Triparty collateral optimisation will ease global investors’ entry into China’s stock markets

• China A-shares listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) will be included in relevant MSCI indices, including the MSCI Emerging Markets Index, for the first time.
• There is a growing list of transactions requiring collateralisation which is transforming the institutional investor business model.
• While triparty solutions are commonly available in most major markets, such a service did not exist for China A-shares prior to BNY Mellon’s offering.

BNY Mellon began its collateral services for securities settled through Hong Kong (HK) Stock Connect in June, becoming the first triparty agent in the region to so to support of the growing cross-border trade volumes into and out of China.

The solution expands the range of eligible collateral available to investors, just as international interest in Stock Connect gathers steam.

With global investors allowed to access to China market through Hong Kong Stock Connect schemes, BNY Mellon expects to see more opportunities for institutional investors to become more active in collateral transformation and market supply, as there is a growing list of transactions requiring collateralisation which is transforming the institutional investor business model.

BNY Mellon has the average tri-party repo balances of over $ 2.6 trillion globally (as of March 31 2018).

Natalie Wallder, the bank’s head of collateral management in Asia Pacific, explained that a tri-party collateral manager will enable participants to aggregate collateral requirements across counterparty relationships resulting in funding efficiencies through optimisation of collateral.

“We help clients with efficient financing of Stock Connect assets and unencumbered asset pools, which will result in mobility and deepening market liquidity while delivering collateral optimisation,” she commented.

Beginning June 1, 2018, China A-shares listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) will be included in relevant MSCI indices, including the MSCI Emerging Markets Index, for the first time.

The addition of these equities to the indices will significantly increase portfolio allocations to China A shares. MSCI predicts that the inclusion of China-A shares will drive an initial flow of around $20 billion to shift and track the China A-shares market.

"BNY Mellon Markets is always looking for ways to increase liquidity for our clients. Our Stock Connect solution does just that, by unlocking the ability to utilise these assets as collateral, bank and broker dealer clients now have an additional avenue to finance inventory and reduce funding costs via tri-party collateral management, “said Wallder.

The tri-party arrangement for Stock Connect securities was a collaboration between various parts of BNY Mellon including Markets, Asset Servicing and Pershing, with each one involved at different stages of the investment lifecycle.

While triparty solutions are commonly available in most major markets, such a service did not exist for China A-shares prior to BNY Mellon’s offering. This was because collateralising SSE and SZSE A-shares required considerable adjustments to collateralisation models to integrate with local legal and market infrastructure.

BNY Mellon’s triparty collateral service enables portfolio utilisation of China A-shares held through HK Stock Connect for market participants.

Welldar emphasised that the decision to start the service was taken in order to stay close to the regulatory requirements and to ensure greater efficiency and effectiveness for its institutional clients.

For example, for the tri-party collateralisation through Stock Connect solution and the T+0 settlement cycle meant further innovative thinking that leverages the different parts of businesses that cover the different stages of the investment lifecycle that include the Asset Servicing team. The model that was put in place enables clients to facilitate securities allocated in tri-party, recall those assets and settle their market delivery.

“We expect to see a gradual increase in market investment in Stock Connect assets and unencumbered asset pools, following the inclusion on June 1 of China A-shares in the MSCI. The progress made on the inclusion of China A Shares in the MSCI Emerging Markets index has created very big demand for an easy-to-implement China access channel, such as Stock Connect,” she added.