SLB mechanism saw a three-fold increase in volumes during the year on the back of growing institutional interest in the segment, along with some relaxation on the regulatory front.
The securities lending and borrowing (SLB) mechanism saw a three-fold increase in volumes during the year on the back of growing institutional interest in the segment, along with some relaxation on the regulatory front.
The total number of shares traded in the SLB segment of NSE rose from 5 crore in 2011 to 15.63 crore in 2012 as clients’ demand for borrowing of shares went up, driven by considerable reverse arbitrage opportunities in the middle of the year.
At the same time, the supply side, which had been an issue, got a boost as some of the global custodians, like Citibank, started offering stock lending to their clients from October this year. Among others, Deutsche and BNP Paribas, too, are reportedly looking at this space.
The SLB mechanism basically involves borrowing a stock from others (lenders) for a specified period of time through approved intermediaries like the clearing corporation of stock exchanges, primarily to capitalise on the cash-futures arbitrage opportunities and to fulfill delivery commitment on shorted securities.
On the other hand, lenders, who are mainly long-term investors, get lending fees in return on the stocks lying idle with them. Currently, the regulations allow retail or institutional investors to borrow or lend shares listed in the futures and options segment for a maximum tenure of 12 months in securities that are part of the futures and options segment.
Experts believe that with more institutions showing interest in lending the securities, the segment has seen considerable improvement in volumes.
“The demand for securities was always there from borrowers, but the supply side was an issue. But over the last one year, there has been growing institutional interest in this segment. With Irda allowing insurance companies to participate in SLB as per its draft guidelines, the big institutions like LIC seem to be interested. A few other asset management companies have also shown interest,” said Ravi Varanasi, senior vice-president at NSE.
The high annualised yields (lending returns), which range from 4-5% for stable stocks like NTPC and Bhel to 25-40% for some of the less liquid and smaller stocks like Suzlon, have prompted investors to look at the segment.
However, the attractiveness of this segment is directly related to reverse arbitrage opportunities present in the market, which have decreased in last 2-3 months. The volumes, which touched 1.80 crore shares in June, have since stabilised at close to 1.5 crore shares per month.
Another reason is the forceful closure of contracts due to corporate actions post results season, said Yogesh Radke, head of quantitative research at Edelweiss Securities. “The open interest has seen a fall from around `600 crore some 3-4 months back to `310 crore as of now,” he said.
Lower client level position limits permitted by Sebi are also acting as a deterrent for some lenders. “Though the market-wide position limit is quite comfortable, the client limit and market participant limit often get hit as there are few active participants who continuously trade in limited counters,” said Radke.
According to experts, the stakeholders have made a representation to Sebi to consider increasing the position limits.
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