FAQs for Securities lending and borrowing (SLB) scheme
Q) What is securities lending and borrowing ?
Securities lending transaction is a temporary loan of securities between Lender & Borrower. It describes the market practice by which, for a fee (L. Fees), securities are transferred temporarily from one party, the lender, to another, the borrower; the borrower is obliged to return them either on demand or at the end of any agreed term.
The SLB scheme is facilitated by the Clearing Corporation of respective stock exchanges through a screen based exchange‐traded system. It has a centralized anonymous order book and all the borrowing and lending are cleared, settled and guaranteed. The expected lending fee is quoted as price and the tenures are available up to 12 months.
Q) Which securities are available for transactions in SLB?
Presently securities on which derivatives are available in the F&O segment are available for transactions in SLB.
Q) Is there any Counter party risk involved in SLB transactions ?
Clearing corporation acts as a central counter party providing financial settlement guarantee for SLB transactions. Clearing corporation has a robust risk management system and collects adequate margins from participants to cover counter party risks.
Q) Will the lending/borrowing of securities under the Securities Lending Scheme will amount to “transfer” under clause (47) of section 2 of the Income‐tax Act (Act) in the hands of the lender?
As per the clarification from Income Tax vide their circular no. 2/2008, dated 22‐2‐2008 transactions done in the SLB shall not be regarded as transfer. For further details, please refer circular no. 2/2008, dated 22‐2‐2008 of the income tax department.
Q) What is the tenure for SLB transactions?
The tenure for SLB transactions is up to 12 months. 12 fixed monthly tenures with fixed reverse leg settlement dates are available for transactions in SLB. The fixed settlement dates are the first Thursday of the respective month and the date is displayed on the SLB trading screen at the time of order entry. Each month is assigned a series to it with January having series as 01 up to December having series as 12.
Q) How shall one quote the lending fee?
Lending fee is quoted on per share basis. Lending fee may be quoted based on the annualized yield expected by the lender or the cost which the borrower expects to pay. For e.g. If the lender is lending shares for a period of 180 days he could quote lending fee per share which is based on the rate of return expected by the lender.
Q) What is the settlement cycle for a SLB Transaction?
T Day: The Transaction is executed on T Day between the lender and borrower. T+1 day: The Lenders are required to deliver the securities for pay‐in on T+1 day. Securities are thereafter transferred to the borrowing participants during pay‐out on T+1 day. The borrower shall bring the lending fee on T+1 which shall be passed on to the lender in the funds pay‐out.
Reverse leg settlement date: The borrower needs to deliver the securities at the time of pay‐in which shall be returned back to the lender during the pay‐out.
Q) What are the various margins applicable to the borrower & lender on T Day?
a) In case of borrower only the lending fee is levied upfront as margin.
b) In case of lender, 25% of the lending price (T‐1 cash market closing price) and Mark to market (MTM) at end of day are charged to the lender. These margins are not applicable to lender in case if lender does Early Pay‐in of securities.
Q) What margins are applicable to the borrower & lender from T+1 to Reverse leg settlement day (Reverse Leg)?
a) No margins are levied on the lender
b) 100% of lending price, Value at Risk margins, Extreme Loss Margins (same as applicable in Cash market for buying or selling a security) and EOD MTM are levied on the borrower.
Q) What form of collaterals can be provided towards margin requirement?
The margins are collected from the collaterals of participant/custodian. Participant/Custodian can provide collaterals in form of cash, fixed deposit or bank guarantee.
Q) What is early recall of securities by the lender?
A participant having an existing lend position can recall a position by entering a recall order on the trading terminal. The lender shall quote the lending fee it wishes to forego for the balance period. In case the order is matched successfully then the settlement of the early recall transaction happens on a T+1 basis. After successful completion of pay‐in, the position of the lender would cease to exist.
Recall orders can be entered upto 3 days prior to the respective reverse leg settlement day.
Q) What is early repayment of securities by the borrower?
A participant having an existing borrow position can repay the securities to NSCCL. On receipt of securities the margins levied on borrower are immediately released. The borrower can further lend the securities for the balance period of the tenure. For this the borrower needs to enter a repay order on the trading terminal by selecting order type as “Repay”. The borrower shall quote the fee he expects to receive for the balance period. In case the order is matched successfully then the settlement of the early repay transaction shall happen on a T+1 basis. After successful completion of pay‐in the position of the borrower shall cease to exist. Repay orders can be entered up to 3 days prior to the respective reverse leg settlement day. The orders can also be entered for partial quantity.
Q) What action is taken if the lender fails to deliver securities on T+1 day?
The transaction shall be financially closed out at the below rate i.e. higher of25% of closing price of the security on T+1 day (closing price for the security in the capital market segment of NSE), or (Maximum trade price of the security in the capital market segment of NSE from T to T+1 day) ‐
(T+1 day closing price of the security in capital market segment of NSE)
Q) What action is taken if the borrower fails to bring the funds/collaterals on T+1?
The transaction shall be cancelled, however, the lending fee shall be collected and passed on to the lender.
Q) What action is taken if the borrower fails to bring securities at the time of reverse leg settlement?
If the borrower fails to deliver the securities clearing corporation conducts a buy‐in auction to acquire the securities on the reverse leg settlement date. If securities are not available in auction then the transaction is financially closed out at the below mentioned close out rate i.e. higher of Maximum trade price in the capital market segment of NSEIL from (reverse leg settlement day – 1 day) to reverse leg settlement day, or 25% above the closing price of the security in the capital market segment on the reverse leg settlement day.
Q) Are there any position limits applicable in SLBM?
Yes position limits are applicable in case of SLBM. Following are the current limits applicable
Market Wide Position Limits: 10% of the free‐float capital of the company in terms of number of shares i.e. 10% of the number of shares held by non‐promoters in the relevant security.
Client Level Position Limits: should not be more than 1% of the market‐wide position limits.
Q) What action is taken in case of Corporate Actions?
- Dividend: The dividend amount would be worked out and recovered from the borrower on the book closure/ record date and passed on to the lender.
- Stock Split: The position of the borrower would be proportionately adjusted, and the lender will receive the revised quantity of shares at the time of settlement of return leg of the respective SLB transaction
- Other Corporate Action: Other corporate actions such as bonus/ merger/ amalgamation / open offer etc: The transactions would be foreclosed from the day prior to the ex-date. The lending fee would be recovered on a pro-rata basis from the lender and returned to the borrower.