Securities Lending & Borrowing Mechanism

( SLBM )

What is Securities Lending and Borrowing mechanism?

  • Securities Lending and Borrowing is a mechanism through which investors can borrow or lend shares to other market participants. The platform provides a viable alternative to derivatives market for purposes of hedging. Borrowers in SLB are usually short-sellers i.e. traders who want to sell shares that they don’t own. Lenders on the other hand are those investors who have bought shares for long-term purposes and such shares are lying idle in their demat accounts. Securities lending is a temporary lending of securities by a lender to the borrower. This mechanism provides liquidity to the equity market and thereby increases the market efficiency

Why is Securities Lending and Borrowing?

  • Just like a loan you avail from a bank, if you have borrowed the shares from another investor, an interest has to be paid for the lender. The interest rate varies from stock to stock and also depends on tenure of such borrowings. As per SEBI rules, the tenure for lending and borrowing is available for maximum period of 12 months. The lending rate for such lending is not fixed but is determined by the market conditions.

Understanding Short Selling

  • A short sale involves the sale and buyback of borrowed securities. The goal is to sell the securities at a higher price, and then buy them back at a lower price. These transactions occur when the securities borrower believes the price of the securities is about to fall, allowing him to generate a profit based on the difference in the selling and buying prices. Regardless of the amount of profit, if any, the borrower earns from the short sale, the agreed-upon fees to the lending brokerage are due once the agreement period has ended. The Securities Lending and Borrowing mechanism allows short sellers to borrow securities for making delivery.

Market Participants of Securities Lending & Borrowing :-

Lender

  • Insurance Companies
  • Banks
  • HNI’s
  • Mutual Funds
  • Retail
Borrower

  • Short sellers
  • Cash & derivatives arbitragers
  • Market makers
  • Retail

Features of Securities Lending and Borrowing

  • Transactions carried out under SLB segment are guaranteed by Clearing Corporations and hence do not carry any counter party risk.
  • All F&O Securities are eligible for SLBM and further few eligible non F&O securities and index ETF’S are eligible for same.
  • Contracts are available with a duration starting from one month to twelve months.

Benefits for Lenders

  • Lenders can earn additional income from the idle portfolio held as they receive a certain fee to lend the stock.
  • There is no limitation of minimum quantity that a lender could lend.
  • Lenders are entitled for all the corporate action like dividend, bonus etc. that takes place during the lending period.
  • No counter party risk as all the transactions are guaranteed by the Clearing Corporations.
  • Risk free income

Benefits for Borrowers

  • Borrowers can carry out unintended short position created in the books.SLB enables borrowers to meet the obligation in case of shortage in delivery and avoid an auction (seller shortage) in Cash segment.
  • Sell securities short against an off‑setting derivatives position to take advantage of dislocation between cash and derivatives markets.
  • Buys the undervalued security and sell the overvalued security
  • SLB enables borrowers to meet the obligation arising out of physical settlement under the derivatives segment.

SLBM thus is a prudent way for investors to make an additional income by lending their idle stocks at a certain fee, for stipulate duration. Traders, on the other hand, can borrow the stocks and can then benefit from arbitrage opportunity or meet the exchange obligation of pay-in of stocks.

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