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Unlocking Opportunities: Navigating the Essentials of Securities Lending and Borrowing Mechanism.

  • Dec 22, 2023
  • 5:36 pm
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In today’s financial markets, innovative strategies and mechanisms are crucial in enhancing trading efficiency and market liquidity. 

One such important mechanism is the Security Lending and Borrowing Mechanism (SLBM), which has significantly impacted how securities are traded. This mechanism not only aids in better price discovery but also opens avenues for income generation and strategic trading.

What is a Securities Lending and Borrowing Mechanism (SLBM)?

Securities Lending and Borrowing Mechanism (SLBM) is a system in financial markets where investors can lend or borrow stocks, often facilitated by a clearing corporation or a similar entity. 

This mechanism allows the borrower to temporarily hold securities, for which the lender receives a fee. SLBM is particularly crucial in enabling short selling – a strategy where traders sell borrowed stocks anticipating a price drop to repurchase them later at a lower price. It offers a structured and secure way of lending and borrowing stocks, providing a win-win situation for both lenders and borrowers. 

Features of Securities Lending and Borrowing Mechanism (SLBM):

The stock lending and borrowing mechanism boasts several distinctive features:

  • Trades are executed on an automated, screen-based trading platform that efficiently matches trades using a system prioritizing price and time.
  • Lending and borrowing of securities can be conducted for periods extending up to 12 months.
  • Lenders have the option to request an early recall of lent securities.
  • Borrowers are provided the ability to repay securities ahead of schedule and have the opportunity to relend them.
  • Transactions are set on fixed monthly tenures, with predetermined settlement dates for the reverse leg. 
  • These tenures vary from one month to a maximum of twelve months, with the specified settlement date for the reverse leg falling on the first Thursday of each corresponding month.

Eligibility for SLBM Membership

The following entities can participate in the shares lending and borrowing mechanism:

  • Eligibility for participation in the Securities Lending and Borrowing Scheme (SLB5) is extended to all trading/clearing members of the Bombay Stock Exchange (BSE), along with Banks and Custodians.
  • However, they must meet specific criteria set by the BOISL. To partake, these entities are required to register as SLB members in the SLBS, adhering to the registration process outlined by BOISL.
  • Members registered under the SLB can lend or borrow securities through SLB5. This activity can be conducted either on their behalf or on behalf of their clients.
  • To engage in these transactions, SLB members must agree with BOISL. Additionally, clients involved in these transactions must enter into corresponding agreements with their respective SLB members. The format for these agreements will be provided by BOISL and made accessible on the BSE website soon.
  • For client participation in SLBS, SLB members must request that BOISL assign a Unique Client ID for each client. 

The SLBM Process Explained

The SLBM process involves a series of steps:

  • Application Submission: Entities interested in becoming SLB members must apply to BOISL.
  • Agreement with BOISL (Part A): These entities are required to agree with BOISL as a part of the registration process.
  • Security Deposit Requirement: A security deposit of Rs. 10 lakhs must be made in the prescribed format as part of the registration requirements.
  • Compliance with SEBI Guidelines: Entities must fulfill all the conditions specified in the SEBI (Securities and Exchange Board of India) guidelines and circulars.
  • Client Agreements and KYC (Part B): After the initial agreement with BOISL, entities must enter into separate agreements with their clients and complete all necessary Know Your Customer (KYC) formalities.
  • Unique Client ID Allocation: Finally, they should approach BOISL for the allotment of a unique client ID for each of their members/clients. 

 

Clearing and Settlement in Securities Lending and Borrowing. 

Clearing Procedure:

  • Gross Basis Obligations: All obligations are settled on a gross basis without netting transactions.
  • Participant Obligations: Participants bear the obligation for transactions made for their clients or their accounts.
  • Custodial Participant Transactions: Transactions made for a Custodial Participant (CP) client require confirmation by the respective custodian. If not confirmed, the obligation reverts to the participant.
  • Obligation Notifications: Obligations for the first leg are communicated to participants/Custodians on the transaction day (T day), and obligations for the reverse leg are communicated on the following day (T+1 day).
  • Settlement of First Leg Transactions: These occur on T+1 day across all series, including early recall/repayment transactions, and are settled on a gross basis.
  • Identification of SLBS Segment Transactions: Transactions under the SLBS segment are identified based on different settlement types for the first leg and reverse leg, with early recall and repayment transactions identified by separate types in the obligation file.
  • Early Recall and Repayment: Early recall transactions require custodial confirmation, while NSCCL automatically confirms early repayment transactions.
  • Lender's Obligation: Lenders must deliver the securities lent on T day by the scheduled time on T+1 day.
  • Early Recall Lender Obligation: The lending fee for early recall transactions is payable on T+1 day.
  • Borrower's Obligation: Borrowers must pay the lending fees in cash and the lending price (based on the T-1 day closing price in the underlying security) in cash collaterals on T+1 day.
  • Early Repayment Obligation: Securities transferred by the borrower are automatically utilized towards the respective pay-in.

Settlement Procedure:

The settlement involves pay-in and pay-out of funds and securities through designated bank accounts and securities settlement accounts, respectively, on a T+1 day basis for the First Leg, Recall request, and early repayment for all eligible series, and on the reverse leg settlement date for respective series.

Criteria for Placing SLB Orders:

The placement of orders in the security lending and borrowing scheme depends on:

  • Eligibility for Lending: To lend in SLB, the order value for each security must be at least Rs 1 lakh.
  • Eligibility for Borrowing: For borrowing, there's a minimum requirement to place an order for 500 shares.
  • Scope of SLB Orders: Traders have the option to both lend and borrow securities through SLB orders.
  • Restriction on Pledged Shares: Traders are not allowed to lend shares that are pledged. Only unpledged shares are eligible for SLB orders.
  • Exchange Limitations: Due to liquidity issues on BSE, SLB orders can typically only be executed on NSE and some other exchanges.

Conclusion:

The Security Lending and Borrowing Mechanism is an integral part of the financial markets, providing numerous benefits to different market participants. It is not only facilitates efficient price discovery and enhances market liquidity but also offers an avenue for income generation for long-term investors. 
 

Reference Sources: 
Investmenz, pfrda.org , BSE India, NSDL, Investopedia, rbcgam. 

Disclaimer:

"Content shared is for information and education purposes only and should not be treated as investment or trading advice. Please do your own analysis or take independent professional financial advice before making any investments based on your own personal circumstances."

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