Securities Lending and Borrowing is a system that allows investors to borrow and lend shares to other market players. For many reasons, the platform is a potential alternative to the derivatives market. Short-sellers are the most common SLB borrowers. On the other hand, Lenders are investors who purchased shares for the long term and have them sitting dormant in their demat accounts.
In most jurisdictions, securities lending and borrowing is an OTC (over-the-counter) commodity where custodians allow borrowing and lending transactions between institutions. SLB, on the other hand, is an exchange-traded product in India.
- Clearing Corporations guarantee transactions in the SLB section and hence do not include any counter-party risk.
- Contracts with durations ranging from one month to twelve months are available.
- Turnover fees from the STT and SEBI are not applicable.
- The market value of the equities determines the loan amount pledged as security.
- This SLB allows retail and institutional investors to lend and borrow assets.
- The securities can be lent by investors who have Ideal Shares in their demat account.
- This approach allows investors or traders who have short-sold stocks to borrow the securities.
- National Securities Clearing Corporation Limited ensures that stocks are delivered after the rental period has ended. As a result, there is no chance of the stock being lost.
- When the borrower returns the stock, any dividends, stock splits, or bonus shares are paid to the lender of the securities.
Both the lender and the borrower benefit from SLB.
SLB delivers an extra return on an idle portfolio for Lenders. So, if you have 1000 shares of xyz that you intend to own for a long time, you can lend them out anytime there is a demand. Where NSCCL is the guarantor, the lender receives loan fees.
The potential to make additional money through the fee charged to the borrower to borrow the security is one of the benefits of securities lending from the lender's perspective. It could also be considered as a way to broaden one's horizons.
From the borrower's perspective, it permits them to engage in activities such as short selling. It also provides investors with more perspectives on the market. As previously said, it aids in the increase of liquidity in the market as a whole. As the difference between the bid and the ask narrows, increased market liquidity tends to tighten spreads, which is favorable to all market players.
A borrower is most likely interested in one of the following opportunities: stock price between two exchanges, reverse arbitrage when futures are at a discount to stock, covering short positions to avoid settlement failure, mispricing in options, and other hedging strategies, SLB could be used to borrow stocks from a lender for a fee.
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