The SLBs avenue

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Sunday , May 11, 2008 at 0132 hrs Prudent and propitious - that's what one could gauge of the introduction of the securities lending and borrowing scheme (SLBS). In the light of the chugging-it-along movement of the markets, the very reach and the inherent advantages involved in SLBS makes it an easily accessible and powerful tool to increase your wealth.

Yet to gain popularity, the SLBS has potency, which makes it more attractive than traditional short selling. Here is an analysis of the mechanism, positives, and negatives and how-best-you-can-use-for- yourself to insulate your portfolio from the dips in the markets.

The nitty-gritty

SLBS is a system wherein one can lend and borrow securities for T+8 days, or the day the trade was made plus eight more days. This also involves a lending fee. SLBS (earlier automated lending and borrowing mechanism) was launched in 1997 to fulfill the demand for funds and security created due to being overbought or oversold respectively on a single day. It was banned in mid-2001 due to less transparency and no specified process.

With more technology available and better regulatory mechanisms in place, the new SLBS is supposed to increase liquidity in the cash market, which would lead to efficient price discovery and also using it as another platform for trading opportunity.

Basically, the SLBS involves the owner of shares who can lend them and earn a fee on these idle assets. And, on the other hand, traders can borrow these shares and take short positions without actually owning the shares. To trade in SLBS, margins are taken from both the parties for security purposes just like in the derivative market. These margins are essentially deposits taken because there is an obligation on the both the borrower and the lender.

Now let us understand the process of lending and borrowing. Firstly, the client has to open an account to trade in SLBS with the participant having a Central Depository Securities Ltd (CDSL) or National Securities Depository Ltd (NSDL) account. The participant could be a brokerage, banks, custodians, etc. Participants also have to register with the approved intermediary (AI), for instance the National Securities for Clearing Corporation Ltd (NSCCL), by depositing Rs 10 lakh for collateral purpose. AI acts as middle person between both the participants to smoothen the process and mitigate the risks.