A shifting landscape: three
trends affecting Asian investors

Against a backdrop of changing regulations, policy divergence and the emergence of new markets, Alex MacMillan, BNY Mellon, explores what is needed to be a dependable partner for Asian investors.

This article is part of the 2023 Asia Pacific Securities Finance Guide, which can be accessed here.  

The Asian market is undergoing a significant transformation, as several compelling trends reshape the investment landscape in the region. Whether on the sell-side or buy-side, investors are increasingly looking to engage with banks that not only have a strong presence in the markets and instruments that are popular in Asia today, but are also primed to react to the next wave of trends across trading, liquidity and collateral:

Rise of synthetics

One important trend impacting Asian investors is the rise of synthetic financing capabilities. Large prime brokers have expanded their use of synthetics, which rely on outright purchases and sales rather than traditional stock borrows, to overcome the regulatory constraints of Basel III, and while the upcoming Basel IV rules may ease some of these constraints, they are unlikely to reverse the relevance of synthetics in Asian markets.

With the popularity of synthetics showing no sign of abating, a growing number of investors are keen to participate in this market. To meet this demand, BNY Mellon is scoping the feasibility of an agency total return swap solution that will further complement our physical lending.

Go big in Japan

The divergence of the Bank of Japan’s (BOJ) monetary policy from that of the G7 has brought renewed interest in the securities borrowing and lending (SBL) market for Japanese securities and cash, as well as domestic borrower demand:

• Yield curve control (YCC) – The BOJ’s yield curve control (YCC) policy has reduced the supply of 10-year bonds in the market. In response, brokers (offshore) are turning to agent lenders for their Japanese government bond (JGB) supply needs. As a result, fees are on the rise – making this class a more attractive option for clients.

• Increased rates – The possibility that Japan will increase interest rates has encouraged the market to review the economics of accepting Yen cash. As an experienced cash reinvestment manager, we are positioning ourselves to support future developments.

• Cost of hedging – The cost of hedging USD-denominated bond exposures (e.g., US Treasuries) has become too expensive for many Japanese asset owners.

Consequently, borrowing demand has diversified to include more non-Japanese holders, as that supply is more stable. Banks such as BNY Mellon, which are able to provide ample supply of US treasuries, are supporting this diversification.

Eyes on new markets

Key Southeast Asian markets are amending rules around SBL, which brings them closer to the international model that allows for offshore participation. For example, new rules aimed at opening the market to offshore investors were recently proposed in the Philippines and are currently going through the necessary approvals.

The Indonesian Central Bank also recently issued new regulations regarding a bilateral securities borrowing and lending facility (onshore), which aims to match potential borrowers and lenders directly. This is a big step towards a working offshore model. Key industry participants are coming together to drive these developments alongside the Pan-Asia Securities Lending Association (PASLA).

Addressing a changing landscape

In response to these trends, BNY Mellon continues to enhance its platform to support the Asian market’s current and future needs. Across Asia Pacific, significant volumes are transacted through BNY Mellon’s platform by a diverse range of institutions which rely on its stability and resilience. This underpins the importance of Asian markets, and is why enhancing accessibility to the bank’s platform and people are key long-term priorities. The better connected BNY Mellon is, the better it can translate the needs of this dynamic region.

In Singapore for instance, BNY Mellon recently introduced enhanced securities finance and liquidity expertise to better service growing ASEAN markets – including trading, client coverage and product. The commitment of our Securities Finance, Liquidity, Collateral Management and FX businesses to enhancing accessibility in the region and future proofing our capabilities doesn’t stop there:

• Sell-side traders from Tokyo to Sydney can borrow global fixed income and equities from our agency lending desk. This means getting pricing and execution in-region on trillions of dollars of securities.

• JGB financing through our global principal trading desk, where we lend cash and US Treasuries, supports the liquidity obligations (e.g., LCR) of Japanese Banks and the local entities of foreign banks.

• FICC Sponsored Repo participation in Southeast Asia has been expanded to include collateral providers and receivers. Clients trade with the FICC via our shortterm investment platform, LiquidityDirect, or directly with our principal or agency desks.

• We lend assets for traditional buy-side clients (i.e., sovereign wealth funds and insurance companies) and are expanding into new segments such as Chinese qualified domestic institutional investors (QDII) and Korean mutual funds. This connects previously restricted supply to global demand.

• Asian institutional clients can invest cash into over 100 MMFs. Purchases, redemptions and exposure management are accessible on the same day.

• Clients can mobilise regional assets as collateral for financing activity globally, as the triparty platform supports more markets in-region than any other platform. In the last few years, the platform has added China Connect, Malaysian and Indonesian assets as eligible collateral.

• Buy-side clients can access innovative FX solutions covering emerging Asia. Most recently, we launched a custody-agnostic KRW onshore solution, which allows global (non-resident) clients to trade KRW deliverable spot and forward FX (via BNY Mellon Seoul).

Regulation, policy divergence and the emergence of new markets continue to shape the decisions of Asian investors. BNY Mellon’s history of supporting connectivity and stability will help ensure its platform continues evolving to address ongoing challenges and empower clients to capture opportunities – now and in the future – in this dynamic, ever-changing marketplace.