Securities lending and its benefits

SECURITIES lending, which began as a means to cover short sales, has since evolved as a facilitator of sophisticated trading strategies.

The absence of a formal market for securities lending had been felt for a while, and SEBI introduced a scheme for securities lending and borrowing in 1997.

In securities lending, a legal title of a security is temporarily transferred from the lender to the borrower. The former retains all the benefits of ownership, other than voting rights. The borrower is entitled to use the securities as required but is liable to the lender for all benefits (for instance, dividends, interest or rights).

Why should you lend/borrow?

The securities lending programme is used by the lenders to maximise yields on their portfolio. Borrowers use it to avoid settlement failures. Securities lending provides income opportunities for securities holders and creates liquidity to facilitate trading strategies for borrowers. It is especially attractive for large institutional holders of securities, as it is an easy way of generating income to offset custody fees, and requires little involvement or time. Securities lending gives borrowers access to lender portfolios which provide the flexibility necessary when borrowing for strategic positioning and financing inventories.

The Automated Lending and Borrowing Mechanism (ALBM) is a scheme envisaged specifically for participants (trading/clearing members). This scheme caters to the needs of clearing/trading members to provide a facility to lend/borrow securities/funds for the weekly and the rolling market, at market-determined rates.

Who can participate in ALBM?

All clearing members of National Securities Clearing Corporation Ltd (NSCCL; owned by the NSE) NSCCL/trading members of the NSE are eligible to become ALBM participants, subject to signing of the securities lending agreement and completion of other documentation and procedure.

How does the service work?

The spot book of the NEAT system of the NSE is used for transacting in ALBM. A participant who wants to borrow security/lend funds for a particular security executes a borrow transaction/buy order. Similarly, the participant who wishes to lend security/borrow funds executes a lend transaction/sale order. At the end of each ALBM session, the net obligation of a participant in a particular security determines net intention to lend or borrow.

A net buy position for a security implies a firm and irrevocable intention to borrow, whereas a net sale position for a security implies a firm and irrevocable intention to lend. Based on this, NSCCL will give effect to lending/borrowing transactions by settling them along with the obligations of the relevant settlement, at the transacted price. The net obligations of these lending/borrowing transactions and obligations of relevant settlement have to be honoured on the settling date of the respective settlement by making pay-in of required securities/funds to NSCCL.

How do I get back the securities I have lent?

The securities lent are returned by creating reverse obligation of the lending/borrowing transactions in the concurrent relevant settlement for the ALBM session conducted for weekly market and in the next immediate rolling market for the rolling ALBM session of the NSE at the securities lending price (SLP). The return of securities on loan/cash collateral are effected along with the respective settlement. NSCCL thereby ensures the return of borrowed securities and the cash collateral.

What are the eligible securities?

Securities that form part of S&P CNX NIFTY & CNX Nifty Junior and are traded in compulsory demat, are eligible securities for lending/borrowing in the ALBM sessions.

What is the tenure of the loan?

NSCCL offers short fixed-term loan of seven days through weekly market ALBM sessions and two or four days (depending on the ALBM session day) tenure loan through its rolling ALBM sessions.

What are the advantages of ALBM ?

Nation-wide reach as sessions are conducted on the NEAT system.

Lending and borrowing at market-determined rates.

Interchangeable roles for participants.

No safe-keeping fees.

Extensive range of securities for lending and borrowing.

Lending and borrowing only in demat form.

Can offset custody fees.

Lending/borrowing on an ongoing basis.

Maximises settlement efficiency.

Protection of rights.

NSCCL ensures return of equivalent securities and collateral.

What is a client-participant documentation?

Clients who wish to lend or borrow securities/funds under the Securities Lending Programme through participants must execute the Securities Lending and Borrowing Client-Participant Agreement (model format issued by NSCCL Annexure -- I) before execution of the transactions on their behalf. Participants are required to issue a SLB confirmation memo to their clients in case of lending/borrowing transactions executed on their behalf.

This is the second part of the article detailing the manner in which the NSE's Automated Lending and Borrowing Mechanism works. The first part was published on November 5.

(Source: www.nse-india.com)