Japan's New Era
By Yuka Hasumi, Vice President, Sales, EquiLend Asia
IT IS A TIME OF CHANGE in Japan as Emperor Akihito abdicates his position, the first to do so in over 200 years. As Japan enters the “Reiwa” Era, it continues to be a powerhouse in the Asia region from a political, technological and economic position.
In the finance markets, Japan at times tends not to attract the level of attention that its securities lending market potentially deserves. Despite being the biggest single securities lending market in Asia from a revenue perspective, it often takes a backseat in the news over hotter markets that have higher fees and greater year-over-year revenue increases.
While markets such as South Korea and Hong Kong dominate the headlines and interest from hedge funds, Japan continues to provide the securities lending market with opportunities through its depth of assets and market participants, both domestic and international. Alliances with regional exchanges in Asia provide further access and integration into Asia, reducing systematic risk. And as host of the 2020 PASLA conference, all eyes will be back on Tokyo in the coming year in the securities finance market.
In 2018, Japan represented 53% of the regional loan balance with an average on-loan value of $117.17 billion across both equities and fixed income, and the market accounted for 35% of revenue earned by lenders across the entire region in 2018, with $778.4 million.
In the broader securities markets, further changes are underway. The big news for Japanese stock markets this year is the pending operational shift from a T+3 to a T+2 (two days after a transaction) settlement cycle. It is the second chapter in a series of settlement reforms to enhance the market’s international competitiveness and increase trading efficiency. The reduced settlement cycle, in line with other major global markets such as the EU and the U.S., is expected to promote increased liquidity in the market, reduce operational and systemic risks and assist counterparties in avoiding trade failures. A further development would be the possible launch of a central counterparty (CCP) model in Japan, although discussions are in the early stages.
Furthermore, firms active in Japan are embracing technology more than ever. The take-up of automated trading platforms by key participants in the Japanese markets has promoted further economic development in the market. As for the securities finance market, EquiLend’s NGT trading platform, Post-Trade Suite and variety of DataLend products have seen steady interest and increasing adoption and use in Japan.
Much like its cash trading markets, Japan’s securities finance market comprises both onshore (domestic) and offshore (international) participants— securities houses, trust banks, asset managers, life insurance companies, brokerage firms, custodians and online brokers.
The number and size of new entrants entering the market has grown substantially in recent years, along with holdings, and cross-border relations have improved.
The market continues to be an integral part of alternative investment strategies for domestic firms, and a leading revenue driver in the region. Furthermore, the cost of funding for local participants accepting Yen collateral provides an advantage for many on the brokerage side.
The compelling aspect of the onshore market that continues to see growth is the participation and increasing market share of retail, or online brokers, which, due to the nature of their underlying clients and growth, are able to provide access to the mid, small and micro cap equity names that so many hedge funds are searching for.
In recent years we have seen new participants enter the securities finance ring to provide access to their holdings and capture additional alpha for their clients. As a result, and given that revenue from lending Japanese equities increased an impressive 30% in 2018 versus 2017, growth and interest in the market should remain robust and perhaps increase in 2019.
With the market developments, technology adoption and growth of the securities finance market, Japan looks to be back in focus for market participants in Asia.