SLB mechanism, changed, lending tenure extended

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Mumbai, Nov 1: the lender receives the revised quantity of shares. In case of other corporate action like bonus issues, amalgamation and open offer, the broad guideline state, “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.”

These, also were a few guideline that the market was expecting clarity about.

However, it is the margining involved in short sales that was a sore point for many participants. Unlike the cash market where there three margins and the futures and options where there is a fixed margin, 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, which is to be paid by both the borrower and lender and lastly a fixed percentage of lending fee, which is paid by the borrower.

This mechanism, while ensures strong risk management, makes it cost ineffective for the participant as sometimes the margins are more than the stock that is being borrowed. And, the same stock is also available on the F&O market where margins range between 25- 35%.

On this matter the Sebi note says, “…, it is advised that common risk management practices shall be followed by stock exchanges for SLB. It is reiterated that the exchanges should ensure that the risk management framework strikes a balance between ensuring commercial viability of SLB transactions and ensuring adequate and proper risk management. Exchanges should satisfy themselves regarding the adequacy of the risk management system.”