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SGX Rolls Out Enhanced Securities Borrowing & Lending Programme
Education | 22 October 2010
By: jason.liew
Articles (66) Profile

The concept of Securities Borrowing and Lending (SBL) is definitely not something new in the local equity market. Although Singapore Exchange (SGX) introduced this service in early 2002, retail investors may not have a thorough understanding of how it actually works.

In A Nutshell

As its name suggests, Securities Borrowing and Lending involve the temporary transfer of securities or stocks from one party (lender), who earns a fee in return, to another party (borrower), who uses the stocks borrowed to execute certain trading strategies.

The Central Depository (CDP), which safe-keeps securities for retail investors and institutions, is the counterparty for all lenders and borrowers.

When stocks are lent, legal ownership of the aforesaid entity passes temporarily to the borrower, until the time when the stocks are returned to the lender. Even though lenders do not hold the voting rights of the loaned stocks, other economic benefits of ownership, including bonus and rights issue as well as dividends, are retained by the lender.

In August this year, SGX rolled out an improved version of the Securities Borrowing and Lending Programme, with the objective of raising the overall liquidity on the local bourse. In the past, the number of stocks eligible for lending or borrowing via the CDP hovered around 150. With the enhancement, this pool of stocks has now expanded to over 600, representing more than 80% of the total listed stocks on the SGX Mainboard and Catalist.

Optimising Returns

“Just like receiving interest on your cash deposits, i.e. lending out cash to banks, investors can receive an additional return on their stocks by simply lending them out,” explained Lai Kok Leong, Vice President, Depository Services of SGX, during a recent interview with Shares Investment (Singapore).

According to Lai, the lending rate and the borrowing rate are currently fixed at 4% and 6% per annum respectively, regardless of the amount of any particular stock being transacted. “The fixed rates are not industry norms. Going forward, the market pricing will be determined by supply and demand rather than an artificially fixed rate. In a fixed rate regime, there are no transactions matched at 6% but there could have been borrowers and lenders willing to transact at 5% or 4%,” he added.

In order to participate in the Securities Lending scheme, investors must first sign up as a lender with the CDP at zero cost. Once registered, the stocks that the person holds will perpetually be included in the lending pool unless a request is being sent in to pull out from the programme.

The lender will receive a confirmation statement from the CDP when a loan has been effected and when the loaned securities have been returned to his or her account.

As pointed out by Lai, investors can lend out their stocks for as long as they wish. Lenders also have the flexibility of selling their stocks at any point in time. When that happens, the CDP will perform an automatic substitution to replace the original lender with a new lender. That is to say, lenders do not need to inform the CDP in the event where they decide to sell off the securities that have been loaned out earlier.

This is also the predominant reason why the CDP cannot lend out 100% of a particular stock in its pool, said Lai. “We need to keep a certain buffer of stocks so that if a lender sells away his stocks, we are able to respond quickly and find another substitute lender,” he elaborated.

On the other spectrum of the transaction is the borrowing of stocks, which is executed through local stockbroking firms. This has traditionally been mainly carried out by institutional investors.

Typically, investors can utilise the Securities Borrowing Programme to cover short positions in a bid to avoid settlement failures. Investors can also borrow securities to hedge their investments in derivative products or for arbitrage purposes.

If they find that a stock is highly overvalued, they can borrow from the pool and take a short position. When prices drop, they can then buy back the stock from the market to unwind their position at a profit. Meanwhile, investors can find out more about the available stocks through the CDP website (www.sgx.com/cdp > ‘Business@CDP’ > ‘Lend’ > ‘Lending Pool’).

A point to note though, while the borrower has an obligation to redeliver the equivalent securities at a later date, the lender still bears the market risk, as the former merely returns the actual quantity of securities and not the original market value of the securities borrowed.

In a conscious effort to create more awareness for the Securities Borrowing and Lending Programme, the SGX Academy (www.sgxacademy.com) will be holding a series of seminars to educate the investing public. Do keep a look out.


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