ASLA
Peter Martin
24 August 2010
The Australian securities lending market has endured a turbulent time over the past couple of years. Peter Martin, head of the Australian Securities Lending Association, tells Securities Lending Times that things are looking up.
Image: Shutterstock
SLT: Tell me about the makeup of ASLA, and what efforts you have made in the context of the world financial crisis?
Martin: The ASLA membership is made up of the majority of the Australian securities lending market - 30 companies with some Australian presence, including brokers, service providers and financial institutions with lending and borrowing interests. We aim to represent our members' interests through publicity, liaising with regulators and working with the media to correct some of the misinformation that continues to exist out there.
A great deal of time and effort went into assisting and liasing with the regulators last year in an effort to help clarify likely outcomes of potential policy changes. Furthermore, there was an extensive media initiative that was taken up in an attempt to demystify some of the misunderstanding pertaining to securities lending. Many of the issues highlighted by the media were concerned specifically with margin lending, but securities lending was getting tarred with the same brush. This therefore required a concerted effort to help remove ambiguity and clarify exactly what securities lending is and how it benefits the financial markets as a whole.
Essentially, over the last 12-18 months we have attempted to work with the regulators in order to proactively make sure any policy or regulatory introductions were thoroughly discussed and understood. This year it's about maintaining contact with the regulators, but also trying to spread accurate information. There are now disclosure requirements for stock loans and there's more information on the ASLA website, which is now a lot more open. We're also engaging with the media to continue building those ties.
SLT: How did ASLA respond to the short selling ban imposed by the regulator, which was lifted in May 2009?
Martin:The general perception from those outside the equity markets was that the short selling ban was needed, and that the Australian market has come through the events of the past two years relatively unscathed. But the regulations for what is required pre-short are now stricter than anywhere else. Additional requirements introduced to Australia go over and above what we see in other markets. There is certainly a perception that Australia is not afraid to unilaterally impose some hard regulatory restrictions. Some fund managers have not re-entered the market because of that risk. The regulatory focus is on execution, and the requirement to physically have the shares before executing the short. Markets such as Hong Kong have certainly benefitted on the back of this.
SLT: Why do you think the decision was made to impose strict restrictions?
Martin:On one level, it could be viewed as a reaction to rather dramatic movements in the market. At the same time, one of the problems was that the market had had so many years of growth, people forgot that it is cyclical. Once the value of the shares started to decline, someone needed to be blamed. On the other hand, you now have a more educated client base. Risk management is almost more important than the performance for many clients. The supply for lending is back - both offshore funds and similarly in the domestic market. Supply is there, but at the moment, there's not the same level of demand, even though the market is fairly healthy.
SLT: What would you like to see happen in the market in terms of relaxing the rules?
Martin:I don't believe we'll see a change to the regulations. We would however like to see some relaxation in terms of the interpretation of the regulations. The language [of the regulations] is the same in both the Hong Kong and Australian markets, but the interpretation in Australia is different from that of Hong Kong. The industry feels there should be additional exemptions to the current regulations, based on how they are applied.
At the moment, we have a 'one size fits all' approach. For example, if someone wants to short [a large cap, liquid security] BHP [Billiton, the Australian mining company that is one of the largest enterprises in the world], you have the same requirements as if you want to short a small, illiquid company. If you can't allow people to trade in and out of these larger names, then that's a problem.
We are trying to communicate the benefits of introducing a liquidity test to the market. At the moment, there are around AU$20 billion of shares on loan, but at its peak in 2007, the market was around AU$80 billion, so there is definitely room for improvement.
SLT: What else is required to get the market back to where it was?
Martin:The funds are coming back in looking for M&A. But once the events have come to fruition the money is not staying in the market. There's not a level playing field in comparison to other markets. It's not just about the regulations, or smaller funds and leverage. There is definitely a bias towards long index positions. When the funding costs increase, businesses have developed methods for utilising their own inventory to raise money.
But there are certainly some positives. There's been an uptick in M&A activity. We started seeing that in the second quarter of this year and this will hopefully increase. AU$100 billion dollars was raised last year, which will hopefully be the catalyst to attract funds back into Australia or increase the percentage of their global portfolio they apply to their Australian strategies. There has also been talk of neutralising the long bias back to shorting the index. But to get back to historical levels, we will need some modifications to the regulation or some additional exemptions.
As much as the recovery is anticipated, that hasn't translated directly into recovery in the securities lending market. The lending clients are showing a healthy interest, and you have an educated client base, which is good, and we're seeing a level of engagement should have been happening anyway.
SLT: What efforts does ASLA make at a regional and international level to coordinate with other associations?
Martin:Anything that's pertinent to Australia we'll circulate with the RMA, ISLA and PASLA membership. Anything relevant to Australia that affects someone in the UK for example, we can assist with. We have a common goal: to get the information out there and make sure it's clear to everyone what securities lending actually brings to the table.
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