacement ahead of additional developments or projects.鈥
In addition to the feedback summary document, ASX has also launched a public consultation on Release 2 of CHESS replacement, which is running until 13 September.
Collaboration across the region
The Australian Securities Lending Association (ASLA) was formed in 1991 to represent industry participants in regulatory and other relevant issues and promote standardisation throughout the industry.
Meeting regularly to support the future development of the securities lending industry in Australia, the association currently represents 33 members from investment banks, custodian and commercial banks, brokers, legal firms, and IT providers.
In June 2024, ASLA signed a letter of intent with PASLA to help it expand its reach to the Australasia region. For Howard, it is an opportunity to develop PASLA鈥檚 Working Group structure and 鈥済enerate high-quality content鈥 for its members.
He adds: 鈥淎s an association, we already operate at a regional scale with our advocacy, and this approach will continue to enable a strong level of consensus building from within the industry in our dialogue with exchanges, regulators, and various policymakers across Asia, Australia, and New Zealand.鈥
Both associations are currently collaborating on the execution and details of the final agreement, which they aim to complete by Q4 2024.
Optimistic predictions
As the Australian securities lending market continues to evolve, new opportunities for increased efficiency and growth arise, accompanied by inevitable challenges. While its unique regulation frameworks provide certain advantages for market participants, rising regional collaboration may strengthen Australia鈥檚 position in the global securities finance landscape.
鈥淭his is a market driven by investor activity,鈥 says Howard, 鈥渁nd that pathway will continue, driving more change, opportunity, and, no doubt, a few challenges along the way.鈥
Looking ahead, Uhlen says: 鈥淲e anticipate a concentration of superannuation funds, which will transform the lending landscape, with more negotiation powers in the hands of a smaller group of big players.
鈥淲e think the agent lenders鈥 role could expand beyond the pure role of generating yield enhancement, ie entering the space of managing and optimising clients鈥 liquidity and collateral needs. This will require closer understanding, product offering, and interconnectivity between clients and service providers, which is an exciting challenge to embrace.鈥
Over the next five years, the Treasury expects to see the CHESS replacement project approach its completion, which will increase daily trade volumes, and the securities lending market may become 鈥渄eeper and more liquid鈥.
Following that, Australia will be ready to implement T+1 and align with other major global markets, which may enhance Australia鈥檚 reputation and competitiveness, as some respondents of the ASX鈥檚 consultation argued.
鈥淲e also expect that the service providers in the securities lending market will continue to innovate and evolve,鈥 adds the Treasury鈥檚 spokesperson. 鈥淭his may include the emergence and more widespread use of technologies such as distributed ledger technology, which may also service market demands in new ways.鈥
鈥淏oth Australia and New Zealand are markets that have stable, pragmatic and robust market structures for all market participants,鈥 says Howard. 鈥淸They] can be characterised as aligned with investor and issuer needs, and that has been reflected in both long-term investment flows and the growth of indexation products, supported by a broad range of risk participants providing market-driven liquidity.鈥
Consisting of mainland Australia, Tasmania, and several smaller islands, the Commonwealth of Australia is the largest country in Oceania, with a very diverse landscape 鈥 from tropical rainforest and savannas in the north, through arid deserts in the centre, to mountain ranges in the south.
Its abundant natural resources and well-developed international trade relations are crucial to the country鈥檚 economy, which generates one of the highest per capita incomes in the world 鈥 US$66,627 as of 2024, according to the International Monetary Fund.
S&P Global Market Intelligence lists Australia among the top five securities lending revenue-generating markets within the APAC region, alongside Japan, Taiwan, Hong Kong, and South Korea. In March 2024, EquiLend recorded 2,049 companies in Australia, with a total market cap of US$1.8 trillion.
With one of the highest endemicity rates, Australia naturally differs from the rest of the world. In terms of securities finance regulation, the main difference is that the country traditionally uses the Australian Master Securities Lending Agreement (AMSLA), while the rest of the world works with the Global Master Securities Lending Agreement (GMSLA).
鈥淭he reason for this is that there's capital gains tax (CGT) relief for the AMSLA,鈥 explains Sophie Gerber, co-CEO of the trade and transaction reporting services provider TRAction. 鈥淵ou don't incur CGT if you return the borrowed shares before the end of 12 months.鈥
Nevertheless, both agreements allow for the collateralisation of loans by cash or alternative collateral of equity or fixed income securities, which are delivered prior to the loan of Australian securities (prepay).
Short selling is permissible in Australia under the Corporations Act 2001, with no pricing requirements for short sale. The threshold for reporting is when a firm鈥檚 short position is more than AU$100,000 or 0.01 per cent of the total quantity of securities or products in the relevant class.
Both domestic and international lenders have to lodge collateral before the physical shares can move in Australia. This can be Australian and American dollars, British sterling, or Japanese yen cash, as well as forms of equities and government debt. Standard collateral headroom is 105 per cent of the stock鈥檚 market value.
The Reserve Bank of Australia (RBA) operates securities lending facilities on its own behalf and separately on behalf of the Australian Office of Financial Management (AOFM), where eligible counterparties can borrow Australian government bonds (AGS) and semi-government bonds.
鈥淭his ensures that these securities lending markets continue to operate efficiently,鈥 says a spokesperson for the Australian Treasury.
Strong competitor, yet prevailing uncertainty
According to Benoit Uhlen, head of market and financing services for APAC at BNP Paribas, the Australian securities lending market is 鈥渙ne of the most efficient, liquid and mature in the region鈥.
BNP Paribas operates as an agent lender for its custody clients in Australia, and its Global Markets business serves corporate and institutional clients in the country.
鈥淎ustralia distinguishes itself from other APAC markets, as it offers a greater emphasis and focus on cash collateral, specifically in Australian dollars,鈥 says Uhlen. 鈥淲hile the Japanese yen is under the limelight from a cash perspective, Australia leads the way for cash reinvestment structures and opportunities in the region.
"The levels of sophistication in Australian lenders are proliferating due to the need for Alpha, the contraction of the numbers of lenders, and the expansion of knowledge brought to these businesses from these mergers. The demands in terms of mechanisms like RAPIDs or proxy callable voting lead to the Australian market differentiating itself from many other markets in APAC."
DataLend鈥檚 dataset shows that the Australian market has had an excess of US$19 billion of demand-driven flows annually over the past decade, utilisation rates average around five per cent, and broad market fees deliver returns in the range of 35 to 95 basis points.
In terms of utilisation rates, Howard compares Australia to Hong Kong, for its hedging demand, yet the Australian market pricing is closer to Japan, he says, which means 鈥渁 more efficient market operating at scale with many active market participants鈥.
The Australian Securities Exchange (ASX) settles equities daily in a multilateral net batch process to facilitate the settlement process. The incidence of market participants failing to deliver their equity is 鈥渧ery low鈥, according to the Treasury, which attributes this to 鈥渢he reliability of this process鈥. ASX鈥檚 analysis of settlement failure rates between 2019 and 2023 set the average around 0.3 per cent (volume-based) and 0.1 per cent (value-based).
However, Australian equities have been underperforming in comparison to their peers across the APAC region. S&P Global Market Intelligence reported a 21 per cent year-over-year (YoY) decline in Australian equities lending revenues for the first half of 2024, generating US$56 million, while Asian equities as a whole declined by just one per cent YoY.
Over the past four years, an average of 56 per cent of all market revenues have been derived from securities finance of small cap equities within the country, according to S&P Global Market Intelligence. Many of these stocks belong to the Australasian materials sector, which has recently been under pressure due to the slowdown in economic activity across China.
The highest revenue-generating stock for July was Vulcan Energy Resources, with US$780,000 in returns. Other popular borrows focus on the Australasia semiconductor sector, such as Weebit Nano, and the software and services sector like Brainchip Holdings.
According to Matt Chessum, director of securities finance at S&P Global Market Intelligence, both of these sectors have attracted borrower interest globally as geopolitical risk and the AI boom have remained 鈥減rominent themes鈥 throughout the first half of 2024.
In 2023, mineral-related stocks, such as Pilbara Minerals, Core Lithium, and Liontown Resources, drew a lot of interest from borrowers as Lithium prices tanked and positioning took place in regard to some of the identified shorts across the electric vehicle sector, Chessum says.
In the fixed income market, the borrowing of Australian government bonds has been on the rise. Annual lending revenues have grown from US$10.5 million in 2020 to around US$42 million in both 2022 and 2023. Utilisation across the asset class has grown to around 32 per cent throughout 2024, with volume-weighted average fees sitting around 14bps.
While for most major economies, inflation has been falling, and many other central banks across the world have started reducing interest rates as a result, this is not the case in Australia, as uncertainty continues to prevail. Therefore, interest rates remain higher than in other countries.
According to Chessum, this slows economic activity, as borrowing is more expensive, and companies find it more challenging to borrow and invest. He says: 鈥淭here is uncertainty as to whether rates will need to rise again or not. This uncertainty leads to increased levels of speculation by investors and a greater potential for short selling.鈥
How clean is your market?
The key regulator for local securities is the Australian Securities and Investments Commission (ASIC), which is an independent Australian government body.
ASIC鈥檚 report from July 2024 showed that Australia鈥檚 equity markets 鈥渃ontinue to operate with a high level of integrity and remain consistently among the cleanest in the world鈥.
Commenting on the report, ASIC Chair Joe Longo said: 鈥淐lean financial markets are essential for the financial wellbeing of Australians and fundamental to an efficient economy. They enable businesses to raise capital and manage risk and give investors confidence to invest.鈥
The report found that there were two periods of temporary deterioration in market cleanliness in the five years up to 30 April 2024. The first was during the coronavirus pandemic, when global markets experienced high market volatility and trading, and the second one was in late 2023 as corporate activity increased. In both instances, ASIC claims to have addressed the harmful conduct through regulatory interventions.
To enhance its enforcement capabilities further, ASIC is establishing a dedicated criminal investigation team to progress insider trading investigations and increase the number of criminal briefs referred to the Commonwealth Director of Public Prosecutions.
Longo adds: 鈥淲e will continue to invest in data and technology to hunt and detect all forms of market misconduct. As our financial landscape evolves, we will expand our market cleanliness work to capture private markets and products in the coming year.鈥
Increasing potential for a CCP
Due to the absence of a central counterparty (CCP) in the Australian bond and repo markets, clearing occurs bilaterally and 鈥渞eflects the complex web of transactions鈥 that occur between participants, according to the Council of Financial Regulators (CFR).
The Australian bond market plays an important role in the country鈥檚 economy, says the CFR, while repos are the key instruments used by the RBA to conduct its domestic market operations and to provide liquidity through its standing facilities.
RBA鈥檚 analysis from 2023 indicated that the potential benefits of central clearing in the Australian market had increased since the bank鈥檚 consultation on the topic in 2015.
Changes like 鈥渟ubstantial鈥 growth in the size of the market and increased participation of non-resident investors have strengthened the case for central clearing, according to the paper.
鈥淐entral clearing would simplify the market structure and could yield other benefits, especially in times of stress,鈥 says RBA. 鈥淔or example, our estimates suggest multilateral netting has the potential to lower settlement obligations by US$60 billion per day.鈥
In response, the CFR is currently holding a consultation on reassessing the case for central clearing of bonds and repos in Australia. By 4 September, the council is seeking feedback from stakeholders regarding the introduction of a CCP.
By this move, the CFR aims to increase its understanding of the circumstances under which an overseas provider could safely and efficiently operate a bond and repo CCP, and what additional protections may be required in such a scenario.
The Treasury adds: 鈥淭he introduction of central clearing may serve to increase efficiency, integrity, and stability, while providing a focal point for regulation and risk management. However, central clearing also incurs operational costs and concentrates counterparty risk while benefits are not experienced equally across participants.鈥
Obstacles on the way to T+1
With the US, Canada, and Mexico having moved to the T+1 settlement cycle this year, there is currently a discussion about whether Australia and other APAC markets will follow suit. Although China already uses T+0 for stock settlement and T+1 for cash settlement, the rest of the region continues to operate on a T+2 basis.
Located in the Australian Eastern Standard Time (AEST) zone, the capital city of Canberra is nine hours ahead of London and 14 hours ahead of Washington DC. Besides a strong jet lag for travellers, the time difference brings certain challenges when it comes to shortening the settlement cycle.
鈥淎ustralia currently effectively settles at T+1陆, with settlement processing at midday on T+1,鈥 says the Treasury. 鈥淭his means that a move to T+1 is likely to require an adjustment to the timing of certain operations throughout the trading day.鈥
For investors from the East Coast of North America and the UK, the move to T+1 would mean that the majority of their trade processing and matching would need to happen overnight when investing in Australia 鈥 essentially T+0.
Another obstacle on the way to T+1 is that its implementation overlaps with the ongoing development of a new electronic system for clearing and settlement, which may significantly delay the process.
The Australian cash equity market uses the ASX鈥檚 Clearing House Electronic Subregister System (CHESS) for all trades executed on ASX, Cboe Australia, National Stock Exchange of Australia (NSX), and Sydney Stock Exchange (SSX). The system, accommodating around 2,200 listed companies and nearly four million investors, currently works on a T+2 settlement cycle.
However, ASX is currently developing a replacement for CHESS, which will allow more flexibility in settlement cycles. Besides T+1, the new system should provide capacity for further changes, according to ASX, which plans to implement the new system in two releases.
The Treasury says: 鈥淎 potential move to T+1 must be considered with respect to Australia鈥檚 position and balanced with the safe delivery of the CHESS replacement project, which serves to modernise Australia鈥檚 critical financial market infrastructure.鈥
Release 1, taking place in the first half of 2026, will replace the clearing component of CHESS and introduce Financial Information Exchange (FIX) messaging for trade registration. 鈥淩elease 2 will replace the settlement and subregister functionality, deliver improved corporate action functionality, and make further enhancements to clearing鈥, ASX says, setting the deadline to early 2029.
On 2 August 2024, ASX published a summary of feedback from industry stakeholders who indicated that 鈥渨hile the transition to T+1 is not urgently required, there is a need to find the balance between the safe delivery of CHESS replacement and alignment with global markets鈥.
Some respondents of the consultation also suggested that T+1 could impact the availability of lendable securities or the willingness of participants to lend securities in Australia, and they agreed that regulatory reporting requirements should be considered to accommodate the shorter settlement cycle.
As a member of the ASX, BNP Paribas participated in the white paper, providing lessons learned from T+1 implementation in the US market. According to Uhlen, the adoption of T+1 could reduce securities lending in Australia due to recall challenges, and general collateral fees could increase in the early stages of the change.
ASX adds: 鈥淲hile further discussions are needed on the T+1 solution and implementation plan, it is evident that the market recognises and values the critical priority of CHESS replacement ahead of additional developments or projects.鈥
In addition to the feedback summary document, ASX has also launched a public consultation on Release 2 of CHESS replacement, which is running until 13 September.
Collaboration across the region
The Australian Securities Lending Association (ASLA) was formed in 1991 to represent industry participants in regulatory and other relevant issues and promote standardisation throughout the industry.
Meeting regularly to support the future development of the securities lending industry in Australia, the association currently represents 33 members from investment banks, custodian and commercial banks, brokers, legal firms, and IT providers.
In June 2024, ASLA signed a letter of intent with PASLA to help it expand its reach to the Australasia region. For Howard, it is an opportunity to develop PASLA鈥檚 Working Group structure and 鈥済enerate high-quality content鈥 for its members.
He adds: 鈥淎s an association, we already operate at a regional scale with our advocacy, and this approach will continue to enable a strong level of consensus building from within the industry in our dialogue with exchanges, regulators, and various policymakers across Asia, Australia, and New Zealand.鈥
Both associations are currently collaborating on the execution and details of the final agreement, which they aim to complete by Q4 2024.
Optimistic predictions
As the Australian securities lending market continues to evolve, new opportunities for increased efficiency and growth arise, accompanied by inevitable challenges. While its unique regulation frameworks provide certain advantages for market participants, rising regional collaboration may strengthen Australia鈥檚 position in the global securities finance landscape.
鈥淭his is a market driven by investor activity,鈥 says Howard, 鈥渁nd that pathway will continue, driving more change, opportunity, and, no doubt, a few challenges along the way.鈥
Looking ahead, Uhlen says: 鈥淲e anticipate a concentration of superannuation funds, which will transform the lending landscape, with more negotiation powers in the hands of a smaller group of big players.
鈥淲e think the agent lenders鈥 role could expand beyond the pure role of generating yield enhancement, ie entering the space of managing and optimising clients鈥 liquidity and collateral needs. This will require closer understanding, product offering, and interconnectivity between clients and service providers, which is an exciting challenge to embrace.鈥
Over the next five years, the Treasury expects to see the CHESS replacement project approach its completion, which will increase daily trade volumes, and the securities lending market may become 鈥渄eeper and more liquid鈥.
Following that, Australia will be ready to implement T+1 and align with other major global markets, which may enhance Australia鈥檚 reputation and competitiveness, as some respondents of the ASX鈥檚 consultation argued.
鈥淲e also expect that the service providers in the securities lending market will continue to innovate and evolve,鈥 adds the Treasury鈥檚 spokesperson. 鈥淭his may include the emergence and more widespread use of technologies such as distributed ledger technology, which may also service market demands in new ways.鈥
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