Securities lending is a little-known yet vital cog in the world of finance, particularly in Singapore. Here, we delve into ten intriguing facets of this complex mechanism you may have yet to consider. At its core, securities lending involves temporarily transferring securities from one party to another, typically for a fee. The Securities Borrowing and Lending (SBL) scheme facilitates this process in Singapore.
What you should know about securities lending
Here are ten things you should know about securities lending in Singapore.
The purpose of securities lending
An essential purpose of securities lending is to facilitate short selling, whereby a trader borrows and sells shares they do not own in anticipation of declining stock prices. Should this happen, they can buy back the same number of stocks or shares at a lower price and then return them to the original lender for a profit.
Who can benefit from securities lending?
Securities lending is an advantageous practice that benefits traders and investors who temporarily lend their shares. By engaging in this activity, investors can earn additional income in the form of interest or rebates paid by the borrower, thereby maximising the potential returns on their investments. This mutually beneficial arrangement allows investors to leverage their idle assets and generate extra revenue while maintaining ownership of their shares.
The role of the SBL
The Securities Borrowing and Lending (SBL) scheme is crucial in maintaining a secure and orderly process of borrowing and lending securities in Singapore’s financial market. By establishing a robust infrastructure, the SBL scheme enables market participants to efficiently and effectively match borrowers with lenders, facilitating smooth transactions and fostering liquidity in the market.
With its comprehensive framework and meticulous supervision, the SBL scheme instils confidence and trust among market participants, contributing to the overall stability and growth of the securities lending industry in Singapore.
Types of securities that can be lent
Securities eligible for lending under the Securities Borrowing and Lending (SBL) program include shares listed on the Singapore Exchange (SGX), Exchange Traded Funds (ETFs), and certain other structured products.
This program provides opportunities for investors to lend their securities to interested parties, facilitating liquidity and enhancing market efficiency. By participating in the SBL program, investors can unlock additional value from their securities holdings while maintaining ownership rights.
Who can borrow and lend securities?
In principle, any accredited financial institution, such as a bank or broker-dealer in Singapore, can become a borrower or lender under the Securities Borrowing and Lending (SBL) program. This program facilitates securities borrowing and lending, providing liquidity and flexibility to the financial markets.
While individuals are not allowed to participate directly, they can engage indirectly through their custodians, ensuring that even individual investors can benefit from the opportunities presented by the SBL program.
Prerequisites for joining SBL
Financial institutions must meet specific prerequisites before they can become borrowers or lenders. These prerequisites include maintaining a good credit rating, meeting the net worth and capital requirements, and adhering to the financial guidelines and regulations set forth by SGX (Singapore Exchange) and MAS (Monetary Authority of Singapore). By fulfilling these requirements, financial institutions ensure a strong foundation and compliance with industry standards, fostering trust and stability in the financial ecosystem.
The securities lending process
The securities lending process is a complicated one that involves several steps. It begins with the lender making an offer, which the borrower needs to accept. After that, legal contracts are signed, and the loan is settled in cash or other securities.
The risks associated with securities lending
Parties should know a few risks associated with securities lending before entering it. These include operational risks such as wrong way, counterparty, credit, and liquidity risks. Proper due diligence is critical to mitigating these risks.
The benefits of securities lending
Despite its potential risks, securities lending can benefit market participants. It helps to facilitate short selling, providing liquidity in the markets and encouraging price discovery. It also allows investors to earn additional income through loan fees and interest payments.
The impact of regulations on securities lending
Regulations in Singapore play a vital role in shaping the securities lending landscape in Singapore. The Monetary Authority of Singapore and the Singapore Exchange (SGX) impose stringent rules to govern securities lending activities, ensuring a robust, transparent, and fair trading environment. These regulations protect market participants and contribute to the financial market’s stability and integrity.
The final word
Securities lending is an important yet often overlooked aspect of finance. With this article, we hope you understand the process and its associated benefits and risks better. As always, it is essential to research and be aware of the risks before participating in any securities lending activities.
Securities lending is a valuable tool for investors and traders alike, and it’s essential to understand its various facets to best use this complex system. We hope that this article has provided you with some valuable insights into securities lending in Singapore.