Pricing of ALBM transactions

How do we set the security to be lent/borrowed on the NEAT system?

The method for setting up the securities for ALBM transactions is the same as in trading in the normal market on the NEAT system. The series is used to distinguish the transactions in a security from weekly settlement ALBM (`EQ') to rolling settlement ALBM (`BE').

How are the lending rates determined?

In the ALBM session, all the lending and borrowing transactions are executed with reference to a price called Securities Lending Price. The SLP is the last available closing price of the security. The difference between the SLP and the rate at which transactions are executed in the ALBM session is the return from borrowing/lending. On a given day, if both Weekly and Rolling ALBM sessions are conducted for the same security, the SLP may vary depending on the previous day's closing price in `EQ' and `BE' series respectively.

Say, the SLP for Reliance, on a particular session is Rs 240. A lender places a sell order for 100 shares of Reliance at Rs 245. If this transaction is executed then the lender, releases 100 shares of Reliance to the borrower for a `fee' of Rs 5 per share (Rs 245-Rs 240). The borrower pays Rs 24,000 (Rs 240*100) as collateral and Rs 500 towards fees for the loan of securities.

Sometimes there are lenders willing to lend at less Q than SLP. Why would that happen?

This happens when (i) a person is in need of the cash collateral more than the securities or (ii) when the lender has a particular view of the market. Take the Reliance case. The SLP is Rs 240. A lender places a sell order at Rs 235. This means the lender of securities actually wants to borrow funds and is willing to give the securities as collateral. The difference of Rs 5 is the `rebate' that the lender of securities gives the borrower in return for loan of funds.

All you need to know about ALBM

AUTOMATED Lending and Borrowing Mechanism (ALBM) is a securities lending product offered by National Securities Clearing Corporation Ltd (NCCL, a subsidiary of the NSE). The ALBM's primary objective is to provide a window for trading members of NSE/clearing members of NSCCL to borrow securities/funds to meet their paying obligations; be it the weekly settlement market or the rolling settlement market at the NSE.

What is the role of NSCCL?

NSCCL is an Approved Intermediary registered with SEBI under the Securities Lending Scheme, 1997. According to the SEBI scheme, all securities lending and borrowing transactions have to be routed through an Approved Intermediary.

Are all members of NSE eligible to participate in ALBM?

Yes, all active trading members of the NSE/ clearing members of NSCCL are eligible to participate in ALBM. However, they are required to sign the Securities Lending Agreement with NSCCL and complete other essential documentation to become a participant in ALBM.

Can the participant lend/borrow securities for clients?

Yes. All eligible participants are allowed to borrow/lend on their own account and on behalf of their clients.

Does it mean that if one fails to close open positions, one can now participate in ALBM and complete his delivery?

Yes, that is one of the major benefits of ALBM.

Are all securities available for lending/borrowing in ALBM?

No. Currently, ALBM is restricted to only S&P CNX Nifty and CNX Nifty Junior index securities that have to be settled compulsorily in the electronic form. This covers the most actively traded and liquid securities.

How do borrowers and lenders interact?

The spot book of the NEAT system of the NSE is used as the medium of interaction. A person wishing to borrow securities/lend funds places a buy order in the system. A person wishing to lend securities/borrow funds places a sell order. By using the NEAT system, lending and borrowing is made available on a nation-wide basis and is conducted efficiently and transparently.

What are the products offered in ALBM?

Two products are offered under ALBM scheme -- Weekly ALBM session and Rolling ALBM session.

What is a weekly ALBM session?

The weekly ALBM session is conducted every Wednesday, corresponding to the normal weekly settlement cycle -- Wednesday to Tuesday -- to facilitate participants to lend/borrow for completing settlement.

What is a Rolling ALBM session?

The rolling ALBM session is conducted daily, corresponding to the daily rolling settlement cycle to facilitate participants to lend/borrow for completing settlements.

How can one differentiate between the ALBM lending/borrowing offers for the Weekly Settlement Market from those of ALBM offers for the Rolling Settlement Market in the NEAT system?

For the sake of differentiation, the ALBM securities lending/borrowing offers for weekly settlement and rolling settlement are assigned different series and settlement types as below:

Weekly ALBM Session: Settlement Type (L) Security Series (EQ).

Rolling ALBM Session: Settlement Type (P) Security Series (BE).

When are the ALBM sessions conducted?

For the weekly settlement market, the ALBM session is normally conducted on Wednesdays between 9:30 a.m. and 4 p.m.. For the rolling settlement market, ALBM is conducted daily (trading days) between 10 a.m. and 4 p.m.

Having participated in ALBM, when does one get the securities/funds and when are the securities/funds returned?

A schedule is announced for each ALBM session. The participants have to adhere to the schedule for pay-in of securities/funds (see tables). The detailed flow of activities for ALBM sessions in the Rolling Settlement Market cycle in view of the above modifications will be as follows:

T0 -- Rolling market trade session (W1) and obligations generation.

T1 -- Rolling ALBM session (P1) followed by obligations generation and custodial confirmations.

T2 -- Custodial confirmations for W1 by end of day and final cumulative obligations for W1 and P1. T2 -- Reverse leg obligations computed and added to T3 Rolling market trade session (W3) obligations.

T5 -- Settlement (pay-in and pay-out) of trade session W1 and rolling ALBM session P1.

T7 -- Return of securities lent/borrowed in rolling ALBM session P1, along with rolling settlement W3.

Does it mean that the obligations for weekly/rolling settlement market, the rolling settlement ALBM session and the return leg of rolling ALBM session are clubbed?

Precisely. In the case of weekly market ALBM, the obligations of ALBM session on Wednesday are to be made on the following Tuesday. These are clubbed with that of the weekly settlement market having the pay-in of securities/funds the following Tuesday. The obligations are, thus, settled on a net basis. Similarly, the return of securities lent would take place on the eighth day (Wednesday) after the execution day. This pay-out will be on a net basis, after clubbing the obligations of the weekly settlement market having the pay-out on that day.

In the case of Rolling Settlement ALBM sessions, the obligations to be settled on Day 6 (T5) are on a net basis after considering the final obligations for the underlying rolling settlement (W1) and Rolling Settlement ALBM session (P1). Similarly, the obligations to be settled on Day 8 (T7) are on a net basis after considering the final obligations for the Rolling Settlement Market (W3), Rolling Settlement ALBM session (P3) and the return leg (RP1) of rolling settlement ALBM session P1.

What is the tenure of loan?

For weekly settlement ALBM sessions, the tenure of loan is seven days. For Rolling Settlement ALBM sessions, the tenure of loans varies according to the day of the session. Typically, the tenure of loan on Monday will be four days, Tuesday two days; Wednesday two days; Thursday two days, and Friday four days.

What happens to corporate benefits that accrue on the shares lent by the lender?

The approved intermediary ensures that the lender gets the corporate benefits accrued on the shares lent. The borrower is required to return the securities with the corporate benefits, if any.

What is the assurance that the lender will get back his securities/funds?

As explained above, the return leg of the ALBM is clubbed with the weekly/rolling settlement obligations, as the case may be. NSCCL takes the responsibility to complete all settlement obligations in the weekly/rolling settlement. If there is a default in the return of securities, the positions are auctioned and if the auction fails, the obligations are squared-up/closed out.

When is the fee/rebate settled?

All ALBM transactions are processed at the transaction price on the first leg of the loan. As the transaction price = SLP + fees (-rebate), the fee (rebate) is automatically settled upfront, at the start of the loan itself.

Is capital gains tax payable on ALBM loans?

No. CBDT has clarified that a loan of securities does not amount to transfer and, hence, does not attract capital gains tax.

Is there any agreement that the clients have to sign with the participant before the lending and borrowing of securities?

Yes, all the clients are required to sign an agreement with the participant to lend/borrow securities.

Does a client get a contract note from a participant for ALBM transactions?

The participant is required to issue a confirmation memo for loan transactions put through on behalf of clients.

(Source: www.nse-india.com)