FIIs want SEBI to lend a helping hand in SLB trade

MUMBAI : It has been almost four months since the Securities Lending and Borrowing (SLB) system was launched amid great fanfare. But there has not been a single trade in this window for over three months now. And unless capital market regulator the Securities and Exchange Board of India (Sebi) overhauls some of the “user unfriendly norms”, that will continue to be the case, warn market watchers. Custodians and institutional players have already made representations to SEBI, suggesting some amendments that could revive interest in this segment. These include extending the tenure of contracts, providing a longer duration for placing trades, and relaxing margin requirements. While the SLB segment has failed to take off, foreign institutional investors (FIIs) continue to actively lend and borrow Indian equities in the over-the-counter (OTC) market। FIIs authorised to issue participatory notes (PNs) are lending shares in their inventories to overseas investors for a fee, say sources at foreign broking houses. One of the reasons for the active OTC market is the lacunae in the domestic lending and borrowing mechanism, they claim. “Why would FIIs want to play the over-regulated SLB market, when the offshore market is far more efficient and a lot quicker,” says an official at the Indian arm of a US-based brokerage. At present, the tenure of a borrowing/ lending contract is seven days. This means that the borrowed shares have to be returned on the eighth day from transaction, to the lender. Market participants say this time frame is too short. In the OTC market, players have the flexibility to borrow shares for up to a month or more. But the bigger problem is that of margins. There are five types of margins levied on trades in the SLB segment. These include value at risk (VaR) margins, extreme loss margins, mark-to-market (MTM) margins, fixed percentage of lending price (to be paid by both the borrower and lender), fixed percentage of lending fee to be paid by the borrower. The margins for the last two categories have been set at 25% and 100% by the National Stock Clearing Corporation - the clearing arm of the National Stock Exchange. If all these margins are added, it works out to be as high as 100% or sometimes even more, say market participants. This means that to borrow Rs 100 worth of shares, you need to pay Rs 100 worth of margins, which then makes the trade unviable. Such high margins make little sense, considering that the list of securities eligible for lending and borrowing is that same as that eligible for futures and options (F&O) trading. In such a scenario, a prospective borrower could as well go short on single stock futures by paying a margin of 25-30%. “In the offshore lending market, the margin requirement is just about 20%,” says an official from an institutional brokerage house. A group of custodians and officials from foreign brokerage houses is already said to have met the NSE, seeking easier margin norms. These players are also seeking extension of the duration for which the trades can be placed in the SLBS window. At present, this window is open for only hours between 10 am to 11 am on trading days. Then comes the matter of transparency - how much is good enough? The Sebi guidelines mandate the authorised intermediaries publicly disseminate the details of SLB transactions executed on the platform provided by them and the outstanding positions on a weekly basis. Some players feel this could lead to front-running or other forms of market manipulation, as the market would be aware which player is short in which stock. “Like in the offshore market, SLB has to exist in a dark pool of liquidity, or there could be attempts to distort prices,” says the official from the institutional brokerage. -ET