The Canadian pension fund plans to increase its allocation to the region from 10% to 15% over the coming four years, even as its total assets under management rise.
Citigroup, acting as an agent to both sides, handled all the regulatory requirements involved in the transaction, which comprised entirely of Taiwan stocks. According to the bank, this ensured greater efficiency and ease of access for the counterparties involved and allowed a global investor to lend their Taiwanese portfolio.
"In Taiwan, a standard lending agency has not been done before and as recent restrictions regarding Taiwan offshore collaterals have been lifted, the time was right to complete a securities financing transaction," says David Russell, managing director of Citigroup's Asia-Pacific securities and funds sales. "Borrowers increasingly want a standard form of collateral and some have a problem dealing in local currencies. Working with the Taiwan Stock Exchange and the borrowers, we believe that we've created a structure that opens the market to new forms of liquidity."
One of the main attractions for the lender, which Citigroup declined to name, is the spreads associated with Taiwan's securities lending market - similar to the high spreads witnessed when the Korean securities lending market opened up a few years ago, and dwarfing the tiny rates currently available for lending a Hong Kong portfolio.
"We're the first player to do this in Taiwan and as a result of our early entrance into the market, we can offer lendable Taiwan securities at very attractive rates," says Russell. "We have the development structure to get results in place and now have a number of clients interested in offshore Taiwan securities lending."
The announcement is timely for both Citigroup and Taiwan's securities lending market. Recent regulatory changes in the country have lifted restrictions on borrowing and lending, and has expanded the scope of collateral beyond the New Taiwan doillar into US Dollars. Previously securities financing in Taiwan was carried out between borrower and lender directly, with both sides working through the regulations themselves.
Acting as the agent, Citigroup books the loan through a local broker and arranges for a cash payment to be sent to the client account when the loan is recalled. Ultimately, this eliminates any timing and settlement risk and avoids some of the severe penalties that have dogged the Taiwan securities lending space.
Before recent regulatory changes were made in June 2005, Taiwan faced issues with settlement, which deterred many borrowers. Many found numerous problems on failed trades and the harsh penalties of potential licence loss and account freezing and hence avoided the market. But as Citigroup's recent move attests, securities borrowers are now ready to move into the market in greater numbers and lenders will increasingly look offshore.
Citigroup's expanding presence in the Asian securities lending universe is not expected to end with Taiwan. The firm has also been working closely with exchanges and regulators in India and Malaysia to develop securities lending markets in both countries and expects to gain an early footprint in the near future.
"A number of securities markets across Asia Pacific are introducing new regulations to allow Securities Borrowing and Lending," says Russell. "Citigroup is committed to being at the forefront of these new market developments and to thereby bring the greatest benefit to our clients across the region."
Prior to the Taiwan announcement, Citigroup had already carried out securities financing in Australia, Japan, Korea, Hong Kong and Singapore.
Asset owners and fund managers intend to invest more into multi-family real estate across Asia and the US, as more young people forced to rent instead of buying expensive houses.
The country's pension funds are lagging behind their Asian peers for sustainable returns, leading to calls for Beijing to let them invest in more alternative assets.
GIC’s highest 20-year annualised real return since 2015 places it among the world’s five largest sovereign wealth funds.
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