Securities lending and borrowing (SLB) scheme

Highlights of the features, risks and rewards of the SLB scheme launched by NSE

 

Are you a long term investor having securities in your demat account and interested in earning some extra bucks by lending them?
Are you an arbitrager looking to enter a reverse cash & carry trade but do not have the securities to execute the strategy?
If your answers to the above questions are a “YES,” then the SLB scheme should work for you, but before jumping into the benefits, let’s understand the concept, features, process and the market for SLB’s.

Concept-
The securities lending and borrowing scheme was initially introduced to ensure the settlement of short-sold securities. Facilitated by the National Securities Clearing Corporation of India (NSCCL), the clearing corporation of the National Stock Exchange of India (NSE), the scheme was launched in April 2008 and market participants comprising of Retail and Institutional investors are permitted to lend and borrow on an automated screen-based platform called the SLB-NEAT, where order matching is based on price-time priority; similar to the secondary markets.SLB transactions can be carried out in securities where derivatives contracts are present, although large volumes are generally noticed in only a few selected securities.
Click HERE to take a look at the various bid-ask quotes for securities listed in the SLB markets.

Key features-

  • Centralized anonymous order book.
  • Market participants can lend and borrow securities from 1-12-months.
  • Securities lending/borrowing can be carried out only through the demat account
  • Participants lending securities are required to quote the lending fee per share on the platform.
  • Option for early repayment of securities.
  • Early recall request of securities by the lender
  • All benefits of corporate action such as stock split, dividend pay-out passed on to the lender.
  • NSCCL acts the central counterparty and provides financial settlement guarantee on all SLB transactions.
  • No applicable regulatory fees such as STT, stamp duty, SEBI fees and transaction charges

 

Process-
Members of NSE and custodians in the cash market segment are permitted to register as Participants in SLB. In the event of lending or borrowing on behalf of clients, the participant should obtain a UCI code for the client, following which the client will be allowed to lend/borrow in the SLB market.

Here’s how the transaction process is broadly carried out:
On T-day, the transaction is executed between the lender and the borrower.
The lender will be asked to bring in 25 percent margins unless the securities are already deposited in the demat account, while the borrower is levied only the lending fees as upfront margins.
On T+1 day, the lender delivers the securities which are transferred to the borrowing participant and the borrower likewise brings in the lending fee, which are passed on to the lender.
The lender does not need to pay margins while the borrower is charged 100 percent of the lending price in addition to VAR, extreme loss margins and EOD MTM.

In the reverse leg of the transaction, after the securities are delivered to the lender, the margins on the borrower are released by the Exchange.


Source: Compositedge- Protrader terminal

Market size-
The SLB scheme is a perfect opportunity for borrowers since it holds huge potential in terms of effecting profitable strategies in the stock market. The SLB market which started about 10-years back is relatively risk-free with lenders earning substantial returns in the form of interest while debtors are assured of risk-free returns from reverse arbitrage opportunities in addition to retaining the security deposit on refunding the borrowed shares.
However, volumes in the segment have really not taken off due to the lack of awareness, especially among retail traders although in the last 5 years, they are estimated to have jumped to about 2000 crores from around 100 crores previously

Conclusion-
Securities borrowing is an excellent tool for individuals and institutions involved in reverse arbitrage. Likewise, security lenders can earn risk-free income on their idle investments. The normal market yield for lenders is estimated to be around 6-8 percent but in the event of a large delivery, short-term yields can even rise tenfold, bringing in massive risk-free profits to lenders.
Although this particular division of the market currently lacks liquidity, SEBI is keenly looking to revive the segment by including additional securities, permitting mutual funds to short sell and allowing depositories to lend, thereby adding more muscle to the market and streamlining the process.

Compositedge is a registered participant in the SLB segment and clients registered with us will be eligible to receive key information as and when a suitable lending opportunity arises. Depending on your holdings, clients who wish to lend will have to sign the necessary agreements before they can start participating in these markets.

 

Compositedge, incorporated in 1995, is a leading discount broker and provider of algo trading solutions for retail customers in India. Headquartered in Bangalore, we provide the internationally acclaimed Protrader platform, which comprises of charts, scalper, matrix, grid, time & sales, market-depth and options master in addition to the state of the art algo trading platform. We combine discount broking and algo trading solutions to ensure all our retail clients experience the finest trading amenities at affordable costs.