Global custodians and local brokers are increasingly looking to provide securities financing services in Malaysia following regulatory relaxation on borrowing and lending stocks over the counter.

Last month Citi became the second international bank to offer such borrowing and lending services after JPMorgan, the first to enter the market this June.

Meanwhile local investment bank CIMB has been investing in its sec-lending servicing, with a new delta-one desk spawning a need for securities borrowing and lending to support its manufacture of equity structured products.

Under Bursa Malaysia, participants can borrow and lend securities either on-exchange or via an OTC model called “negotiated transaction” that must be reported to the exchange’s clearing house.

The latter, which was introduced in 2009 some two years after the on-exchange model was launched, enables market participants to decide the terms of the deal, the type of collateral backing up the borrowing, and the spreads demanded by the lenders.

This contrasts with the on-exchange model, where the type of collateral is fixed by the exchange, as is the borrowing rate at 2.2%.

Karu Ramesh Kumar, associate director of equity financing services at CIMB in Kuala Lumpur, notes that daily sec-lending activity has shot up after regulations were brought in over the past two years providing more flexibility.

For example, this year it has been possible to have average daily short positions on the 100 securities eligible for borrowing and lending of up to RM1 billion ($327 million), compared with only RM20 million a year ago. 

“We have heard that a lot of banks, particularly local banks, are implementing systems preparing for service launch next year. We expect more players to come to the market during the first quarter,” he says.

Regulators introduced several key changes, including one waiving the need for major shareholders to report if the securities they had lent out had been returned within three days, encouraging the securities holders to seek extra return via sec-lending.

Industry players generally expect lenders and borrowers to prefer the OTC model as it allows flexibility to on-lend the securities after borrowing them.

Besides on-lending loaned securities, regulators also permit sec-borrowing for settling a regulated short sale, and for market-makers of exchange-traded funds to settle their clients’ or counterparties’ buying orders.

Kumar estimates there is around RM100 billion in Malaysian equities available for lending, while on-loan securities amount to over RM1 billion.

Pierre Mengal, Citi’s head of investment and financing solutions for Asia-Pacific, sees demand for borrowing Malaysian securities primarily from international clients such as global asset managers that also operate in Asia.

Citi runs a sec-lending trading team of seven out of Hong Kong and Sydney. Malaysia is another new Asian market outside of the more active ones such as Australia, Hong Kong and Taiwan that the bank has added to its list of agency lending programme, called “Openlend”. Earlier this year Citi also launched services in India.

Industry players say that prime brokers are one of the key sources of sec-borrowing in Malaysia. On the supply side, some of the local long-only players such as pension funds also prefer the OTC model as Bursa Malaysia does not have a credit rating, meaning such investors may not view the exchange as the preferred sec-lending counterparty.